Final Commpilation

A2015 | Updated Commpilation of Commercial Law Review Transcripts and Notes | Atty.
Jacinto Jimenez Page 1

NEGOTIABLE INSTRUMENTS, TRUST RECEIPTS AND LETTERS OF CREDIT
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NEGOTIABLE INSTRUMENTS LAW
THIS TRANSCRIPT IS PREPARED BY 4A 2015 STUDENTS OF ATTY.
JACINTO JIMENEZ FOR COMMERCIAL LAW REVIEW. SOME BITS AND
PIECES WERE ADDED FROM THE PUBLICATIONS OF ATTYS. DATE: November 4, 2014 (MR)
VILLANUEVA, QUIMSON, AGBAYANI, SUNDIANG, AND AQUINO, FOR
PURPOSES OF BAR REVIEW. HUGE CREDIT GOES TO WHOEVER MADE Italy was the center of commerce before the Americas were discovered.
THE 2001 TRANSCRIPTS. PLEASE DO NOT REMOVE OUR NAMES WHEN Negotiable Instruments (NI) were intended to be substitutes for money
REPRODUCING THIS DOCUMENT. #ASTRONG #COMMICSANS because its dangerous to be carrying a lot of money and be waylaid.
o Ex. Renato owes Giovanni. Giovanni is travelling to Venetia.
Merchant Giuseppe owes Renato money. So instead of getting
COVERAGE payment from Renato, Renato will give him a bill of exchange (B/E)
addressed to Giuseppe ordering him to pay Giovanni the amount
Negotiable Instruments 1 Renato owes him. So when Giovanni arrives in Venetia, he will have
the money Renato owes him, but having been able to avoid being
Trust Receipts 53 waylaid by highwaymen.
Letters of Credit 57 o They circulate like money but must have certain features to serve the
Corporation 61 purpose:
1. Exemption from defenses based on underlying contract.
Foreign Investments Act 121 For example, a deed of sale for a car is non-
Securities Regulation Code 127 negotiable. When the deed is assigned, the
New Central Bank Act 131 assignee merely steps into the shoes of the seller
and all the defenses on the contract can be used
General Banking Law 137 against the assignee. The latter will not accept that
Secrecy of Bank Deposits 141 because he was not a party to the contract and for
Anti Money Laundering Act 147 all he knows the car is stolen. This is the reason for
this feature.
Insurance 150 2. Accumulation of secondary liability the more people who
Intellectual Property 198 negotiate, the more can be made liable by the holder
Transportation 232 For example, I dont know the maker of the NI.
How will I know hes solvent? He may be
dishonest. But I know the person offering the
instrument to me and I know hes solvent. I can
Mindy Bautista / Leon Caguioa / Arkaye Chavez / Rose Cupin / Mike David make him responsible in case the maker does not
Armand Dulay / Ivy Enguio / Karen Feble / Jag Galon / Gay Gammad pay.
Jella Gan / Aiza Giltendez / Cler Gonzales / Rax Lambino / Ken Lukban BUT banks will not accept checks with second
Eddan Macabulos / Jourd Magbanua / Quito Nitura / Nat Oducado / Chikit Pabilane endorsementbecause when a bank receives a
Hye Quintos / Rhealeth Ramos / Margo Remollo / Paula Rivera / Roselee Santos check from a depositor, it must guarantee that all
Mahrra Tan / JT Taylo / Andrew Uy endorsements are genuine.

bautista.caguioa.chavez.cupin.david.dulay.enguio.feble.galon.gammad.gan.gerona.giltendez.gonzales.lambino.lukban.macabulos.magbanua.nitura.oducado.pabilane.quintos.ramos.remollo.rivera.santos.tan.taylo.uy
A2015 | Updated Commpilation of Commercial Law Review Transcripts and Notes | Atty. Jacinto Jimenez Page 2
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2 parts of the Negotiable Instruments Law: Holder in due course: someone who took the instrument in good faith (no knowledge
1. Requisites of negotiability of defects) for value, before maturity and without notice of defenses (see comments under
2. Liability of partieswhat happens when theres forgery or alteration? What Sec. 52)
law applies?
Sec. 1 tackles requisites for negotiability; Sections 2-9 are elaborations of Section 1.
2 basic types of NI:
1. promise to pay Section 1. Form of negotiable instruments. - An instrument to be negotiable
2. order to pay must conform to the following requirements:
payable to order: endorsement and delivery a. It must be in writing and signed by the maker or drawer;
b. Must contain an unconditional promise or order to pay a sum certain
payable to bearer: mere delivery is sufficient in money;
c. Must be payable on demand, or at a fixed or determinable future time;
4 basic transactions under NIL: d. Must be payable to order or to bearer; and
1. making e. Where the instrument is addressed to a drawee, he must be named or
execution of a promissory note otherwise indicated therein with reasonable certainty.

2. drawing
Requisites of Negotiable Instruments
execution of order to pay
1. It must be in writing
3. negotiating
because it is intended to circulate
4. accepting
2. Signed by the maker/drawer
consent given by person to whom the instrument is negotiated
Signature indicates consent; symbol is irrelevant.
Purpose of Commercial Law: to ensure fairness in commercial transactions The question to ask is: Did the person intend that symbol to be his
Law is biased in favor of the holder in due course (cannot invoke exemption from signature?
defenses) 3. Must contain a promise or order to pay
o Estoppel An acknowledgement of debt is not a promise to pay; an
Son stole check from fathers checkbook. He forged his acknowledgement is evidence of a pre-existing obligation.
fathers signature and negotiated the check to someone. Promise to pay creates new obligation.
This potential payee called the father to verify with the Any words of command will suffice.
father his signature. Father said yes. If later on the check is But authority to pay is not sufficient as giving authority means theres
dishonored because the signature is forged, the father discretion w/n to pay. Request to pay is also not an order to pay.
cannot escape liability due to forgery because the father is in 4. The promise or order must be unconditional.
estoppel. 5. Payable in money
o Banks will usually be deemed negligent because they have specimen Does not contemplate barter, because barter is cumbersome. (For
of signatures; but negligence of drawer can be greater than banks instance, I propose to pay you with nails. What will you do with
and the former can be held liable. We will discuss this more in Sec. 23. nails?)
You appointed a swindler to be manager of your 6. Sum certain
checkbook. Its like appointing Dracula to be manager of a People must know how much they will get when they get it
blood bank! 7. Determinable or fixed future time
8. Payable to bearer or order
Other equivalent words will apply.
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Ex. Instead of bearer, you can use holder or possessor. If bill of because when a lawyer negotiates with a layman, the latter is always
exchange, it must be written from whom I will demand payment. at a disadvantage.
o Ex. If the stipulation is 20%, but the court finds it to be
Sec. 2. What constitutes certainty as to sum. - The sum payable is a sum unconscionable, it can reduce it from 20% to 10%.
certain within the meaning of this Act, although it is to be paid:
Sec. 3. When promise is unconditional. - An unqualified order or promise to
a) with interest; or pay is unconditional within the meaning of this Act though coupled with:
If theres stipulation to pay interest, stipulation will apply. But the
discretion of the creditor is not unbridled. a) An indication of a particular fund out of which reimbursement is to be
If too unconscionable, legal rate will apply. Bench mark is 30% - 30% made or a particular account to be debited with the amount; or
b) A statement of the transaction which gives rise to the instrument.
or more a year is unconscionable.
If no rate mentioned, 6% according to Circulation 799 Pay Jag Galon or order PHP10,000,000,000,000,000.00. Reimburse yourself
from my representation allowance; or debit from representation allowance.
b) by stated installments; or
o This is allowed because its just an indication of how payment shall
c) by stated installments, with a provision that, upon default in payment
of any installment or of interest, the whole shall become due; or be stated in books of account.
RULE: you must indicate how much each installment will be and Pay to Aiza Giltendez or order P500 arising from our extra rice deal Valid
the date each installment will be paid. o It is a simple mention of the origin of the transaction under Sec. 5(b).
Examples: Case: There was a case where someone bought two cars, which were secured
o Promise to pay Margo Remollo or order in installments by a chattel mortgage on the vehicles. A promissory note was made but went
100k WRONG unpaid (ooh rhyming!). Maker argued that the note was not negotiable
o 100k in 10 installments WRONG because it was secured by a chattel mortage.
o 100k in 10 installments, starting Nov. 15, every 15th of the o Held: Court rejected that argument. The reference to the mortgage
month WRONG did not make the promise subject to the terms of the mortgage.
o 100k in 10 equal monthly installments starting Nov. 15 and o But suppose it was made subject to the terms of the mortgage, but
every 15th of the month CORRECT!! :D upon examination, the promise was discovered to be unconditional.
There can be an acceleration clause Will it make it negotiable? No. You can only look into the four
corners of the instruments to determine compliance with requisites
d) with exchange, whether at a fixed rate or at the current rate; or of negotiability. You cannot look at evidence aliunde.
Exchangethere must be at least 2 currencies
But an order or promise to pay out of a particular fund is not unconditional.
Ex. Promise to pay Arkaye Chavez or order on Dec. 15, 2014 the
Because it is conditioned on availability of funds
equivalent of 2000USD in Philippine pesos
Abubakar v. Auditor General: A treasury warrant is not negotiable because
e) with costs of collection or an attorney's fee, in case payment shall not
falls under this situation. The 1987 Constitution says: No payment out of treasury
be made at maturity. without appropriation for the purpose.
Attorneys feesalways subject to control of court o BUT the exception is this: it wont be conditional if not limited to
See Art. 2208 of CCGR: not recoverable, Except: stipulation that fund.
reasonable attorneys feesnegotiable because in legal ethics, o Ex. Payment of 50K: Apply proceeds of sale of share of stocks from
SMC. This does not imply a prohibition to use other funds in case
stipulations for payment are always subject to control of court
this fund not sufficient.
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Sec. 4. Determinable future time; what constitutes. - An instrument is payable But the negotiable character of an instrument otherwise negotiable is not
at a determinable future time, within the meaning of this Act, which is affected by a provision which:
expressed to be payable:
a) Authorizes the sale of collateral securities in case the instrument be
a) At a fixed period after date or sight; or not paid at maturity
b) On or before a fixed or determinable future time specified therein; or Eg. authorizes foreclosure of real estate mortgage, chattel mortgage,
c) On or at a fixed period after the occurrence of a specified event, which or pledge
is certain to happen, though the time of happening be uncertain.
b) Authorizes a confession of judgment if the instrument be not paid at
An instrument payable upon a contingency is not negotiable, and the
maturity
happening of the event does not cure the defect.
PNB case: The rule on confession of judgment was declared by the
Supreme Court as unconstitutional.
I promise to pay Jose Cruz 50k 30 days from today or from acceptance

on or before Dec. 15, 2014 c) Waives the benefit of any law for the advantage or protection of the
If the holder feels insecure and demands security and obligor refuses, he can obligor
deem the note immediately demandable. Negotiable? Eg. Waiver of venue, waiver of exemption from execution
1. one view: This requires doing something other than payment of Sec. 13, Rule 39 of the Rules of Court --- states exempt properties
money. Thus, date of payment becomes uncertain. Exemption may be waived
2. second view: This only secures better performance of obligation. It is
only accessory to main obligation; w/n payment can be accelerated is d) Gives the holder an option to require something other than payment
within control of maker. He can prevent the holder from in money
accelerating by putting up securities. (This is the better view Eg. Vince made a note saying: I promise to pay Aiza or order
according to Atty. Jack) P2,000 or to deliver 100 sacks of rice at the option of the holder
Another scenario: There is a promise to pay or order 50k on Dec. 15. If holder valid because the option is with the holder. The holder can at any
becomes insecure, he can deem it immediately demandable. Is this instrument time choose to demand cash. Obligation to pay cash would be
negotiable? absolute.
o No, because date of payment becomes uncertain. Under section 4,
the option to advance payment is in the maker. But here, the option But nothing in this section shall validate any provision or stipulation
otherwise illegal.
is with the holder. If the option is with maker and he pays,
instrument is discharged and all those secondarily liable are Sec.6. Omissions; seal; particular money. The validity and negotiable
discharged. But if the power is with maker, it benefits all other character of an instrument are not affected by the fact that:
parties that can be held liable.
o In this present example, if it were allowable, what will happen if a) it is not dated
maker unable? Those secondarily liable will become primarily liable. see Sec. 17: It will be dated as of the date it was issued
b) does not specify the value given, or that any value had been given
DATE: November 5, 2014 (MB) therefor
see Sec. 24: it is presumed that there was a valuable consideration
Sec. 5. Additional provisions not affecting negotiability. - An instrument which c) does not specify the place where it is drawn or the place where it is
contains an order or promise to do any act in addition to the payment of payable
money is not negotiable. see Sec. 73
If the instrument contains an obligation other than the payment of money, it is d) bears a seal
not negotiable Irrelevant in Philippine Civil Law
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In common law, consideration is not presumed in contract. Leon promises to pay Jella or someone who is not the
However, if the contract is sealed, consideration is presumed. drawer or drawee
e) designates a particular kind of currency in which payment is to be Leon issues a bill of exchange addressed to Roselee to pay
made Jella or the drawer.
RA 8183, which repealed RA 529, states that it is now valid to
stipulate that payment of an obligation should be paid in foreign b) Drawer or maker
currency. Order of himself, to avoid cash
If somebody is withdrawing money from his checking
But nothing in this section shall alter or repeal any statute requiring in certain account, he issues a check payable to the order of himself.
cases the nature of the consideration to be stated in the instrument. Banks always tell you to avoid the issuance of checks
Sec. 7. When payable on demand. - An instrument is payable on demand:
payable to cash or payable to bearer because anybody can
encash it.
a) When it is expressly payable on demand, or at sight, or on What you should do is put your name as the
presentation payee. Tell the bank the you do not issue checks
Eg. Promise to pay on demand, bill of exchange issued and drawee is payable to cash so that if somebody presents a
ordered to pay upon presentation of the bill of lading, check payable to cash, it's suspect.
However, that will not be valid as a contract until the
b) In which no time for payment is expressed maker indorses it. But maker is liable as maker to the person
Silence as to when it will be paid means it is payable upon demand. who indorsed it.
However: Where an instrument is issued, accepted, or Manresa says that although the law is silent, it is understood
indorsed when overdue, it is, as regards the person so that there must be at least two parties to a contract because
issuing, accepting, or indorsing it, payable on demand.
consent is one of the essential elements to a contract.
If the maker issues to himself, there is no contract. But if he
Problem: A bill of exchange was issued on March 1, payable on March 31.
indorses it, he will be liable as maker.
Mindy, the drawer, indorsed it to Ken on March 15. Ken indorsed it in May to
Margo. (Mindy > Ken > Margo). When Margo, the holder, presented it for c) Drawee
payment, it was dishonored. Somebody got a loan from the head office of the PNB. But
o Can Margo run after the drawer (Mindy)? No. Margo presented it he has a current account with the branch office of PNB in
when it was already overdue. Tarlac. He issues a check from him drawn against his
o Can Margo run after the person who indorsed (Ken)? Yes. Ken account in Tarlac. It is payable to the head office.
indorsed it to Margo when it was already overdue. As between Ken
and Margo, it will be deemed payable on demand. d) Two or more payees jointly
to Cler Gonzales, Rose Cupin, and Mahrra Tan
Sec. 8. When payable to order. - The instrument is payable to order where it is
drawn payable to the order of a specified person or to him or his order. e) One or some of several payees
to Quito Nitura or Sheena Tengco
To whom the instrument may be payable to order?
Eg. Pay to the order of Andrew Uy; pay to Andrew Uy or order f) Holder of an office for the time being
A company wants to pay taxes to Makati. It issues a check
It may be drawn payable to the order of: payable to the treasurer of the City of Makati.
a) A payee who is not maker, drawer, or drawee;
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Where the instrument is payable to order, the payee must be named or o Mueller and Martin v. Liberty Insurance Bank: 1920 case. Mueller
otherwise indicated therein with reasonable certainty. and Martin had a partnership with a checking account with Liberty.
Either partner could sign checks. Martin wanted to steal money. He
Sec. 9. When payable to bearer.- The instrument is payable to bearer:
issued a check on behalf of the partnership payable to a corporation
a) When it is expressed to be so payable of which he was the corporate secretary. But he was not authorized
o Caltex v. CA & Security Bank: Angel dela Cruz had a certificate of to indorse checks on behalf of the corporation. There was no board
time deposit issued by Security Bank. He went to Caltex and he resolution giving him that authority. He indorsed it on behalf of the
wanted to apply for a credit line to purchase petroleum products. corporation to himself and encashed it. The bank paid. Mueller
Caltex required a collateral for the credit line. Angel said he will found out and it sued the bank for the restoration of the money.
pledge a certificate of time deposit. Caltex accepted it. Then, Angel Is this payable to the order of fictitious persons? --- Yes. It
went to Security Bank, saying his certificate of time deposit was lost is true that the payee made is an existing corporation but
and asked the bank to replace it. Security Bank believed him and Martin did not intend the corporation to actually get the
replaced it. Thereafter, Angel said he wanted to get a loan from money. He wanted to steal it for himself. So it is payable to
Security Bank equal to the value of the certificate of time deposit and bearer and no indorsement is needed to acquire title. The
he will give it as collateral in a holdout arrangement. He got the loan, bank validly debited the account of the partnership and the
got the products and disappeared. money could not be recovered.
When the certificate fell due, the question is: Who had the o PNB v. Spouses Rodriguez: There were employees of a branch of
better right to collect the money, Security Bank and PNB who formed a loans and savings association. They opened a
Caltex? The answer is Security Bank. There is no provision current account in the same branch for the loans and savings
in NIL governing pledge of negotiable instruments, so we association even if they had no money. What they did was if a
apply the Civil Code, which requires that it must be in a member wants to borrow money, the loans and savings association
public document. It wasnt in a public document so Caltex would issue a postdated check in favor of that borrower but the
cannot claim valid pledge. amount will be bigger than amount the member wanted to borrow.
Is this a negotiable instrument? --- Yes. The certificate of The Rodriguez spouses were maintaining a checking account in the
time deposit says "This is to certify that bearer has same branch of the PNB. The check would be indorsed by the payee
deposited so much payable to the depositor." It was argued named as borrower to the Rodriguez spouses. Spouses would issue a
that this was payable to the depositor, not the bearer. But check equal to the actual amount that the borrower wanted to
who is the depositor? The bearer. Hence, it is payable to borrow and the difference between the amount that the payee
bearer. wanted to borrow and the face value of the check would be the profit
of the spouses for their business. But the loans and savings association
b) When it is payable to a person named therein or bearer had a policy that if a borrower has an outstanding loan which has not
o Eg. Payable to Cler Gonzales or bearer been fully paid, it cannot apply for a new loan. Now, some officers
had outstanding loans and they wanted to borrow. So they got some
c) When it is payable to a fictitious or non-existing person, and such fact members who had no outstanding loans, issued checks payable to
was known to the person making it so payable these members without their knowledge and forged their
o Fictitious person does not mean that the person did not exist. There indorsements in favor of the Rodriguez spouses. The spouses,
may be a real person with that name. thinking that the payees were the borrowers, issued checks drawn
o The person who did it did not intend the person named to actually against their account payable to the payees. The officers who were
get the money. the ones actually borrowing the money encashed the checks with the
PNB. When the PNB found out what was happening, it closed the
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account of the loans and savings association. When the Rodriguez If an instrument/acceptance is dated, that date is presumed to be the true date.
spouses who were paid the postdated checks tried to encash, these o That is merely a presumption, which can be rebutted and disproven.
were dishonored because the account was closed. So spouses
Rodriguez sued the PNB to pay even if the indorsements of the Sec. 12. Ante-dated and post-dated. - The instrument is not invalid for the
payees were forged. PNB refused and argued that the checks were reason only that it is ante-dated or post-dated, provided this is not done for an
payable to fictitious persons, therefore payable to bearer. illegal or fraudulent purpose. The person to whom an instrument so dated is
delivered acquires the title thereto as of the date of delivery
Held: No, because it was not the intention of the
Antedating or postdating an instrument is not invalid, provided it is not for an
Rodriguez spouses for the payees not to receive the money.
illegal or fraudulent purpose.
They spouses thought that those payees were actually the

borrowers. The Rodriguez spouses intended the named Sec. 13. When date may be inserted. - Where an instrument expressed to be
payees to get the money. Drawer bank (PNB) bears the payable at a fixed period after date is issued undated, or where the acceptance
loss. of an instrument payable at a fixed period after sight is undated, any holder
may insert therein the true date of issue or acceptance, and the instrument
d) When the name of the payee does not purport to be the name of any shall be payable accordingly. The insertion of a wrong date does not avoid the
person instrument in the hands of a subsequent holder in due course; but as to him,
o Eg. Check payable to the order of cash. the date so inserted is to be regarded as the true date.
o Ang Tek Lian v. CA: Ang Tek Lian (ATL) issued a check payable to Where an instrument is payable at a fixed period after certain date and it was
the order of cash and exchanged it with Lee Hwa Hong (LHH) for undated, or it was payable after acceptance and the acceptance was undated,
cash. When LHH tried to encash the check, it was dishonored for the holder may write the correct date and that will be payable accordingly.
insufficient funds so filed a case against ATL for estafa. ATL argued Suppose that a promissory note was payable 30 days from the date of issuance,
that when a check is payable to the order of cash, the bank will not but the date of issuance was left blank, what will the payee do? He wrote at
honor it unless it is indorsed at the back by the drawer and ATL did the date 1 1/2 months before such that it would accelerate the payment. ---
not indorse it at the back. So when LHH he knew all along that the Void. Wrote the wrong date.
check was not indorsed so there was no fraud. Suppose he indorsed a bill of exchange payable 30 days after sight, it was
Held: We don't know about the practice you are saying. If accepted on March 1st payable on March 31st, but the payee wrote date of
it is payable to the order of cash, no indorsement is needed. acceptance to be March 25th, and that was negotiated to someone who
presented it for payment beyond March 31st, but within 30 days from March
e) When the only or last indorsement is an indorsement in blank. 25th. Such person can collect because if a blank was left and that made it
o In the last 3 cases, the instrument is on its face payable to order but possible to write the wrong date, the law will protect the holder in due course
the law treats it as payable to bearer. because of equity. As between two innocent persons, the one whose
negligence made the loss possible will bear the loss. Here it became possible to
Sec. 10. Terms, when sufficient. - The instrument need not follow the language
write the wrong date because the drawer left the date blank.
of this Act, but any terms are sufficient which clearly indicate an intention to
conform to the requirements hereof
You do not need the exact words of the law. You may use other words The next three sections deal with completeness and delivery of instruments.
equivalent to them like bearer, possessor or holder Sec. 14: Incomplete but delivered instruments
Sec. 15: Incomplete and undelivered instruments
Sec. 11. Date, presumption as to. - Where the instrument or an acceptance or Sec. 16: Complete but undelivered instruments
any indorsement thereon is dated, such date is deemed prima facie to be the
true date of the making, drawing, acceptance, or indorsement, as the case may
be.
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Sec. 14. Blanks; when may be filled. Slamdunk Inc., whose primary purpose is to produce concerts and shows
This provision deals with incomplete but delivered instruments connected with basketball. Patrimonio presigned blank checks and gave them
to Gutierrez to be used to pay for expenses. He instructed that before the
Where the instrument is wanting in any material particular, the person in checks be filled up, his approval must be obtained. Now, Gutierrez went to
possession thereof has a prima facie authority to complete it by filling up the Octavio Marasigan (who was a former teammate of Patrimonio), and said that
blanks therein.
Patrimonio is building a house and needs 200k. Gutierrez was able to convince
If the instrument is wanting in any material particular, the person with
Marasigan to give 200k, and in return, Gutierrez gave Marasigan a postdated
possession of the instrument is presumed to have authority to fill it up.
check, payable to the order of cash. When presented for payment, the check
Example: Somebody obtained a loan from a bank and got two acquaintances
was dishonored because the account was closed. Marasigan filed a case for
to sign as accommodation makers. When the loan was not paid and the bank violation of BP 22 against Patrimonio. Patrimonio now files a civil case against
sued, they raised the defense that when they signed it, the amount was blank. Marasigan and Gutierrez for annulment of the loan. Patrimonio argues that
Not valid. Law expressly provides that if you sign in blank, that means you are the authority he gave was subject to the condition that his approval must be
giving authority to fill it up. obtained, which instruction was not followed by Gutierrez. Marasigan argued

that under Sec. 14, since Patrimonio left the check incomplete and blank, and
And a signature on a blank paper delivered by the person making the
signature in order that the paper may be converted into a negotiable it was filled up, the check can be enforced against him.
instrument operates as a prima facie authority to fill it up as such for any o Held: No. For you to be able to do that, you must be a holder in due
amount. course. Marasigan was not a holder in due course because Patrimonio
A signature on a blank paper, delivered by the person making the signature, in did not borrow money from him. It was not Patrimonio who
order that the paper may be converted into a negotiable instrument, operates actually borrowed money from Marasigan. It was Gutierrez who
as authority to fill it up for any amount. made the misrepresentation. At the very least, you were grossly
If someone was issued a blank check, it must have been delivered with negligent. When Marasigan released 200k there was a belief that
intention to convert it into a negotiable instrument. Patrimonio was building his house. You should have known that
there's a defect.
In order, however, that any such instrument when completed may be enforced
against any person who became a party thereto prior to its completion, it must Sec. 15. Incomplete instrument not delivered. - Where an incomplete
be filled up strictly in accordance with the authority given and within a instrument has not been delivered, it will not, if completed and negotiated
reasonable time. without authority, be a valid contract in the hands of any holder, as against
any person whose signature was placed thereon before delivery.
But if any such instrument, after completion, is negotiated to a holder in due Incomplete and undelivered instruments
course, it is valid and effectual for all purposes in his hands, and he may Even if the instrument is completely negotiated without authority, it will not
enforce it as if it had been filled up strictly in accordance with the authority
given and within a reasonable time. be valid in the hands of a holdereven a holder in due course. (real defense!)
Ching v. Nicdao: Nicdao had a store and issued pre-signed blank checks. One
If someone was authorized to fill up a blank instrument, it must be filled up in of the checks ended up in the possession of somebody. He placed there an
accordance with the instructions or authority given. amount amounting to a large sum, and the check was not honored. A BP 22
But if the instructions were not followed and the instrument was negotiated to case was filed against Nicdao. Evidence does not show how the check fell into
a holder in due course, he can enforce it in accordance with the actual tenor. the hands of the complainant. Nicdao claims the supplier usually sends bill
o The law will always protect a holder in due course when you left a collectors, so she leaves checks to employees so they can fill up. But she did
blank and made it possible to deviate from that. not issue a check to this complainant.
Patrimonio v. Gutierrez: Alvin Patrimonio formed a joint venture with o Held: SC believed Nicdao. She could not be held liable.
Napoleon Gutierrez, a sports columnist. They called the corporation
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Bank of America v. Philippine Racing Club: Every two years, the PRC had to original promissory note since that is the actionable document, and
attend a convention. The President and Vice President of PRC were to be sent because Development Bank is the payee.
abroad. They pre-signed several checks paid for bills that may fall due. Checks BPI Family Savings Bank v. Manikan: BPI issued a managers check to pay
were drawn against Bank of America. Somebody encashed 95k with Bank of taxes in the city of Iloilo. They asked an employee in mayors office to be the
America. Bank honored. payee. This payee used the money to pay some others taxes. Iloilo City still
o Held: Bank was negligent because it was apparent that there was claimed unpaid taxes.
something wrong. The amount was written twice: one in amount o Held: BPI is still liable because the check issued was never delivered
and another in the blank for payee. This should have alarmed bank. to the city.
But the President and VP are both at fault for signing blank checks. But where the instrument is in the hands of a holder in due course, a
Therefore, they should split the loss. valid delivery thereof by all parties prior to him so as to make them
liable to him is conclusively presumed.
Sec. 16. Delivery; when effectual; when presumed. And where the instrument is no longer in the possession of a party
Compete but undelivered instruments whose signature appears thereon, a valid and intentional delivery by
him is presumed until the contrary is proved
Every contract on a negotiable instrument is incomplete and revocable until
delivery of the instrument for the purpose of giving effect thereto. Sec. 17. Construction where instrument is ambiguous. - Where the language of
the instrument is ambiguous or there are omissions therein, the following
Every contract that is complete is revocable until delivery.
rules of construction apply:
Delivery is a fundamental element in transactions involving negotiable
instruments. a. Where the sum payable is expressed in words and also in figures and
In civil law, negotiable instruments are real contracts. Delivery is needed to there is a discrepancy between the two, the sum denoted by the
perfect. words is the sum payable; but if the words are ambiguous or
uncertain, reference may be had to the figures to fix the amount;
As between immediate parties and as regards a remote party other than a
If the sum payable is expressed in words and figures, and there is a
holder in due course, the delivery, in order to be effectual, must be made discrepancy, words and letters will prevail, because they are more
either by or under the authority of the party making, drawing, accepting, or expressive of the actual intent and it is easier to clear the mistake.
indorsing, as the case may be; Unnamed Case: Numbers say 100,200, but words 120,000. The
And, in such case, the delivery may be shown to have been amount in the account was enough for 100,200 but not 120,000.
conditional, or for a special purpose only, and not for the purpose of o Held: Correct amount is 102,000 and the balance in the
transferring the property in the instrument.
account is sufficient to cover that.
Between immediate parties, it may be shown that delivery was conditional.
A bank can dishonor check based on the discrepancy in amount
o What is conditional is delivery, not the promise or order to pay for
mentioned.
special purpose.
If the amount is ambiguous, then the figures can be consulted.
Development Bank v. Sima Wei: Sima Wei had a loan in Development Bank.
o Eg. The amount is in figure 8,000, and the amount in
He issued checks to pay for his loan. Evidence did not show what happened,
words is not clear. Specifically, it is not clear whether there
but later on, the check never fell into the possession of the bank. The checks
is a "y" after "eight." The amount indicated in figures can be
were indorsed to Plastic Corporation and to Producers Bank. Development
consulted.
Bank sued borrower Sima Wei, the Plastic Corporation, and Producers Bank.
o Held: Development Bank cannot sue Plastic Corporation and DATE: November 6, 2014 (CG)
Producers Bank, because the checks were never delivered to
Development Bank. It can sue Sima Wei (the borrower) based on the b. Where the instrument provides for the payment of interest, without
specifying the date from which interest is to run, the interest runs
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from the date of the instrument, and if the instrument is undated, from o Among the parties to a negotiable instrument, the indorser has the
the issue thereof; least liability, and doubts are resolved against the assumption of
c. Where the instrument is not dated, it will be considered to be dated as obligations because obligations restrict human freedom.
of the time it was issued;
d. Where there is a conflict between the written and printed provisions of
o Remember that the Civil Code provides the contracts have the force
the instrument, the written provisions prevail; of law. So, if you have signed a contract, you are not free.
Why would the written provisions prevail over the printed provisions? Example: You sign a contract selling your car. You are not
o The written provisions are more expressive of the actual intention of free to change your mind and refuse to deliver the car. And
the parties because printed provisions are forms made without any since obligations restrict human liberty, doubts are resolved
specific transaction in mind. against the imposition of obligations.
o If you open a current account with the bank, and you ask the bank to
g. Where an instrument containing the word "I promise to pay" is signed
order a checkbook for you, it will place an order to the Bangko
by two or more persons, they are deemed to be jointly and severally
Sentral to print a checkbook for you. And thats among the millions liable thereon
of checks printed every day.
For example, you are given a checkbook, and you decide to Liability of parties whose signature does not appear on the instrument
issue a check. If you write at the left hand corner for Xs
account only, what did you do? You destroy negotiability. GR: Parties whose signature does not appear are not liable to the instrument.
You prohibit indorsement. That writing will prevail as
against the printed form of pay to the order of X because Exceptions:
that expresses your intention to prevent negotiation. 1. Use of trade name;
Sec.18. Liability of person signing in trade or assumed name.
e. Where the instrument is so ambiguous that there is doubt whether it - No person is liable on the instrument whose signature does
is a bill or note, the holder may treat it as either at his election; not appear thereon, except as herein otherwise expressly
This provision must be correlated with Section 130: provided. But one who signs in a trade or assumed name will
o Sec. 130. When bill may be treated as promissory note. - Where in a bill the be liable to the same extent as if he had signed in his own
drawer and drawee are the same person (i.e., in the case of cashiers check or name.
managers check) or where the drawee is a fictitious person or a person not Ex. A contractor Ramon Gayte is engaged in a single proprietorship,
having capacity to contract, the holder may treat the instrument at his option which he calls Rogen Builders. If a customer issues a check payable
either as a bill of exchange or as a promissory note to Ramon Gayte, and he indorses it to Rogen Builders, it will bind
him because he used that as his trade name. Or also remember
f. Where a signature is so placed upon the instrument that it is not clear Ramon Revilla, he uses Revilla as stage name but his real surname is
in what capacity the person making the same intended to sign, he is Bautista.
to be deemed an indorser;
This should be correlated with Section 63: 2. Authorized agent signed for him;
o Sec. 63. When a person deemed indorser. - A person placing his signature Sec. 19. Signature by agent; authority; how shown. The
upon an instrument otherwise than as maker, drawer, or acceptor, is deemed to signature of any party may be made by a duly authorized
be indorser unless he clearly indicates by appropriate words his intention to be agent. No particular form of appointment is necessary for
bound in some other capacity. this purpose; and the authority of the agent may be
established as in other cases of agency.
Why is he deemed only to be an indorser?
Sec. 20. Liability of person signing as agent, and so forth. -
Where the instrument contains or a person adds to his
signature words indicating that he signs for or on behalf of a
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principal or in a representative capacity, he is not liable on party against whom it is sought to enforce such right is
the instrument if he was duly authorized; but the mere precluded from setting up the forgery or want of authority.
addition of words describing him as an agent, or as filling a Ex. A son forges the signature of his father, and then the checks have
representative character, without disclosing his principal, been offered to somebody. The person then calls the father and
does not exempt him from personal liability.
confirms that he signed it. The father is estopped and he will be
For agents to escape further liability:
liable and cannot use the defense that he did not sign that.
1. He must be duly authorized;

2. He must indicate signing as an agent (e.g. Nenzo Cruz for 6. Signature in a separate paper when the original instrument has no more space.
Armand Dulay); and
3. He must indicate his principal. But when a president of a Sec. 21. Signature by procuration; effect of. A signature by "procuration"
corporation signs a negotiable instrument on a piece of operates as notice that the agent has but a limited authority to sign, and the
paper where the logo of the corporation appears, that is principal is bound only in case the agent in so signing acted within the actual
sufficient disclosure of principal. limits of his authority.

3. If a person forges the signature of another, although that is not his own Sec. 22. Effect of indorsement by infant or corporation. The indorsement or
assignment of the instrument by a corporation or by an infant passes the
signature, he will be liable because he was the one who forged it; property therein, notwithstanding that from want of capacity, the corporation
or infant may incur no liability thereon.
4. A person negotiating by delivery will be liable to a person to whom the
instrument was delivered. If the instrument is indorsed ultra vires or by a minor, that will pass valid title.
This is explained under Section 65. But for now, heres the codal: o Only the corporation can invoke ultra vires as a defense, and only the
Section 65. Warranty where negotiation by delivery and so forth. Every minor can invoke minority as a defense.
person negotiating an instrument by delivery or by a qualified indorsement Prior parties cannot invoke those as defenses. Neither can subsequent parties
warrants: invoke the same defenses because they warrant that all prior parties have
a. That the instrument is genuine and in all respects what it purports capacity to contract.
to be; If maker of a promissory note (payable to somebody who is an adult) indorses
b. That he has a good title to it; the instrument to a minor, and thereafter, the minor indorses it to somebody,
c. That all prior parties had capacity to contract; and now the holder demands payment, the maker cannot refuse to pay on the
d. That he has no knowledge of any fact which would impair the ground that a minor was the one who indorsed it to the holder.
validity of the instrument or render it valueless. Although the law mentions only minors, by analogy, Section 22 also applies to
But when the negotiation is by delivery only, the warranty extends in favor of other incapacitated persons, like a person suffering from civil interdiction, or
no holder other than the immediate transferee. insane or deaf-mute persons.
The provisions of subdivision (c) of this section do not apply to a person However, the minor shall be liable under the following exceptions:
negotiating public or corporation securities other than bills and notes. 1. The minor actively misrepresents his age and it appears that he is
physically of such age (minor is in estoppel)
5. If the person is in estoppel; and Atty. Balane has a different view. See Claudia Squillantinis
Sec. 23. Forged signature; effect of. - When a signature is oblicon notes.
forged or made without the authority of the person whose
2. The minor kept the fruits or benefits
signature it purports to be, it is wholly inoperative, and no
right to retain the instrument, or to give a discharge therefor, 3. The minor spent the money in good faith (relate with Art. 1427 of the
or to enforce payment thereof against any party thereto, can Civil Code)
be acquired through or under such signature, unless the
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Forgery (dun dun dun) encash the check. The businessman discovered the
impostors false pretenses. He cannot run after the bank. L
Sec. 23. Forged signature; effect of. When a signature is forged or made Exceptions:
without the authority of the person whose signature it purports to be, it is
a) Theres a forgery if the person who issued the
wholly inoperative, and no right to retain the instrument, or to give a discharge
therefor, or to enforce payment thereof against any party thereto, can be instrument knows the intended payee and thought that
acquired through or under such signature, unless the party against whom it is that person is the payee he had in mind.
sought to enforce such right is precluded from setting up the forgery or want Drew wanted to restore the Rizal Park, so he went to
of authority. solicit funds from businessmen for its restoration and
maintenance. Francis, a businessman, did not know
Simply because an instrument is forged does not mean that it is completely void. It will that it was Ken, pretending to be Drew, who collected
be valid as against those who are estopped from invoking forgery. the check. So Francis issues a check, and it was picked
up and encashed. The signature is a forgery because
Types of Forgery: Francis thought that it was Drew whom he was giving
1. Fraud amounting to forgery or fraud in factum; the check to, and Francis wanted Drew (not Ken) to
A person did not intend to issue a negotiable instrument but he get the money.
signed a document not knowing it is a negotiable instrument. He b) If the instrument was issued because of the title or
thought it was something else. position of the intended payee.
o Ex. A son who is a lawyer made his elderly father, who has Ex. Armand went to the office of Hye, a business-
cataract, sign a document purporting to be a Special Power woman, wearing a Roman Kora. Armand told Hye, I
of Attorney, but it turns out to be a Bill of Exchange. am Fr. Armand Dulay. I am the President of San Feble
But if theres an intention to issue a negotiable instrument, but it was University, and we are trying to raise funds to provide
induced through fraud, that is not forgery. scholarships to poor students. Hye said, with a British
o For example, if somebody issued a check to pay for a ring, accent, Thats a good cause. So Hye issued a check
but it turns out to be fake. payable to the President of San Feble University.
Hye wanted the occupant of that position to get the
2. Duress amounting to fraud; money. But Armand is not the President and if hes
Ex. A group of kidnappers kidnapped Quito. They asked him to able to encash the check, Hyes signature would be a
issue a check for P5M and will only release him the moment theyre forgery.
able to collect. If not, they will strangle him to death. So Quito
signed. That is duress in the execution amounting to fraud. 4. Imitating the signature
The most common type of forgery would involve trying to imitate
3. Fraudulent impersonation; and the genuine signature of a person. It can be done by tracing.
GR: There is no forgery in impersonation where the person issuing o The forger may have a specimen signature. Its a glass top
the instrument intended that person to get the money table with a translucent glass. It puts under it a fluorescent
o Example. Someone appeared before a businessman, saying, lamp. It would put the signature there and places on top of
I am Allen Gerona. Im trying to raise funds to help our it another piece of paper and traces the signature.
brothers in Leyte for victims of Typhoon Yolanda. And o If youre able to get hold of a standard signature, trace over
this man is an impostor. Hes trying to get money for it, and see that they exactly coincide from the first stroke to
himself. But the businessman believed that he is sincerely the final stroke that is already corroborative evidence that it
helping, so he issued a check. The impostor was able to is a forgery.
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o The probability that two signatures would exactly coincide Combinations in Forgery:
from the first to the last stroke is one to a billion. 1. In a promissory note, if the signature of the maker or instrument payable to
o The most common one is somebody who practices and order was forged, it cannot be enforced against the maker.
comes up with an acceptable imitation. But you can always Remedy: Holder will run after the forger and subsequent indorsers.
tell a forged signature from a genuine signature.
o You can sign your name without thinking consciously how 2. In an instrument payable to bearer, if the signature of the maker was forged, it
you will form each stroke of your signature. But when you cannot be enforced against him.
are forging something, you are suppressing your own Remedy: Run after the forger and subsequent indorsers.
handwriting characteristics.
o You are trying to copy the handwriting of somebody else. 3. If a promissory note payable to order was stolen, and the signature of an
The strokes would be thick and rough. A forger would indorser was forged. Can the holder run after the maker?
concentrate on the strokes, which would readily catch the Take note that for a note payable to order may be negotiated, an
eye. Usually, they are the initial letters of the first name and indorsement is necessary. But the indorsement is forged so the holder
the surname. The forgers do not concentrate on little cannot run after the maker.
things. Remedy: Holder can only run after the forger or subsequent indorsers who
o Some people may have a pecuniary habit like placing the warranted that the instrument is genuine. The holder cannot run after the
dot on the letter i quite a distance from the letter i. The maker and the parties before indorsement because it is payable to order and a
forger does not know that that is his habit. valid indorsement is required to get good title. The holder can only run after
In the case of Bridget (Jones?), somebody forged the signature of the the forger and subsequent indorsers.
manager in a check. The manager was an Englishman named Poste.
He questioned the document examiner. The following discrepancies 4. If a promissory note payable to bearer and indorsement are forged when
were observed: negotiated down the line. Can the holder collect from the maker? It depends.
o The genuine signature saw that the slant of the signature Since this is payable to bearer, no indorsement is needed to acquire title.
was 45 degrees. But in the forgery, it was slanted at 90 If the makers defense is want of delivery of a complete instrument, it can
degrees. be invoked against someone who is not a HDC but cannot be invoked
o When Mr. Poste would write the letter S, the last stroke against a HDC. So if a holder is a HDC, the maker cannot invoke the
would never cross beyond the initial stroke. But the forger defense. Otherwise, it can.
crossed the initial stroke. Remedy: Run after the one who forged.
o When the letter would be written by Mr. Poste, it would
write the cross in the middle. The forger crossed it on top 5. In a bill of exchange, somebody forged the signature of a drawer and it is
of the letter T. payable to order. The holder presents it to the drawee. The drawee accepted
o The final stroke would curve upward. But in the forgery, it and paid. Can the drawee get back the money? No.
was horizontally straight. Those are little things the forger According to Section 62, the acceptor admits that the signature of drawer
did not notice. is genuine. When you open a checking account, you are asked to sign a
o And the signatory had a very peculiar habit. When he specimen signature card. And everytime a check is issued, the bank
would sign, he would not write directly above the line. He compares the signature with the signature card.
would leave a little space. He would leave a little blank In the case of Price v. Neal, a certain forger forged the signature of the
between the signature and the line where hes supposed to drawer in two BOE addressed to Price. Price paid Neal, the payee. He
sign. And the forger did not know that peculiar habit. was convicted, sentenced to death and hanged. Price sued Neal to get
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back the money on the theory of payment by mistake. The court ruled The reason why he cant keep the money is because his title is not an
that Price cannot recover. As the drawee, it was his obligation to verify indorsement and not because he is warranting that the signature is
the signature of the drawer. He was guilty of negligence, so he must bear genuine and instrument is what it purports to be.
the loss. It is now embodied in Section 62 of the law.
In Philippine National Bank v. CA, which is a government bank, a check 9. If the drawee dishonors it, the holder cannot run after the drawee. The holder
was issued by the GSIS through forgery. The check was deposited and cannot also sue the drawer because that is forged indorsement.
was sent to the clearinghouse. The check was cleared so PNB paid. The Remedy: Sue the forger and subsequent parties.
defense of GSIS was that the signatures of the officers were forged so it
sued to get back the money. The court said no according to section 62, 10. Payable to bearer and its a forged indorsement. If the drawee paid, the
you cannot get back the money. The bank is only guilty of negligence. payment is valid because it is payable to bearer. No indorsement is required.
The forger committed a crime of estafa through falsification of He can debit the account of the drawer. You ordered to pay the bearer and it
commercial documents. was obeyed.
Remedy: Sue the forger for reimbursement if the drawee-acceptor cant get Remedy: Sue the one who stole the bearer instrument.
back the money.
Estoppel
6. Check payable to bearer, signature of the maker was forged and the drawee Ex.
paid, he cannot get back the money. Same rule will apply. 1. A son stole a check of his dad and then the dad told the prospective payee that
the signature is genuine. He cannot invoke Sec. 23 because he is estopped.
7. Payable to bearer but suppose the drawee dishonors it, the holder cannot sue 2. In the Slatter case, there was estoppel by negligence.
the drawee. Hes not liable unless he accepts. He cannot sue the drawer There was a Stockbroker in NY who had the two customers who
because the signature is forged. happened to have the same name, one was H.E. Richards from Texas, and
Remedy: Sue the forger and all subsequent parties. the other was H.E. Richards from Oklahoma.
The one in Oklahoma asked the broker to sell the shares. The order was
8. A bill of exchange payable to order and an indorsement were forged, implemented.
presented to drawee, and the drawee accepted and paid. Can the drawee get To deliver the money, a check was issued to H.E. Richards. But by
back the money? Yes. mistake, it was sent to H.E. Richards in Texas. Since the name was the
The instrument is payable to order and therefore, to acquire title there same, the bank honored it.
must be a valid indorsement. There was no valid indorsement because it The court said that the broker could not ask the bank to return the money
was a forgery. because the name of the person who collected it was the same. And the
The drawee can get back the money from the payee and it cannot debit bank had no way of knowing its the wrong H.E. Richards.
the account of the drawer. The drawer only ordered to pay to order, but Its the fault of the drawer because he gave it to the wrong person who
the drawee disobeyed because there was no order to pay because the happened to have the same name.
indorsement was forged. Likewise, there was estoppel because of delay. The bank is supposed to
In a number of cases, the SC ruled that the holder must return the money send to the drawer every month a bank statement, and copies of the check
invoking section 66 that the instrument is genuine and what it purports to issued. Usually they send you photocopy and it is your obligation to
be. But that refers to indorsement. Here, the holder is not an indorser. examine that and see if there is a discrepancy.
That is not indorsement but presentment for payment. If the drawer did not examine and the bank was prejudiced, then Court
cannot order that the bank return the money.
Remember estoppel requires prejudice.
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From CLV: Delineating liability for forged indorsements on checks payable to Four basic principles of Forgery:
order (Associated Bank v. Court of Appeals, 252 SCRA 620) 1. Party whose signature is forged is not liable unless hes in estoppel
1. When the instrument is payable to order at the time of forgery, the signature 2. Instrument payable to order and the indorsement is forged, the holder does
of its rightful holder is essential to transfer title to the instrument. When not acquire valid title
holders indorsement is forged, all parties prior to the forgery may raise the 3. If the instrument is payable to bearer, a holder acquires valid title if hes a
real defense of forgery against all parties subsequent thereto. holder in due course even if its a forged instrument.
2. Since the indorser warrants that the instrument is genuine, he cannot interpose 4. The drawee who accepts and pays cannot get back the money
the defense that signatures prior to his are forged.
3. The collecting bank where a check is deposited, and which endorses the check DATE: November 6, 2014 (LC)
upon presentment with the drawee bank, is such an indorser.
4. Drawee bank is under strict liability to pay the check to the order of the payee. n Calinog v. PNB
Drawers instructions are reflected on the face and by the terms of the check. o Calinog had a current account with PNB. Someone managed to steal
Payment under a forged endorsement is not to the drawers order. a check, forge the signature, and encash.
5. When drawee bank pays a person other than the payee, it does not comply o When Calinog received statement, she noticed the discrepancy
with the terms f the check. It thus violates its duty to charge the customer- regarding the balance.
drawers account only for properly payable items. Since drawee bank did not o Bank refused to reinstate.
pay a holder or other person entitled to receive the payment, it has no right to SC: Bank must restore the amount.
be reimbursed by the drawer. The general rule then is that the drawee bank n Quimpo Case
may not debit the drawers account, and is not entitled to indemnification o Gozon left the checkbook lying around. His classmate stole a check,
from the drawer. The risk of loss must perforce fall on drawee bank. forged signature, was able to encash P5000.
6. However, if drawee-bank can prove a failure by the customer-drawer to o Gozon received a bank statement, and he noticed the discrepancy.
exercise ordinary care that substantially contributed to the making of the o The Bank refused to restore, claiming that Gozon should bear the
forged signature, drawer is precluded from asserting forgery. loss because of his negligence.
7. If drawee bank was also negligent to the point of substantially contributing to SC: When forgery occurs, invariably, the instrument is
the loss, such loss from the forgery can be apportioned between the negligent stolen. No negligence can be imputed to him because he
customer-drawer and the negligent drawee-bank. had no reason to be suspicious of his classmate.
8. The chain of liability does not end with the drawee bank. Drawee-bank may Classmates may have evil schemes lurking in their hearts. L
not debit the account of the drawer, but may generally pass liability back n Internationale Case
through the collection chain to the party who took from the forger and, of o An External Auditor (EA) of a Company was asked to take care of
course, to the forger himself. In other words, drawee-bank can seek reconciling the bank statements and their records.
reimbursement or a return of the amount it paid from the presentor-bank or Thus, he gained access to bank records.
person. o EA forged signatures on some checks and was able to steal > P1M.
9. Presentor-bank or person can demand reimbursement from the person who o Bank argued that the Company should bear the loss because it was
endorsed the check to it, and so on. The loss falls on the party who took the negligent in the supervision of EA.
check from the forger, or on the forger himself. SC: The External Auditor was NOT an employee, so do
10. Since a forged indorsement is inoperative, the collecting bank had no right to not apply principle of quasi delict (supervision/selection)
be paid by the drawee-bank. The collecting bank must necessarily return the he is an independent contractor. No estoppel in this case.
money paid by the drawee-bank because it was paid wrongfully. Nevertheless, Estoppel presupposes knowledge. The
management did not know that he was stealing money.
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n MWSS Case But to avoid this stuff, the Court allowed direct suit of the
o MWSS had its checks printed by a private printing press and not by collecting bank.
the Central Bank. n Case of Health Insurance Corporation
o Over a period of 3 months, 24 checks with forged signatures were o Great Eastern Insurance issued a check to Mellicor
paid. o Maasim stole it, forged indorsement, deposited to thiefs account to
SC: MWSS here should bear loss coz of its gross PNB, PNB presented it to HSBC for payment, HSBC honored it.
negligence. o Check was returned to Great Eastern Insurance, who noticed that it
It had no controls/checks over the private printing press was not the signature of the payee. So, they sued HSBC, saying that
they did not [ask the] printing press to surrender plates, they should return the money, coz they disobeyed the order pay
account for spoilage. (?) Mellicor or order
When the first batch of checks was returned, they did not Court said PNB did not have valid title to the check, it was
examine the bank statement/checks. Had they done that, indorsed by Maasim, they should return money to HSBC.
the fraud would have been nipped in the bud. A person to whom (a check?) has been offered is obliged
Thus: MWSS fault. to see to it that indorsement is genuine (?)
n Case of Mrs. Natividad
o Mrs. Natividad trusted her bookkeeper (BK) blindly.
o BK asked Mrs. Natividad to sign checks to pay a supplier. Mrs. RULES OF CLEARING
Natividad didnt examine the supporting documents, so the BK was n Representatives of banks used to meet and exchange checks, give them to
able to steal a lot of money. drawee banks. (history part ito)
SC: Natividad should split loss with bank she trusted the o May bags of gold dust, used to pay these checks.
BK blindly, and was therefore grossly negligent. o Dati walang branches, only one head office, nasa escolta, dasmarinas,
She never examined bank statements/checks being and juan luna
returned. o Clearing would be held at the PNB office, 2x a day.
n Madame Ivy Case: o Now, clearing is computerized, volume of checks, manual clearing
o Somebody (lets name her Madame Ivy) was selling Ready to Wear no longer feasible. Checks have that magnetic print thing.
Clothes to department stores and shopping malls o Procedure for clearing checks, cut off time 130, gather checks,
o Ivy would be paid with checks determine against who the checks were drawn, brought to clearing
o But then instead unintelligible L house, then the computer will debit the drawee bank and credit of
o We already released the checks the bank that brought them. Checks brought to drawee bank, banks
So essentially Ivy looked for the checks pero nawala. decide whether or not to honor them. If they are not honored, must
o Some were delayed these fell into the hands of someone else who return within 24 hours.
deposited and withdrew the money n Equitable Bank v. PNB
o If you want to be strictly legalistic, step by step seller should sue o PNB honored a check whose signature of the drawer was forged.
shopping malls and department stores. They returned it beyond 24 hours.
Depts stores will now sue the banks, coz they issued the o SC said, clearinghouse rules say, dishonored checks have to be
money for forged signatures. returned in 24 hours, if not, barred.
Banks will now sue collecting banks because they have no o This was applied in a later case forged signature of indorser/payee
title to the checks they presented for clearing, since the (applied 24 hour rule too).
signatures were forged
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Drawee bank will not know till later, when they send the o Justice Aquino no reason why banks should not detect irregularities
check to the drawer and the drawer says that the signature in checks.
is forged. Nagpanic ung mga bank. o If bank has reason to dishonor a check, but did not return it within
There was a pingpong of checks 24 hours, it can still sue to get back the money. (arbitration, not a
Collecting bank brings to clearing house, credited, court case).
drawee bank dishonors, returns, etc o Only effect of failure to return within 24 hours, is that you cannot
clearinghouse has to put an end to this pingpong ask the computer to reverse the entries. Meanwhile, money stayes in
of checks. the collecting bank, at least until may decision na.
o Check can be deposited only twice. If dishonored, deposit again one o Prescriptive period of 10 years, based on written contract.
more time.
Monetary board prohibits banks from honoring checks Recently, SC took cognizance of change in rules if you fail to return, you can still run
which have not been cleared. after collecting bank within 10 years. While litigation takes place, money stays with
o Different if checks/bills are purchased. collecting bank --- cannot ask computer to reverse the payments/entries

If bank bought check, payee can immediately withdraw
Sec. 24. Presumption of consideration. - Every negotiable instrument is
money. deemed prima facie to have been issued for a valuable consideration; and
It is a credit facility, sparingly granted to VIPs. Credit every person whose signature appears thereon to have become a party
facility, included in computing single borrowers limit. thereto for value.
Monetary Board Requires that if banks dishonor, they
Must return it the same day, not wait till the next day. Sec. 25. Value, what constitutes. Value is any consideration sufficient to
support a simple contract. An antecedent or pre-existing debt constitutes
n Check Kiting
value; and is deemed such whether the instrument is payable on demand or at
o Requires at least two accounts, or more. a future time.
o Ex. Someone has a bank acct in BPI Makati.
o Another acct in Davao, BDO. Sec. 26. What constitutes holder for value. - Where value has at any time been
o Issues a check, no funds. given for the instrument, the holder is deemed a holder for value in respect to
o He deposits checks drawn from the BDO, wala ring pera. He all parties who become such prior to that time.
deposits a check to the BPI, vice versa. Would keep going on.
They are far apart, two weeks for the checks to be cleared. n Under Sec. 24, a NI is presumed to be issued for valuable consideration
Effectively borrowing money from the account of the o Time and again, SC rules that in a prosecution for BP22, not
payee(? Unintelligible, someone coughed) This can keep required that it was issued for VC. That is PRESUMED.
going on and on. o Value: any consideration sufficient to support a simple contract.
o Branch manager can detect it though movement is unusual. Check o Pre-existing debt is sufficient consideration
deposited always matches the checks being drawn. Mirror images n History Part -- Napoleon was an admirer of Roman Civilization. He adapted
ang ledgers of both accounts title of consul for himself, wanted to be remembered as a great lawmaker, like
o SC not estafa Hammurabi, Solon, Justinian, adopted the Roman Eagle emblem
o When check kiting is stopped, loss borne by the bank Where kite o Created a commission to draft a code based on Roman Law, Code
crashed. Napoleon
n Because of the trouble created by the SC ruling of the 24 hour rule when the Implemented in Continental Europe France, Spain, Port,
indorsement is forged, and SC kept talking about the 24 hour rule, Rules on Italy, Belgium, etc, and Latin American Countries.
Clearing House were changed Napoleon umepal sa code commission -- Donations:
Contract? How can it be a contract daw Seller in deed of
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sale gives something to buyer, who pays. Donation o maker,
donee gives nothing. o drawer,
Donation is an act daw. Dictator is always right. Hehehe. o acceptor, or
o indorser,
When Spain was drafting CC, Manresa retained this
without receiving value therefor, and
terminology, Sanchez Roman criticized them for retaining. for the purpose of lending his name to some other person.
JBL Reyes criticized our Code Commission for saying that
donation is act, not contract. Such a person is liable on the instrument to a holder for value,
Consideration: liberality, kindness, love, affection notwithstanding such holder, at the time of taking the instrument, knew him to
But see Cockrell v. McKenna: love/affection do be only an accommodation party.
not constitute value within the meaning of the
n Accomodation Party someone who signs as maker/drawer/acceptor, only to
law.
lend his credit signing, not receiving value therefor. He did not receive a
Sec. 27. When lien on instrument constitutes holder for value. Where the portion of the proceeds.
holder has a lien on the instrument arising either from contract or by o The liability of the accommodation party is that of a surety. The
implication of law, he is deemed a holder for value to the extent of his lien. liability is not only primary, but also unconditional to a holder for
value.
n If the holder has a lien, he is a holder for value to the extent of his lien.
Holder for value is a holder in due course minus the
n If an employer lost the case in the NLRC, and would appeal, he is required to
knowledge of lack of consideration on the part of the
post a supersedeas bond.
accommodation party.
o Insurance companies will always insist on cash collateral; they will
o Accommodated party cannot recover from the accommodation
not accept real estate mortgage (NLRC cases 99% money claim, very
party, since as between them, absence of consideration is a defense.
risky).
o Ex: Employer applies for a supersedeas bond. He has a negotiable
n Case of Prudencio
instrument for P1M, offers P500K of it as collateral surety
o Concepcion Company got a construction contract from governmet,
company has a lien and is a holder to the extent of this P500K.
and a loan from PNB as working capital.
Sec. 28. Effect of want of consideration. - Absence or failure of consideration o It assigned proceeds of the contract to PNB, but PNB wanted co-
is a matter of defense as against any person not a holder in due course; and makers.
partial failure of consideration is a defense pro tanto, whether the failure is an o The Company got Spouses Prudencio, who mortgaged property as
ascertained and liquidated amount or otherwise. collateral.
n Want of consideration is a valid defense against someone who is not a HIDC. o The Company didnt have sufficient capital, so they asked for money
n Example: check issued to pay for a ring which was fake. And the check was from PNB. PNG agreed, pero kulang parin, so they abandoned the
indorsed to somebody else, indorsee aware. If dishonored, cannot run after project.
drawer bcause he knows that consideration is a fake ring. o PNB might foreclose on the Prudencio Spouses, so the Spouses filed
n Partial Failure Proportionate Defense a case to stop/enjoin.
o 100 sacks of rice, check bounces, only 50 sacks were delivered, valid SC: for accommodation party to be liable, payee must be a
defense of up to 50% HIDC, and all requirements fulfilled except for the fact
that payee is aware of want of consideration, OR
Sec. 29. Liability of accommodation party. accommodation party did not receive.
PNB did not prove these requirements of a HIDC. Spouses
An accommodation party is one who agreed to cosign when they were told that Concepcion
one who has signed the instrument as
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Company had assigned proceeds to PNB, spouses felt they He gave it as a collateral for a loan which he got from the Bank.
were safe. What did bank do? It released money (?) Then, he disappeared, like magic. The dispute is who had a better
o Jack: Law says holder for value, not HIDC right to the proceeds of the cert. Caltex said this was pledged to us.
Sec 52 must take instrument in GF and for value. o Who was entitled to collect money?
Reckoning point time where he got the instrument. SC Court: Theres no provision regarding pledge of NI
talking about something that happened after PNB took the Under Civ Code, for a pledge to bind 3rd parties, it must
instrument appear in a public instrument
Partial release of proceeds does not make PNB in bad faith. The pledge was not notarized; thus, it was not binding on
Bank really wanted project to be completed so they released Security Bank
money, probably error of judgment, Concepcion Company Also, it is required that if the property being pledged is NI,
really needed money it must be indorsed eh it was not indorsed.
n Case of Jose n Indorsement simply signing on the back. Same way that the mere signature
o Disputed ownership of piece of land affixed to deed of sale carries warranty against hidden defects, no need to write
o Other party, client of Atty. Beltran, give up claim for money it in contract of sale.
o Atty. Beltran signed a check to pay Jose, the other party.
Sec. 32. Indorsement must be of entire instrument. - The indorsement must be
o The Check of the company of which Beltran was president, cosigned
an indorsement of the entire instrument. An indorsement which purports to
by VP, bounced transfer to the indorsee a part only of the amount payable, or which purports
o ISSUANCE WAS ULTRA VIRES no business purpose. Why to transfer the instrument to two or more indorsees severally, does not
should corp pay for the benefit of Atty. Beltrans client? operate as a negotiation of the instrument. But where the instrument has been
o When agent exceeds limits of authority, personally liable. paid in part, it may be indorsed as to the residue
o Mrs. Jose should sue Beltran and co-signer, not the corporation.
n Indorsement must be complete/of whole instrument. The instrument must be
Indorsement expected to circulate, hassle kung partial indorsements, on one piece of paper.
n If indorsement is partial, that will not operate as an indorsement, but as an
Sec. 30. What constitutes negotiation. - An instrument is negotiated when it is assignment, so personal defenses may be invoked.
transferred from one person to another in such manner as to constitute the n A partial indorsement is allowable if the instrument is payable in installments,
transferee the holder thereof. If payable to bearer, it is negotiated by delivery;
some having already been paid.
if payable to order, it is negotiated by the indorsement of the holder and
completed by delivery. Sec. 33. Kinds of indorsement. - An indorsement may be either special or in
blank; and it may also be either restrictive or qualified or conditional.
Sec. 31. Indorsement; how made. - The indorsement must be written on the
instrument itself or upon a paper attached thereto. The signature of the
n Sec. 33: mentions various types of indorsements
indorser, without additional words, is a sufficient indorsement. o Special o Blank
o Absolute o Conditional
n If instrument is payable to order, it must be indorsed and delivered to be o Restrictive o Successive
negotiated. If payable to bearer, it is negotiated by delivery. o Facultative o Irregular
o Dela Cruz case (from orig. transcript): This case is where Dela Cruz n Clasifications are not mutually exclusive. Indorsement can fall under 2 or
who had a deposit with Security Bank with a certification: This is to more of these.
certify that bearer has so much of deposit repayable to the
o Ex. Special and Qualified.
depositor. He pledged that to Caltex as collateral for his credit line.
Then he told the Bank that it got lost and asked for a replacement.
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DATE: November 10, 2014 (MT) (c) Vests the title in the indorsee in trust for or to the use of some other
persons.
Sec. 34. Special indorsement; indorsement in blank. - A special indorsement o 3rd mode makes the indorsee a trustee for the benefit of
specifies the person to whom, or to whose order, the instrument is to be somebody else. Like Yul Araya as trustee for Angela Feria
payable, and the indorsement of such indorsee is necessary to the further o Further negotiation also is prohibited but whoever will take the
negotiation of the instrument. An indorsement in blank specifies no indorsee,
instrument will take the instrument subject to the same
and an instrument so indorsed is payable to bearer, and may be negotiated by
delivery. restrictions.--The mere agent or mere trustee
o Title passes, so consideration is presumed
A special indorsement specifies the person to whom the instrument is to be
But the mere absence of words implying power to negotiate does not make an
payable and the further indorsement of that person is required to negotiate the
indorsement restrictive.
instrument.
Sec. 37. Effect of restrictive indorsement; rights of indorsee. - A restrictive
Sec. 35. Blank indorsement; how changed to special indorsement. - The holder indorsement confers upon the indorsee the right:
may convert a blank indorsement into a special indorsement by writing over
the signature of the indorser in blank any contract consistent with the (a) to receive payment of the instrument;
character of the indorsement. (b) to bring any action thereon that the indorser could bring;
(c) to transfer his rights as such indorsee, where the form of the
But if the instrument is blank that means payable to bearer it may be negotiated indorsement authorizes him to do so.
by mere delivery.
But if the indorsement is in blank, the holder may change that into a special But all subsequent indorsees acquire only the title of the first indorsee under
the restrictive indorsement.
indorsement by writing his name for his protection.
o Because if that's in blank and payable to bearer, if somebody that gets lost Sec. 38. Qualified indorsement. - A qualified indorsement constitutes the
and somebody finds it, that person can collect the proceeds of the indorser a mere assignor of the title to the instrument. It may be made by
negotiable instrument. adding to the indorser's signature the words "without recourse" or any words
of similar import. Such an indorsement does not impair the negotiable
Sec. 36. When indorsement restrictive. - An indorsement is restrictive which character of the instrument.
either:
Now, qualified indorsement may be made by writing the phrase without
(a) Prohibits the further negotiation of the instrument; or recourse that may happen.
o Like pay to Gay Gammad only o Without recourse means without resort to a person who is
o Negotiation is prohibited secondarily liable after the default of the person who is primarily
o Title passes, so consideration is presumed liable.
For example, if it's a long term promissory note, it will fall
(b) Constitutes the indorsee the agent of the indorser; or due after five years and the indorser is not willing to assume
o Like pay to Rax Lambino for collection only. She is an agent
potential secondary liability should the maker fail to pay.
only for collection.
That's a long long time nobody can tell. You may be
o Further negotiation is prohibited but whoever will take the
solvent today but five years from now you may be
instrument will take the instrument subject to the same
insolvent. I am not willing to assume for that long period of
restrictions.--The mere agent or mere trustee
time.
o The title remains in the principal. Therefore, there is the
o But it doesn't mean that the indorser does not have any liability at all.
presumption that consideration has passed.
He will be liable for breach of warranty under section 65.
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He warrants that it is genuine in what it purports to be (if 28, 2012, Pau must return the money on the principle of solutio
theres a forged signature or alteration of the amount or indebiti.
breach).
He warrants that he has good title. If it is obtained by Sec. 40. Indorsement of instrument payable to bearer. - Where an instrument,
swindling, theres breach. payable to bearer, is indorsed specially, it may nevertheless be further
negotiated by delivery; but the person indorsing specially is liable as indorser
He warrants that all parties have capacity to indorse but if
to only such holders as make title through his indorsement.
one of the parties is a minor, theres breach.
He warrants that he is not aware of any fact that will make An instrument payable to bearer may indorsed specially.
it valueless.
It may be further negotiated by delivery.
If the maker is insolvent and he was aware of it, theres
o CLV: But Sec. 40 applies only to the first four types of bearer
breach. But if he is not aware, there will be no breach.
instruments under Sec. 9 (thus, it does not apply to instruments

where the only or last endorsement is an endorsement in blank).
Sec. 39. Conditional indorsement. - Where an indorsement is conditional, the
party required to pay the instrument may disregard the condition and make These four types, even if endorsed specially, retain their character as
payment to the indorsee or his transferee whether the condition has been bearer instruments, and may still be negotiated by mere delivery.
fulfilled or not. But any person to whom an instrument so indorsed is The special endorsement may be ignored.
negotiated will hold the same, or the proceeds thereof, subject to the rights of Again, note the maker bound himself to pay to bearer. Therefore, an indorser
the person indorsing conditionally. cannot change the obligation and make it payable to order without the consent

of the bearer. I precisely made that payable to bearer. I don't want to assume
An indorsement may be conditional. Remember: what is conditional is the
the risk of paying the wrong person because of a forged indorsement. So you
indorsement and not the promise or order to pay.
cannot change my obligation an obligation payable to bearer and since it is
Now the payers who are liable has two options: payable to bearer it may be further negotiated by delivery. But the person
1. He can wait to see if the condition is fulfilled, or indorsing is liable only to the indorser.
2. He can ignore it and pay at maturity.
Rose issued an instrument to Cler. Cler indorsed it to Mahrra, on the Situation:
condition that Mahrra will pass the CPA test. Now, Rose can tell Mahrra, A-B-C-D-E
Okay, I can either wait to see if you pass the test or ignore that condition. I A made a promissory note payable to bearer and delivered it to B B
will pay next week because right now my business has a lot of cash flow and I indorsed to C C delivered to D D delivered to E E presented it for
want to discharge it now. payment to A. A refused to pay.
o Because Rose bound herself to pay unconditionally, Cler, the Note that the note is payable to bearer but B indorsed it to C. Can E run after
indorser, cannot change Roses obligation without Roses consent. B? ANS: No, because he indorsed it. And C and D did not indorse. So he
o If Rose pays and the condition is not fulfilled, Cler cannot run after cannot raise his title to B.
Rose because the law allows Rose to ignore the condition and pay.
o The remedy of Cler is to run after Mahrra, the indorsee, and get the Sec. 41. Indorsement where payable to two or more persons. - Where an
money. instrument is payable to the order of two or more payees or indorsees who are
CLV: An instrument is issued, whereby Ivy promised to pay Pau if it rains on not partners, all must indorse unless the one indorsing has authority to
June 28, 2012. indorse for the others.

o Pau may present the instrument to Ivy for payment before June 28,
If the instrument is payable to two or more payees, all must indorse.
2012. In such case, Ivy may either: (1) tell Pau to wait for June 28,
2012, or (2) pay Pau the money already, but if it does not rain on June Exception: If one has a power of atty. For the others, he is an agent or they are
partners because in partnership there is mutual agency.
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Untitled Case: Jech obtained a loan from Claudia to buy a car from Rae, a car Sec. 44. Indorsement in representative capacity. - Where any person is under
dealer. Jech executed a promissory note in favor of Rae. The promissory note obligation to indorse in a representative capacity, he may indorse in such
terms as to negative personal liability.
was indorsed to Claudia. Claudia required that the car be mortgaged to secure

payment of the loan. Claudia also required it to be insured, and the policy
Now if a person will indorse as an agent, to avoid personal liability, he should
should provide that in case of loss, the proceeds will be paid to Claudia. Of
indicate that he is signing as an agent. (disclose principal too! See section 69)
course, the car was lost. Jech filed a claim. The insurance company issued a

check. The payees were Jech and Claudia. Jech then deposited the check (Jechs Sec. 45. Time of indorsement; presumption. - Except where an indorsement
check) and the bank paid. So when Claudia found out about it, she sued. bears date after the maturity of the instrument, every negotiation is deemed
o The court ruled in favor of Claudia. Why did the bank pay the check prima facie to have been effected before the instrument was overdue.
when there were two payees, and only one indorsed? This is the case
where the two people are partners or one is an agent; therefore, the General Rule: A negotiation is presumed to have been made before the
indorsement is not valid. The bank has to pay Claudia. instrument was overdue.
o Exception: if the indorsement was dated and the date is after
Sec. 42. Effect of instrument drawn or indorsed to a person as cashier. - maturity.
Where an instrument is drawn or indorsed to a person as "cashier" or other This presumption is important because one of the requirements to be a holder
fiscal officer of a bank or corporation, it is deemed prima facie to be payable to
the bank or corporation of which he is such officer, and may be negotiated by in due course you must have taken the instrument before it was overdue.
either the indorsement of the bank or corporation or the indorsement of the
officer. Sec. 46. Place of indorsement; presumption. - Except where the contrary
appears, every indorsement is presumed prima facie to have been made at the
place where the instrument is dated.
Here, the instrument is indorsed to a cashier or other fiscal officer, like a

treasurer.
Suppose the promissory note says: Manila, Philippines, and the date is there
It is presumed that the intended payee is the indorsee is the corporation of
November 10, 2014. It is presumed that was indorsed in the Philippines.
which the person is the cashier or treasurer.
So that lays down a conflict of law rule. In case of litigation regarding the

Sec. 43. Indorsement where name is misspelled, and so forth. - Where the
indorsement, its Philippine law that will govern.
name of a payee or indorsee is wrongly designated or misspelled, he may
indorse the instrument as therein described adding, if he thinks fit, his proper Sec. 47. Continuation of negotiable character. - An instrument negotiable in its
signature. origin continues to be negotiable until it has been
a. restrictively indorsed or
b. discharged by payment or otherwise.
If the name of the indorsee is misspelled, they should indorse the name as

misspelled because subsequently, they will then have no way of knowing that
An instrument that is negotiable remains to be negotiable unless it is
the indorser actually committed a mistake.
restrictively indorsed or discharged.
For example, somebody issued a check to former chief justice Enrique
But of course the restrictive indorsement is contemplated here, or where the
Fernando and wrote his name as Enrique Fernandez.
indorsement prohibits further negotiation.
o If he wants to indorse that, he must sign his name as Enrique

Fernandez. Sec. 48. Striking out indorsement. - The holder may at any time strike out any
o Then if he wants to consign it the second time with the name indorsement which is not necessary to his title. The indorser whose
Enrique Fernando, its as if Enrique Fernandez is the original payee indorsement is struck out, and all indorsers subsequent to him, are thereby
who indorsed it to Enrique Fernando. relieved from liability on the instrument.

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Situation: this Act, reissue and further negotiable the same. But he is not entitled to
Order of indorsement: Allen Blu [in blank to] Cler Drew Eddan enforce payment thereof against any intervening party to whom he was
Allen issued a promissory note to Blu or order. Blu indorsed it in blank to Cler (so it personally liable.
became payable to bearer). Cler indorsed it to Drew, and Drew indorsed it to Eddan.
Situation:
Eddan can cross out the indorsements of Cler and Drew, and retain only the Order of indorsement: Francis Glorie Hye Ivy Joco Glorie Karen
blank indorsement of Blu. Joco negotiated the instrument back to Glorie, and Glorie negotiated this to Karen. And
o Because the indorsement will make it payable to bearer. Karen presented this for payment to Francis, but Francis refused to pay. Why cant
o So Eddan did not need anymore the indorsemens of Cler and Drew. Glorie run after Hye, Ivy, and Joco?
o But Eddan cannot cross out the indorsement of Allen, because the ANS: Because they (Hye, Ivy, and Joco) can run after him. So there will be offsetting of
promissory note is payable to order. liabilities. Compensation will take place.
o So the indorsement in blank of Blu is needed. Her
Sec. 51. Right of holder to sue; payment. - The holder of a negotiable
Now but suppose Eddan crossed out the indorsement of Cler. What is the effect? instrument may to sue thereon in his own name; and payment to him in due
Indorsement of Cler is discharged, and Eddan cannot run after Drew. Why? course discharges the instrument.
Drew was prejudiced. Drew lost his right to run after Cler because he was
Sec. 52. What constitutes a holder in due course. - A holder in due course is a
discharged. She holder who has taken the instrument under the following conditions:

Sec. 49. Transfer without indorsement; effect of. - Where the holder of an a. That it is complete and regular upon its face;
instrument payable to his order transfers it for value without indorsing it, the b. That he became the holder of it before it was overdue, and without
transfer vests in the transferee such title as the transferor had therein, and the notice that it has been previously dishonored, if such was the fact;
transferee acquires in addition, the right to have the indorsement of the c. That he took it in good faith and for value;
transferor. But for the purpose of determining whether the transferee is a d. That at the time it was negotiated to him, he had no notice of any
holder in due course, the negotiation takes effect as of the time when the infirmity in the instrument or defect in the title of the person
indorsement is actually made. negotiating it.

If the instrument is payable to bearer or order, but it was just delivered (no Can the payee be a holder in due course (HIDC)?
indorsement), then he is merely an assignee. There are two views: one view says yes and the other says no. But I think the
He takes it subject to personal defenses view of Brannan is the correct one.
o Transferee acquires only the rights of the transferor. The defenses He says that by sheer definition, the payee can be a holder in due course.
available against the transferor will also be available against the Section 196 says who is a holder: A payee or indorsee who is in possession of the
transferee.
instrument or the bearer thereof
But, he has a right to sue the indorser to compel him to indorse
Since the definition includes holder includes payee, and if the payee meets the
But in determining if he is a holder in due course, you consider the time when requirements of section 52, then he should be considered a holder in due
the indorsement was obtained course.
o Example: if Rax issued an instrument to pay for a bottle of Blue
Label that is stolen, and she did not know that the bottle was stolen Gatchalian Case: Anita Gatchalian wanted to buy a second-hand car. Manuel
when it was delivered to her, but when she got the indorsement she Gonzales came forward and said that he knew somebody who was selling his
was already aware, then she is not a holder in due course. car, but this owner wants to deal only with serious buyers. He does not want
to waste his time with curiosity seekers. Therefore, Gonzales told Gatchalian:
Sec. 50. When prior party may negotiate instrument. - Where an instrument is
negotiated back to a prior party, such party may, subject to the provisions of To satisfy the owner that you are serious, you must show the color of your
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money. So Gonzales asked Gatchalian to issue a check and he said that he will of PNB New York. The employee told Banco Atlantico not to present the
return with a certificate of registration. Gatchalian issued a crossed check. checks for payment right away. But the bank allowed her to withdraw the
Gonzales got it, and then he stopped showing up. And what did Gonzales do money although the checks were not yet cleared. When Banco Atlantico
with the crossed check? He used it to pay for the medical expenses of his wife. eventually presented the checks, PNB dishonored them because the amount
And since the amount of the check was greater than the hospital bill of his has been altered by raising the amount. Banco Atlantico sued.
wife, sinuklian pa siya ng hospital. So when Gonzales did not return, o Held: The Court said Banco Atlantico was not a HIDC because it
Gatchalian stopped the payment of the check. The hospital sued Gatchalian. agreed to take the checks and not to present them for payment
Gatchalian said that was issued for the payment of the car and Gonzales never immediately although they were already due and payee told them to
returned. So there was a failure of consideration. But the hospital said, we are a not present that for payment right away. And then they also allowed
holder in due course, so you cannot invoke that. the payee to withdraw the money right away although the checks
o Held: The court said NO. When a check is crossed, the crossed have not yet been cleared.
check can only be deposited. That serves as warning sign that it was Mesina Case: This Jose Go bought a cashiers check payable to his order. But
issued for a specific purpose and therefore, to be a HIDC, you must he negligently left the check. Another customer who saw the check stole it.
make inquiries (for what purpose was the check issued, the nature of When Jose Go realized that he had left the check, he asked the bank to stop
the title of the payee, etc.). If one does not make that inquiry, then he payment. Now the customer who stole it, Alexander Lim, indorsed the check
cannot claim to be a holder in due course. to Marcelo Mesina, who then demanded payment. When the bank refused, he
Stelco Case: Stelco Marketing Corporation is a distributor of steel bars. It sold sued the bank.
steel bars to RYL Construction who did not pay. RYL asked Steelwell Corp o Held: SC said he could not recover since he was not a HIDC. The
for financial help. So Steelwell Corp issued a check on the understanding that court said he refused to explain how and why the check was indorsed
the check will be used only to guarantee your obligation, but not to pay for to him. Mesina had noticed that there was a defect in the title of Lim.
your obligation. But RYL Construction gave the check instead to Armstrong o Jack thinks the better reasoning here is that the indorsement was
Industries, sister company of Stelco Marketing, for the manufacture of the forged. Remember that the payee of the check was Jose Go and the
steel bars (where Stelco Marketing was the one selling the steel bars). Now, the one who indorsed it to Mesina was Lim. The indorsement was a
evidence does not show why they gave the check to Armstrong Industries, the forgery. But the court invoked Section 52 instead.
manufacturer of the steel bars for Stelco Marketing. The check was dishonored Salas Case: This has been asked in the bar exams. Sales bought a car from Violago
for lack of funds. After it had been dishonored, it came to the possession of Motors. To pay for the car, she obtained a loan from Filinvest. In accordance
Stelco Marketing. The evidence does not indicate how it came to the with the usual practice, she executed a promissory note in favor of Violago
possession of Stelco Marketing. Stelco Marketing now sued Steelwell Motors. Violago Motors then indorsed the PN to Filinvest. Salas now refused
Corporation, the drawer. to pay Filinvest because she said there is a discrepancy between the engine
o Held: The court said it cannot recover, it was not a HIDC. First the number and the chassis number as indicated in the certificate of registration
payee was RYL Corporation, and the check was not indorsed to it and the sales invoice and the actual number-engine number and chassis
it was payable to order. Secondly, when they took it, they were number.
aware that it had been previously dishonored because there was a o Held: Assuming that there is a discrepancy, she cannot refuse to
stamp at the back by the drawee bank, which said DAIF or drawn because Filinvest was a HIDC. Therefore, she cannot invoke those
against insufficient funds. Because when the bank dishonors that, it defects as a ground for not paying the PN.
will stamp at the back-notice of dishonor-and it will state there the State Investment House v. CA: Corazon Victoriano delivered some pieces of
grounds DAIF-drawn against insufficient funds. jewelry to Nora Mulic to be sold on commission. Mulic issued two checks to
Banco Atlantico Case: Banco Atlantico is one of the biggest banks in Spain. An Victoriano as security for the expected proceeds from the sale of the jewelry.
employee of the Philippine Embassy deposited in this bank her paychecks. Well, she was not able to sell the pieces of jewelry so she returned them to
They were being paid in dollars but the checks were drawn against the branch Victoriano but before she returned them, Victoriano meanwhile, rediscounted
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the checks with State Investment House (SIH). When SIH presented the Sec. 56. What constitutes notice of defect. - To constitute notice of an infirmity
checks for payment, they were dishonored for lack of funds. Mulic did not in the instrument or defect in the title of the person negotiating the same, the
fund the checks anymore because she had returned the pieces of jewelry. So person to whom it is negotiated must have had actual knowledge of the
infirmity or defect, or knowledge of such facts that his action in taking the
SIH sued Mulic. Her defense was that she was not liable because the pieces of instrument amounted to bad faith.
jewelry were returned to Victoriano.
o Held: SIH was a HIDC. Mulic could not invoke the absence of Title is defective in the following situations:
consideration between her and Victoriano as a defense. Fraud: Quito indorsed a note to him by forging Sheenas signature

Sec. 53. When person not deemed holder in due course. - Where an instrument
Fraud: Sheena issued a check to Quito as payment for a ten-carat diamond ring
payable on demand is negotiated on an unreasonable length of time after its she bought from him, but the ring turned out to be fake
issue, the holder is not deemed a holder in due course. Duress: Quito kidnapped Sheena and forced her to issue a check to his name
Unlawful means: Quito issued a check to pay for his illegal gambling debts
Sec. 54. Notice before full amount is paid. - Where the transferee receives
Illegal consideration: Quito issued a check for payment of shabu
notice of any infirmity in the instrument or defect in the title of the person
negotiating the same before he has paid the full amount agreed to be paid
therefor, he will be deemed a holder in due course only to the extent of the Asia Bank v. Ten Sen Guan: Ten Sen Guan ordered ten cases of patis
amount therefore paid by him. (expensive linen) from Snows Limited. To collect payment, Snows drew a bill
of exchange. The drawee was Ten Sen Guan, the buyer. Snows indorsed the
Situation: checks to Asia Bank. When the crates arrived, they did not contain patis, but
Roxie was issued a postdated check of P80,000, payable next month. She sack cloth.
approached Carlo and said, My pet chicken is sick and its with the vet. The o Held: The court said that this is negotiation that amounts to fraud.
bills are piling up and I need money very badly. I cannot wait for next month. Therefore, Asia Bank could not acquire valid title and could not
I have a check here for 80k. Carlo replied, I have only 40k, so come back enforce the bill of exchange against Ten Sen Guan.
after two days for the remaining 40k. So Carlo gave Roxie the 40k. But
Roxie used the 40k to buy a stolen car from Lucy. At the time Carlo gave DATE: November 11, 2014 (RS)
Roxie the 40k, he was not aware of that. But two days later, he became aware.
Theres now failure of consideration. Sec. 57 Rights of holder in due course. A holder in due course:
Carlo is entitled to collect half of the face value of the check, representing holds the instrument free from any defect of title of prior parties, and
free from defenses available to prior parties among themselves,
the 40k he had already paid Roxie. But he cannot collect the remaining
and may enforce payment of the instrument for the full amount
40k because he became aware of the failure of consideration two days thereof against all parties liable thereon.
later.
HIDC holds the instrument free from personal defenses.
Sec. 55. When title defective. - The title of a person who negotiates an
instrument is defective within the meaning of this Act when he obtained the But real defenses can be invoked against him.
instrument, or any signature thereto, by Authors have tried to distinguish between the two:
1. fraud, o Some say in real defense, there is no contract while in personal
2. duress, defense, there is a contract but it is inequitable to enforce.
3. force and fear, o Some say in personal defense, contract is voidable but in real defense
4. other unlawful means,
5. for an illegal consideration,
it is void.
6. when he negotiates it in breach of faith, or o But still no clear-cut, acceptable distinction between the two, so we
7. under such circumstances as amount to a fraud. just go over the list of personal/real defenses.
Defense can only be invoked by proper party
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o ex. Want of consideration: Acceptor cannot invoke that against the Examples:
HIDC. He cannot say that there is no consideration between me and Fraud in factum: Mike asked Jourd to sign a mortgage document, which was in
the drawer because the acceptor admits that the drawer has authority fact a promissory note. Jourd signed the document, which was covered. This is
the B/E addressed to him fraud in factum because Jourd never had any intention to make an instrument.
Now, under Section 57, the HIDC is entitled to enforce payment for the full It is a real defense, available against a HIDC.
amount. Fraud in inducement (or contractual fraud): Yul convinces John Terry to buy a
o Exceptions: supposed bar of gold, which is actually made of brass. John Terry issues a note
Instrument is payable in installments, if some installments in payment. Yul indorses the note to Mats, who is a HIDC. John Terry cannot
have already been paid. He can only collect payment for set up fraud against Mats, it being a personal defense. The remedy of John
unpaid installments. Terry is annulment plus damages against Yul.
When he merely has a lien on parts of the face value of the Minority: Jag is a HIDC, but Kathleen is only 17 years old. Kathleen refuses
instrument. to pay. She may set up minority as a real defense, even against Jag, a HIDC.
Or in the case of material alteration where the alteration Duress/intimidation: Rhealeth threatened the life of Chikit. Chikit made a
was made after the drawer or acceptor became bound on check and signed. The check was indorsed to a HIDC. Chikit cannot set up
the instrument, HIDC can only enforce it on the original the defense that her signature was obtained through intimidation, since its a
amount, which may be less than the altered amount. personal defense.
Gambling debt would be merely personal defense as against an instrument. Insolvency: An insolvent person may set up such fact against a HIDC, whose
Table of defenses from Sundiang: claim may not be filed in the insolvency proceedings. Insolvency is a real
defense.
Real defenses Personal defenses
Minority (available only to the minor) Failure or absence of consideration Sec. 58 - When subject to original defense. - In the hands of any holder other
Forgery Illegal consideration than a holder in due course, a negotiable instrument is subject to the same
defenses as if it were non-negotiable.
Non-delivery of incomplete instrument Non-delivery of complete instrument
Material alteration Conditional delivery of complete If someone is not a HIDC, he takes instrument subject to personal defenses
instrument o thats a handicap that youll have to face personal defenses can be
Ultra vires acts of a corporation Fraud in inducement invoked against him;
o Hi-Cement Corp. v. Insular Bank: The NIL does not absolutely bar a
Fraud in factum or in esse contractus Filling up blank not within authority
holder who is not a HIDC from recovering on the checks. He may
Illegality if declared void for any Duress or intimidation recover from the party who indorsed/encashed the checks if the
purpose latter has no valid excuse or defense for refusing payment.
Vicious force or violence Filling up blank beyond reasonable time
But a holder who derives his title through a holder in due course, and who is
Want of authority Transfer/negotiation in breach of faith
not himself a party to any fraud or illegality affecting the instrument, has all
Prescription Mistake the rights of such former holder in respect of all parties prior to the latter.
Discharge in insolvency Insertion of wrong date
Payment after maturity (CLV) Payment before maturity (CLV) But Sec. 58 provides, even if not HIDC but he acquired it from one, and he
was not a party to the illegality, he will take it free from personal defenses.
Ante-dating or post-dating for illegal or
Purpose of the law is to protect HIDC.
fraudulent purpose

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Sec. 59 - Who is deemed holder in due course. - Every holder is deemed prima Araneta v. Perez
facie to be a holder in due course; but when it is shown that the title of any o P took out a loan from A and signed a negotiable PN. P failed to pay,
person who has negotiated the instrument was defective, the burden is on the
so he was sued.
holder to prove that he or some person under whom he claims acquired the
title as holder in due course. But the last-mentioned rule does not apply in o P claimed: A was a trustee of a trust fund, whose beneficiary is Ps
favor of a party who became bound on the instrument prior to the acquisition daughter. P used the money loaned to him for the medical expenses
of such defective title. of his daughter. But A was administering the trust fund. Because of
that, the trust fund should have been made to pay for the medical
Fossum v. Fernandez Hermanos: Fernandez Hermanos asked American Iron to expenses. So, there should be offsetting.
fabricate a tail shaft for a vessel. To pay for it, Fernandez Hermanos drew a bill o Held: No, as maker, you are binding yourself to pay
of exchange addressed to American Iron, and they accepted it. It was supposed unconditionally. Whatever you did with the money is not the
to be paid, but when the shaft was delivered, it was defective for failure to concern of the payee.
meet Fernandez Hermanos specifications as shown in a blueprint. Meanwhile,
American Iron negotiated the bill to Asia Bank, who then indorsed it to Sec. 61 - Liability of drawer. The drawer by drawing the instrument:
Fossum, the manager of American Iron. Fossum now sued Fernandez
Hermanos. (a) admits the existence of the payee and his then capacity to indorse;
(b) and engages that, on due presentment, the instrument will be
o Fernandez Hermanos argued that Fossum cannot collect, since accepted or paid, or both, according to its tenor,
Fossum is not a HIDC. Fernandez Hermanos argued that Fossum, (c) and that if it be dishonored and the necessary proceedings on
being the manager of American Iron, knew of the failure of dishonor be duly taken, he will pay the amount thereof to the holder
consideration due to the defective tail shaft. or to any subsequent indorser who may be compelled to pay it.
o Fossum argued that he got it from Asia Bank, a HIDC. And since
under Sec. 58, Fossum can collect, exempt form those defenses. But the drawer may insert in the instrument an express stipulation negativing
or limiting his own liability to the holder.
o Held: For Sec. 58 to apply, you must have obtained it from HIDC.
Fossum did not prove that Asia Bank is a HIDC. Cebu International Corp. v. CA
o But Fossum argued that Sec. 59 says every holder is presumed to be a o CIFC issued a check in favor of Alegre, who presented the check to BPI.
HIDC o BPI debited CIFCs account, but BPI did not release money to Alegre.
o Held: For the presumption under Sec. 59 to apply, the party o BPI investigated the incident but froze the release of the money.
invoking it must be a holder. But Asia Bank was no longer a holder o Alegre sued CIFC, whose defense was it complied with its undertaking to
in possession of the instrument. Fossum cannot invoke that Alegre, and that the bank had already debited its account.
presumption. Fossum cannot collect. #awesumfossumdimsum o SC: No, that was just a bookkeeping entry, but money was never delivered.
Therefore, CIFC is still liable.
Liabilities of Parties o When the bank deducted the amount of the CHECK from CIFCs

current account, this did not ipso facto operate as a discharge or
Sec. 60 - Liability of maker. - The maker of a negotiable instrument, by making
it, engages that payment of the instrument. Although the value of the CHECK was
(a) he will pay it according to its tenor, and deducted from the funds of CIFC, it was not delivered to the payee,
(b) admits the existence of the payee and Vicente Alegre. Instead, BPI offset the amount against the losses it
(c) his then capacity to indorse. incurred from forgeries of CIFC checks, allegedly committed by
Alegre. The confiscation of the value of the check was agreed upon
The instrument is expected to be circulated. And if the payee does not exist by CIFC and BPI through a compromise agreement. xxx
and has no capacity to enter into a contract, the instrument cannot be
negotiated.
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o BPIs confiscation of Alegres money constitutes garnishment received. Following the plain language of the law, LBP, by
without the parties going through a valid proceeding in court. xxx the said payment, recognized and complied with its
In effect, CIFC has not yet tendered a valid payment of its obligation obligation to pay in accordance with the tenor of his
to the private respondent. Tender of payment involves a positive acceptance. The tenor of the acceptance is determined by
and unconditional act by the obligor of offering legal tender the terms of the bill as it is when the drawee accepts. Stated
currency as payment to the obligee for the formers obligation and simply, LBP was liable on its payment of the check
demanding that the latter accept the same. Tender of payment cannot according to the tenor of the check at the time of payment,
be presumed by a mere inference from surrounding circumstances. which was the raised amount.
Because of that engagement, LBP could no longer repudiate
Sec. 62 - Liability of acceptor. - The acceptor, by accepting the instrument, the payment it erroneously made to a due course holder.
engages that he will pay it according to the tenor of his acceptance and We note at this point that Gold Palace was not a participant
admits:
in the alteration of the draft, was not negligent, and was a
(a) The existence of the drawer, the genuineness of his signature, and his holder in due course-it received the draft complete and
capacity and authority to draw the instrument; and regular on its face, before it became overdue and without
(b) The existence of the payee and his then capacity to indorse. notice of any dishonor, in good faith and for value, and
absent any knowledge of any infirmity in the instrument or
Far East Bank v. Gold Palace (GR No. 168274) defect in the title of the person negotiating it. Having relied
o A bumbay went to a jewelry store and issued a bank draft for 380K on the drawee bank's clearance and payment of the draft
o Drawee is Land Bank of the Philippines (LBP). and not being negligent (it delivered the purchased jewelry
o He said he wanted to buy jewelry. Bought jewelry costing 150K. only when the draft was cleared and paid), respondent is
o Owner said: I will reserve the pieces you want, and I will deposit the amply protected by the said Section 62. Commercial policy
draft in my account. When it is cleared, you can take delivery. favors the protection of any one who, in due course,
o Store deposited the draft with the bank account with Far East Bank changes his position on the faith of the drawee bank's
(FEB). FEB brought it to the clearinghouse. clearance and payment of a check or draft.
o LBP (the drawee) honored it. Store informed buyer to pick up the o 2 views:
jewelry. First: pay according to the tenor of acceptance.
o So since draft was for 380k, but the jewelry cost only 150k, mayroon Second: pay accdg to the original tenor of the bill as drawn
pang sukli. If you look at the law, the acceptance is always inseparably
o Around the weeks later, LBP however informed FEB that the check linked to the order.
was materially altered, from 300 pesos to 380k! Sec. 1321 - acceptance of a bill is the signification by the
o FEB returned the 380k to DB and sued the jewelry store for drawee of his assent to the order of the drawer
reimbursement. Sec. 1392 - general acceptance assents without qualification
o SC: Why did you do that? When it was presented to the to the order of the drawer. So that if the acceptance deviates
clearinghouse, it honored and paid it. At the time that it agreed to do from the tenor of the order, that is qualified acceptance.
that, the tenor was for 380K. It accepted it for that amount.
Therefore, you cannot sue. 1
Sec. 132. Acceptance; how made, by and so forth. - The acceptance of a bill is the signification by the
Unmistakable herein is the fact that the drawee bank (LBP) drawee of his assent to the order of the drawer. The acceptance must be in writing and signed by
cleared and paid the subject foreign draft and forwarded the 2
Sec. 139. Kinds of acceptance. - An acceptance is either general or qualified. A general acceptance
amount thereof to the collecting bank (FEB). The latter
assents without qualification to the order of the drawer. A qualified acceptance in express terms
then credited to Gold Palace's account the payment it
varies the effect of the bill as drawn.
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And consent presupposes knowledge. Example: Postdated checks were issued by Rhyz, in exchange for cash, to Jei.
o Obiter dictum Before agreeing, Rhyz asked her sister Joanne to sign as an irregular indorser.
SC: The liability of the drawee is the tenor of instrument as The check bounced for insufficient funds. Jei filed a case for estafa against
drawn by drawer. Rhyz and Joanne. Rhyz went into hiding and disappeared. In the case, Joanne
CLV: Sec. 132 defines acceptance as assent to the order of was acquitted of estafa, on the ground of failure to prove conspiracy with
the drawer, so acceptor is liable only to the original tenor Rhyz.
The acceptor admits (1) The existence of the drawer, the genuineness of o Court still ordered Joanne to pay because she is civilly liable as an
his signature x x x irregular endorser, although she was acquitted from criminal
o The acceptor cannot take back the payment when the signature of liability.
the drawer is forged and that the drawer has no money to pay.
Sec. 65 - Warranty where negotiation by delivery and so forth. Every person
Sec. 63. When a person deemed indorser. - A person placing his signature negotiating an instrument by delivery or by a qualified indorsement warrants:
upon an instrument otherwise than as maker, drawer, or acceptor, is deemed
to be indorser unless he clearly indicates by appropriate words his intention (a) That the instrument is genuine and in all respects what it purports to
to be bound in some other capacity. be;
(b) That he has a good title to it;
(c) That all prior parties had capacity to contract;
Now, the indorser binds himself in some other capacity and therefore
(d) That he has no knowledge of any fact which would impair the validity
somebody who signed at the back for the purpose of identifying the signature of the instrument or render it valueless.
of the payee is not an indorser.
But when the negotiation is by delivery only, the warranty extends in favor of
Sec. 64. Liability of irregular indorser. - Where a person, not otherwise a party no holder other than the immediate transferee. Only immediate transferee
to an instrument, places thereon his signature in blank before delivery, he is
liable as indorser, in accordance with the following rules: The provisions of subdivision (c) of this section do not apply to a person
negotiating public or corporation securities other than bills and notes.
(a) If the instrument is payable to the order of a third person, he is liable
to the payee and to all subsequent parties. If there is forgery there is breach.
(b) If the instrument is payable to the order of the maker or drawer, or is
If title is obtained thru fraud breach.
payable to bearer, he is liable to all parties subsequent to the maker
or drawer. If prior party was a minor breach.
(c) If he signs for the accommodation of the payee, he is liable to all If he has knowledge of any fact that would make the instrument valueless
parties subsequent to the payee. breach.
o Maker was bankrupt, and person negotiating knew it breach.
Irregular indorser is just an accommodation party. He is another party who o But if he did not know it no breach.
signed in order to enhance the credit standing of the instrument. If he was
already bound, signing again will not enhance the creditworthiness of the According to Sec. 65, if negotiation is by delivery, the warranty shall extend
instrument. only to the immediate transferee.
Example: PN Bank says we have to get another maker. A person signs in blank o Example: Leo delivered a bearer instrument to Laurence, who, in
and before delivery. He is an irregular indorser because, normally, the first turn, delivered it Grace. Leo will be liable only to Laurence, but not
signature you will find in the back is the signature of the payee. Instead he to Grace. #cassesexy
finds the signature of a total stranger. o This principle is similar to the Statute of Frauds (Art. 1403, NCC),
o If he signs after delivery, he will be a regular accommodation party. which is based on common (not civil) law. Under the Statute of
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Frauds, an undertaking to answer for a debt of another is not BPI case:
enforceable unless it is in writing. o Somebody had a managers check issued and signed by an American
Example: Ada delivered a bearer instrument to Sean, but bank payable to the order of cash
nothing was in writing. So if there is a breach of warranty, o Holder had no dollar account, so he had no way of collecting. So he
Ada will not be liable to Sean. asked his friend to accommodate him. They will deposit the check in
If Sean negotiated the instrument to Anna, and the friends account.
Anna to Ian, and it was dishonored, Anna and Ian o Jack does not know why but the friend pre-signed a withdrawal slip
cannot run after Sean because there is nothing in and gave it to him, but he kept the passbook
writing. o But he returned; although check wasnt cleared still was allowed to
Assuming theres writing, Seans liability extends withdraw money. Remember gave the withdrawal slip but not the
only to Anna. Ian can run after Anna, but not passbook.
Sean. #cassesexy o Manual of Regulation For banks passbook must be presented
whenever there is a withdrawal from the savings account. Branch
Sec. 66 - Liability of general indorser. Every indorser who indorses without manager, however, allowed withdrawal. There must have been
qualification, warrants to all subsequent holders in due course: collusion.
o BPI sued customer.
(a) The matters and things mentioned in subdivisions (a), (b), and (c) of
the next preceding section; and
o SC: It was BPIs fault, it allowed the friend to withdraw money
(b) That the instrument is, at the time of his indorsement, valid and although check wasnt cleared.
subsisting; RCBC case:
o Banks will tell you that there is a 45-day waiting period before you
And, in addition, he engages that, on due presentment, it shall be accepted or can withdraw funds of a dollar check deposited.
paid, or both, as the case may be, according to its tenor, and that if it be
o RCBC accommodates its employees; Employees will deposit dollar
dishonored and the necessary proceedings on dishonor be duly taken, he will
pay the amount thereof to the holder, or to any subsequent indorser who may check, and they can withdraw right away without waiting for the
be compelled to pay it. 45-day period.
o They extended that to the mother of an employee named Gonzales.
GI warrants that the instrument is valid; thus, if the maker is insolvent, and o Sister sent dollar check, which was deposited to mothers account
the instrument is not paid, he will pay for it. with RCBC
Haram case: o Bank asked daughter to sign at the back as irregular indorser.
o Bumbay deposited a check drawn against NY branch of PNB o Before the check was presented, somebody in another section of bank
o He was able to withdraw money although the check was not yet wrote at the back below the indorsement VALID UP TO 107,500
cleared. When the Standard Chartered Bank (SCB) presented the PESOS ONLY
check to the bank in NY, it was dishonored by PNB on the ground o American Bank dishonored it with an annotation of irregular
that the signature was forged. SCB asked the holder to return the indorsement
money. Holder refused, so SCB sued. o RCBC sued mother and daughter citing Sec. 66
o TC ordered payment; so he appealed. The holder argued that SCB o SC: Warranty was not breached; it was not their fault that the check
failed to prove that the signature was forged. wasnt paid; the fault was with the bank itself. Some employee wrote
o SC Under Sec. 66, you warranted that youll pay. The only issue that there it was valid only up to a portion of the face value of the
is: Was it paid or not? Whether or not banks reason is valid is check. That is why it was dishonored.
irrelevant..
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Sec. 67. Liability of indorser where paper negotiable by delivery. Where a But not in the case of PN where the maker is primarily liable. If PN is not
person places his indorsement on an instrument negotiable by delivery, he presented for payment to the maker at the date of maturity, maker remains
incurs all the liability of an indorser.
liable
o If the maker was at the place where payment was to be made at
Applies to instruments payable to bearer.
maturity, but the holder does not show up, his liability will not be
If qualified indorser, liable under Sec. 65; general indorser under Sec. 66.
extinguished. BUT, he will not be liable for interest because there

was no delay.
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 Sec. 71 - Presentment where instrument is not payable on demand and where
have agreed otherwise. Joint payees or joint indorsees who indorse are payable on demand. - Where the instrument is not payable on demand,
deemed to indorse jointly and severally. presentment must be made on the day it falls due. Where it is payable on
demand, presentment must be made within a reasonable time after its issue,
except that in the case of a bill of exchange, presentment for payment will be
Indorsers are presumed to be liable in the order in which they indorse. sufficient if made within a reasonable time after the last negotiation thereof.
This presumption can be rebutted.
Ex. C can prove that he did not indorse it to D. Joint payees or indorsees will Sec. 72. What constitutes a sufficient presentment. - Presentment for payment,
be severally liable. to be sufficient, must be made:

Sec. 69. Liability of an agent or broker. - Where a broker or other agent (a) By the holder, or by some person authorized to receive payment on
negotiates an instrument without indorsement, he incurs all the liabilities his behalf;
prescribed by Section Sixty-five of this Act, unless he discloses the name of (b) At a reasonable hour on a business day;
his principal and the fact that he is acting only as agent. (c) At a proper place as herein defined;
(d) 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
An agent who indorses, to escape liability, must indicate that he signs as an is made.
agent and disclose his principal.
Case: Ayie and Fael were married, but estranged. They had two kids, Cham
Presentment and Paolo. Ayie, who was abroad, had a negotiable time deposit certificate

with a bank here in the Philippines. When she came here from abroad, she
Sec. 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
presented the certificate for payment. The Bank refused to pay, saying that
instrument; but if the instrument is, by its terms, payable at a special place, they already paid. How? They paid the husband.
and he is able and willing to pay it there at maturity, such ability and o Held: Ayie and Fael were estranged; Fael did not present the
willingness are equivalent to a tender of payment upon his part. But except as instrument. It was with Ayie, the wife, all along. So, the payment to
herein otherwise provided, presentment for payment is necessary in order to Fael was not valid, because he is not the holder. Nor was he
charge the drawer and indorsers. authorized by Ayie to receive the payment. Thus, there was no
presentment. #cassesexy
Who are principally liable?
What is reasonable in the term reasonable time depends.
o Maker (for promissory note)
o If you go to the bank at 2 a.m., its invalid. 2 a.m. is not reasonable.
o Drawer (for bill of exchange)

If B/E is not presented for payment on due date to acceptor, the drawer will be Sec. 73 Place of presentment. - Presentment for payment is made at the
discharged proper place:
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(a) Where a place of payment is specified in the instrument and it is there Sec. 75 - Presentment where instrument payable at bank. - Where the
presented; instrument is payable at a bank, presentment for payment must be made
(b) Where no place of payment is specified but the address of the person during banking hours, unless the person to make payment has no funds there
to make payment is given in the instrument and it is there presented; to meet it at any time during the day, in which case presentment at any hour
(c) Where no place of payment is specified and no address is given and before the bank is closed on that day is sufficient.
the instrument is presented at the usual place of business or
residence of the person to make payment; Law presumes that the reason why it was being paid at the bank is that it will
(d) In any other case if presented to the person to make payment be the source of the funds.
wherever he can be found, or if presented at his last known place of
business or residence. If there was no money to pay, presentment may be made even beyond banking
hours because it will not make any difference if it were made during banking
Ex. Armand issues a check to Nat. Armand lives in Quezon City, and his office hours; the holder will not be paid anyway.
is in Mandaluyong. But Nat, the holder, knows Armand is not in his
Sec. 76. Presentment where principal debtor is dead. - Where the person
home/office, because he is on vacation in Boracay, because Armand wanted to
primarily liable on the instrument is dead and no place of payment is
get a tan. Nat can make the presentment there. specified, presentment for payment must be made to his personal
Law is not concerned so much as where presentment was actually made so representative, if such there be, and if, with the exercise of reasonable
long as payment is actually received. diligence, he can be found.
Sec. 74 - Instrument must be exhibited. - The instrument must be exhibited to Sec. 77. Presentment to persons liable as partners. - Where the persons
the person from whom payment is demanded, and when it is paid, must be primarily liable on the instrument are liable as partners and no place of
delivered up to the party paying it. payment is specified, presentment for payment may be made to any one of
them, even though there has been a dissolution of the firm.
The instrument must be exhibited to the person from whom payment is
Sec. 78. Presentment to joint debtors. - Where there are several persons, not
demanded, so that the person can determine whether the person demanding partners, primarily liable on the instrument and no place of payment is
payment is entitled to collect. specified, presentment must be made to them all.
Demand by telephone is not valid. Actual exhibition is necessary.
o Except: Actual exhibition is not necessary in the following cases: Sections 76-78 have a common factor. They all apply when there is no
When payment was refused on some other grounds, and stipulation to where presentment should be made.
When the instrument is lost or destroyed. Person liable is dead presentment made to executor or administrator, if there
is one.
Case: A car was purchased by Hywel from Luigi. To pay for the car, Hywel Persons liable are partners presentment made to any one of them.
issued a promissory note to Luigi, who indorsed it to Vince. When Vince came o If not partners presentment made to each one of them.
to collect from Hywel, he did not pay. So, Vince filed a suit against Hywel and
Luigi. But, Luigi, the indorser, argued that there was no proper presentment, Sec. 79. When presentment not required to charge the drawer. - Presentment
since Vince did not present the note to Hywel, the maker. Vince countered for payment is not required in order to charge the drawer where he has no
that the presentment requirement was complied with, since he presented in right to expect or require that the drawee or acceptor will pay the instrument.
evidence a letter of demand.
Drawer will not be discharged if presentment was not made to the acceptor if
o Held: The letter of demand only proved that there was demand
he has no right to expect that it will be paid.
before the institution of the suit. It did not prove that the PN was
o Ex. If drawer has no funds with the acceptor and there was no
presented. So Luigi, the indorser, escaped liability.
agreement that such acceptor will advance the money or stop
payment.
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Sec. 84. Liability of person secondarily liable, when instrument dishonored. -
Sec. 80. When presentment not required to charge the indorser. - Presentment Subject to the provisions of this Act, when the instrument is dishonored by
is not required in order to charge an indorser where the instrument was made non-payment, an immediate right of recourse to all parties secondarily liable
or accepted for his accommodation and he has no reason to expect that the thereon accrues to the holder.
instrument will be paid if presented.
When the instrument is dishonored, an immediate right of recourse to all
If the instrument was made for the accommodation of an indorser, then he parties liable accrues.
will be liable if the instrument was not presented. Why? Because the party They now become liable jointly and severally with the party primary liable,
accommodated and the accommodation party are alternately liable. If the the maker or the acceptor. Of the indorser
accommodation party paid, the instrument is not discharged because of the Case: Holder sued the indorser and the defense is that the action is premature
right to be reimbursed by the accommodated party, who has the obligation to in that before suing the indorser, the holder should have first pursued the
make arrangements for payment. But under the Civil Code, if somebody paid maker and exhausted all the remedies against him
for the debt of another, the former is entitled to be reimbursed by the debtor. o Held: No, there is no need to do that because you became jointly
and severally liable; hence, you can be sued immediately.
Sec. 81. When delay in making presentment is excused. - Delay in making
presentment for payment is excused when the delay is caused by Date: November 11, 2014 (QN)
circumstances beyond the control of the holder and not imputable to his
default, misconduct, or negligence. When the cause of delay ceases to Sec. 85. Time of maturity. - Every negotiable instrument is payable at the time
operate, presentment must be made with reasonable diligence. fixed therein without grace. When the day of maturity falls upon Sunday or a
Delay is excused if caused by a fortuitous event. holiday, the instruments falling due or becoming payable on Saturday are to
Ex. Yolanda. Tacloban was inaccessible for quite some time. be presented for payment on the next succeeding business day except that
instruments payable on demand may, at the option of the holder, be presented
Sec. 82. When presentment for payment is excused. - Presentment for for payment before twelve o'clock noon on Saturday when that entire day is
payment is excused: not a holiday.
(a) Where, after the exercise of reasonable diligence, presentment, as
required by this Act, cannot be made; Now under Section 85, a negotiable instrument is payable at a fixed time.
(b) Where the drawee is a fictitious person; If maturity falls on a Sunday or a holiday, or falls due on a Saturday or
(c) By waiver of presentment, express or implied. becomes payable on a Saturday, that should become payable on Monday
because even when some offices and some companies work on a Saturday,
Presentment is excused:
they usually work for half day. The law wants a full day.
o Where, despite due diligence, it cannot be made;
Now, if it falls due on Saturday, it is payable on a Saturday. If it becomes
o the drawee is fictitious;
payable 30 days from July 1st, and July 31st is a Saturday. Becomes payable
o waiver of presentment is made, express or not expressed.
means it is not payable on Saturday, but became payable on Saturday.
Example: If the holder who did not make presentment for
o For example, it was payable on a Friday, but Friday was declared a
payment encountered the drawer, but the drawer told him,
national holiday. It will become payable on Saturday. However, if
Never mind, dont worry, Ill take care of the bill, there
the instrument is payable on demand, since the party bound himself
is implied waiver.
to pay the money, he must be prepared to pay on a Saturday even if
Sec. 83. When instrument dishonored by non-payment. - The instrument is
dishonored by non-payment when: demand is made on a Saturday.
(a) It is duly presented for payment and payment is refused or cannot be
obtained; or Sec. 86. Time; how computed. - When the instrument is payable at a fixed
(b) Presentment is excused and the instrument is overdue and unpaid. period after date, after sight, or after that happening of a specified event, the
time of payment is determined by excluding the day from which the time is to
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begin to run, and by including the date of payment. since they were the very ones who dishonored the instrument.
Notice may be given
Section 86 gives the formula for the computation of periods. Its the same formula you (a) by or on behalf of the holder, or
find in the Rules of Court and in the Civil Code. Exclude the first, include the last. (b) by or on behalf of any party who might be compelled to pay and
For example, if the instrument is payable 30 days from July 1st, counting 30 who would have a right of reimbursement from the party to whom
days, it will be payable on July 31st. This is unlike the Roman formula which the notice is given.
is include the first, include the last. Thats why in the New Testament, it is said Example: Armand issued a promissory note to Blu, who
that Jesus rose again on the 3rd day. Friday was the first day, Saturday was the indorsed it to Claudia, who indorsed it to Drew, who
second day, Sunday was the third day. indorsed it to Eddan. Eddan went to Armand for payment,
but he refused.
Sec. 87. Rule where instrument payable at bank. - Where the instrument is
Eddan can give notice to Blu, Claudia, and Drew.
made payable at a bank, it is equivalent to an order to the bank to pay the
same for the account of the principal debtor thereon. Drew can give notice to Blu and Claudia.
When the instrument is payable at the bank (where the maker has money), it is Claudia can give notice to Blu.
considered as an order without pay. Notice of dishonor need not be given to Armand.
In Binghamton, the promissory note was made payable at Binghamton Bank.
Sec. 91. Notice given by agent. - Notice of dishonor may be given by any agent
It was open and operating at the date of maturity, but the holder did not show either in his own name or in the name of any party entitled to given notice,
up. He dilly-dallied. When he finally decided to go there, the bank had already whether that party be his principal or not.
closed and become insolvent. Now the maker said, I was prejudiced because he Notice of dishonor may be given by an agent. The notice will be valid even if he
did not present it on time, thus I am discharged from liability. The court said does not possess authority. Why? Because that is favorable and beneficial to the
no, you are still the maker. Therefore you are primarily liable. holder. It makes those who are secondarily liable primarily liable to the holder.
Since its beneficial, the law sanctions that. The notice will be valid even if it is
Sec. 88. What constitutes payment in due course. - Payment is made in due
not given by a person who is authorized by the holder as long as it is given on
course when it is made at or after the maturity of the payment to the holder
thereof in good faith and without notice that his title is defective. behalf of the holder.
NOTICE OF DISHONOR Sec. 92. Effect of notice on behalf of holder. - Where notice is given by or on
behalf of the holder, it inures to the benefit of all subsequent holders and all
Sec. 89. To whom notice of dishonor must be given. - Except as herein prior parties who have a right of recourse against the party to whom it is
otherwise provided, when a negotiable instrument has been dishonored by given.
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 Sec. 93. Effect where notice is given by party entitled thereto. - Where notice is
is not given is discharged. given by or on behalf of a party entitled to give notice, it inures to the benefit
of the holder and all parties subsequent to the party to whom notice is given.
Sec. 90. By whom given. - The notice may be given by or on behalf of the Notice given on behalf of the holder benefits all subsequent holders and all
holder, or by or on behalf of any party to the instrument who might be prior parties who have a right of recourse against the party to whom it is
compelled to pay it to the holder, and who, upon taking it up, would have a given.
right to reimbursement from the party to whom the notice is given. Example: Armand Blu Claudia Drew Eddan Febz

o If Eddan is the current holder, and he gave notice to Blu, Claudia,
If the instrument was dishonored, notice of dishonor must be given to the
and Drew, the notice to Blu will benefit Claudia and Drew, even if
drawer and indorsers, otherwise, they will be discharged.
the two of them did not notify Blu.
Notice need not be given to those primarily liable (maker/drawee-acceptor),
o If Eddan indorsed the instrument to Febz, that will benefit Febz also,
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pursuant to Sec. 92. Example, if the drawer only made one check and the holder made a mistake as
o Supposed Eddan did not give a notice of dishonor, but Drew gave it, to the serial number. The error would be ok since the drawer was not misled
the act of Drew will benefit Eddan. Eddan can now run after Blu, since there was only one check.
even if he did not give notice. And if Eddan negotiated it further to But suppose he issued several checks and he was misled as to which one was
Febz, Febz can also run after Blu. dishonored, he would be prejudiced and thus discharged.
Notice may be given personally or through the mails. But you know, post
Sec. 94. When agent may give notice. - Where the instrument has been
offices all over the world are losing money. People dont use post offices
dishonored in the hands of an agent, he may either himself give notice to the
parties liable thereon, or he may give notice to his principal. If he gives notice anymore. They resort to email. (eg. noticeofdishonor@gmail.com)
to his principal, he must do so within the same time as if he were the holder,
and the principal, upon the receipt of such notice, has himself the same time Sec. 97. To whom notice may be given. - Notice of dishonor may be given
for giving notice as if the agent had been an independent holder. either to the party himself or to his agent in that behalf.

Under Section 94, if an agent was the one who presented the notice of If notice will be given to the agent of the party to be notified, the agent must
dishonor, and it was dishonored on Monday, the agent has two options. be authorized to receive the notice.
o First, he can choose to notify his principal. In such case: o Why? Because this is an act which is prejudicial. The party to be
The agent will have until Tuesday to notify his principal. notified will now become primarily liable and therefore, the agent
His principal will have until Wednesday to notify the must be authorized.
parties secondarily liable. Summary of rules of notice involving agents:
o Or, he may choose to notify the parties secondary liable. He will o Notice may be given by an agent, even without authority (Sec. 91)
have only until Tuesday to notify them. o Notice may be given to an agent, who must have authority (Sec. 97)

Sec. 95. When notice sufficient. - A written notice need not be signed and an Sec. 98. Notice where party is dead. - When any party is dead and his death is
insufficient written notice may be supplemented and validated by verbal known to the party giving notice, the notice must be given to
communication. A misdescription of the instrument does not vitiate the notice (a) a personal representative, if there be one, and if with reasonable
unless the party to whom the notice is given is in fact misled thereby. diligence, he can be found.
(b) If there be no personal representative, notice may be sent to the last
Sec. 96. Form of notice. - The notice may: residence or last place of business of the deceased.
Be in writing or merely oral
be given in any terms which sufficiently identify the instrument If the party to be notified is dead, the notice may be given to the executor or
indicate that it has been dishonored by non-acceptance or non- administrator of his estate. If theres no one, notice may be sent to his
payment residence or office.
in all cases, be given by delivering it personally or through the mails.
Sec. 99. Notice to partners. - Where the parties to be notified are partners,
Notice may be oral, but then of course, the prudent thing is to put it in notice to any one partner is notice to the firm, even though there has been a
writing. Otherwise, you can end up with a litigation where it will be your dissolution.
word against my word. Thats why the law says that the written notice need
not be signed. Any deficiency can be cured by verbal communication. Sec. 100. Notice to persons jointly liable. - Notice to joint persons who are not
partners must be given to each of them unless one of them has authority to
For example, a notice of dishonor of a check which did not indicate the serial receive such notice for the others.
number. That can be cured by verbal communication. If the holder made a
mistake and gave the wrong serial number of a check, that should be binding if Parties who are jointly liable must all be notified.
the drawer was not misled. o But if they have partners, or one of them has a power of authority,
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then notice to one partner or to him who has a power of attorney hours of the following day.
will be sufficient. If it is to be sent to his residence, before the usual hours of rest of the following
day.
Sec. 101. Notice to bankrupt. - Where a party has been adjudged a bankrupt or If it is to be sent by mail, it should be sent at the time where he will receive it
an insolvent, or has made an assignment for the benefit of creditors, notice
the following day.
may be given either to the party himself or to his trustee or assignee.
If the parties reside in different places, follow Section 104.
If a person is bankrupt, notice may still be given to the bankrupt debtor or the If it was sent not by mail but by courier, like LBC, DHL, FedEx, etc. it should
administrator appointed by the insolvency court. be received within the same period that it would have been received if it was
sent through the post office.
Sec. 102. Time within which notice must be given. - Notice may be given as If the notice is lost through the mail, it will still be valid.
soon as the instrument is dishonored and, unless delay is excused as Of course, the prudent thing is to send it by registered mail so you have proof
hereinafter provided, must be given within the time fixed by this Act.
that you actually mailed it and you can trace the letter.

Notice may be given as soon as the instrument is dishonored. Sec. 105. When sender deemed to have given due notice. - Where notice of
Ex: At 8 oclock, the holder demanded payment from the maker and it was dishonor is duly addressed and deposited in the post office, the sender is
dishonored. Then and there, the holder can give notice. deemed to have given due notice, notwithstanding any miscarriage in the
mails.
Sec. 103. Where parties reside in same place. - Where the person giving and
the person to receive notice reside in the same place, notice must be given Sec. 106. Deposit in post office; what constitutes. - Notice is deemed to have
within the following times: been deposited in the post-office when deposited in any branch post office or
in any letter box under the control of the post-office department.
(a) If given at the place of business of the person to receive notice, it must
be given before the close of business hours on the day following. Sec. 107. Notice to subsequent party; time of. - Where a party receives notice
(b) If given at his residence, it must be given before the usual hours of rest of dishonor, he has, after the receipt of such notice, the same time for giving
on the day following. notice to antecedent parties that the holder has after the dishonor.
(c) If sent by mail, it must be deposited in the post office in time to reach
him in usual course on the day following. If, let us say, an indorser was notified on Tuesday, then he has the following
day to notify those whom he is entitled to notify.
Sec. 104. Where parties reside in different places. - Where the person giving
and the person to receive notice reside in different places, the notice must be Sec. 108. Where notice must be sent. - Where a party has added an address to
given within the following times: his signature, notice of dishonor must be sent to that address; but if he has
not given such address, then the notice must be sent as follows:
(a) If sent by mail, it must be deposited in the post office in time to go by (a) Either to the post-office nearest to his place of residence or to the
mail the day following the day of dishonor, or if there be no mail at a post-office where he is accustomed to receive his letters; or
convenient hour on last day, by the next mail thereafter. (b) If he lives in one place and has his place of business in another,
(b) If given otherwise than through the post office, then within the time notice may be sent to either place; or
that notice would have been received in due course of mail, if it had (c) If he is sojourning in another place, notice may be sent to the place
been deposited in the post office within the time specified in the last where he is so sojourning.
subdivision.
But where the notice is actually received by the party within the time specified
If the parties reside in the same place, the notice must be given according to in this Act, it will be sufficient, though not sent in accordance with the
the times specified in Section 103. requirement of this section.
If it is to be given in his office, it must be given to before the close of business
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Where should notice be sent? Now notice of dishonour may be waived before the time for giving, or after
If someone placed an address below his signature, notice should be sent to that the time for giving.
address. The waiver may be express or implied.
o If not, it can be sent to the post office where he usually receives o For example, it is stipulated. Notice of dishonour may be waived.
letters. Or, the drawer was not notified, then the drawer told the holder,
If you will send a letter to Pampanga, you need not give the house number and Dont worry, even if you failed to notify me, I will take care of the
the street. You can just put there, Guagua, it will be received. You can also put bill of exchange.
there, Macabebe, it will also be received. If the waiver is embodied in the instrument, it binds everybody.
If he lives in Manila and has his office in Makati, it may be sent to Makati or o Why? Because its part of the terms and conditions of the contract.
Manila. o But if it was merely added by an indorser, it will bind only the
If he is sojourning in one place, it may be sent to him there. indorser.
o For example, he lives in Manila but is vacationing in Boracay, it can How do you know if it is part of the terms and conditions of the instrument?
be sent to him in Boracay. The test is the time.
I remember when I first went to Munich, the hotel room beside mine o Was it there when the instrument was issued?
was a couple on honeymoon. The first thing they did was to put a sign o If it was there when it was issued, it is part of the terms and
on the door, Do Not Disturb. In my moment of mischief, I reversed conditions of the contract and it will bind everybody.
the sign, Please Make Up Room. (Jack laughs for the next 30 o But, if it was not there when it was issued, it only surfaced later on, it
seconds.) will bind only the indorser who wrote it.
Waiver of protest includes waiver of:
Suppose the notice gave the wrong house number and the postman gave it to that o Presentment, and
address, and the owner said, Ay, hindi samin ito, sa kapitbahay namin ito. Dalhin mo o notice of dishonour.
dun sa kapitbahay namin. Even if the postman delivers to the wrong address, it can still Protest includes all the steps needed to make a party secondarily liable
be actually received by the addressee in time. The law is not concerned with where it primarily liable.
was delivered exactly, as long as it is delivered on time. Notice is waived or dispensed with if despite due diligence, it cannot be made.

Sec. 109. Waiver of notice. - Notice of dishonor may be waived either before Sec. 113. Delay in giving notice; how excused. - Delay in giving notice of
the time of giving notice has arrived or after the omission to give due notice, dishonor is excused when the delay is caused by circumstances beyond the
and the waiver may be expressed or implied. control of the holder and not imputable to his default, misconduct, or
negligence. When the cause of delay ceases to operate, notice must be given
Sec. 110. Whom affected by waiver. - Where the waiver is embodied in the with reasonable diligence.
instrument itself, it is binding upon all parties; but, where it is written above
the signature of an indorser, it binds him only. Delay is excused if it is due to a fortuitous event.
o For example, what happened in Tacloban.
Sec. 111. Waiver of protest. - A waiver of protest, whether in the case of a
foreign bill of exchange or other negotiable instrument, is deemed to be a
waiver not only of a formal protest but also of presentment and notice of Sec. 114. When notice need not be given to drawer. - Notice of dishonor is not
dishonor. required to be given to the drawer in either of the following cases:
Sec. 112. When notice is dispensed with. - Notice of dishonor is dispensed (a) Where the drawer and drawee are the same person;
with when, after the exercise of reasonable diligence, it cannot be given to or (b) When the drawee is fictitious person or a person not having capacity
does not reach the parties sought to be charged. to contract;
(c) When the drawer is the person to whom the instrument is presented
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for payment; 1. When the drawee is a fictitious person or does not have the capacity to
(d) Where the drawer has no right to expect or require that the drawee or contract and the endorser was aware of this at the time of endorsement.
acceptor will honor the instrument; 2. Where the endorser is the person to whom the instrument is presented for
(e) Where the drawer has countermanded payment.

payment. The holder went to the office of the acceptor. The acceptor was
away. Presentment was made to the endorser who was the office manager. He
The law mentions when notice need not be given to the drawer.
need not be given notice of dishonor.
When the drawer and the drawee are the same. Like in a managers
3. When the instrument was made or accepted for his accommodation. The party
check. the drawer is the bank. The drawee is the same bank.
ultimately liable has the obligation to make arrangements to pay the
When the drawer is a person who is fictitious or does not have the
instrument not he date of maturity because if the accommodation party paid,
capacity to contract the instrument is not discharged. The accommodation party is entitled to
When the drawer is the person to whom the instrument is presented demand endorsement from the accommodated party.
for payment.
When the drawer does not have the right to expect or require that Sec. 116. Notice of non-payment where acceptance refused. - Where due
the drawee or acceptor will honour the instrument. notice of dishonor by non-acceptance has been given, notice of a subsequent
o For example, someone who was given pieces of jewellery to dishonor by non-payment is not necessary unless in the meantime the
be sold on commission, and she issued two postdated checks instrument has been accepted.

to cover the expected proceeds from the sale. But she was
Now if the bill of exchange was presented to the drawee and he did not accept it, and
not able to sell the pieces of jewellery so she returned them.
notice of dishonor was given, and on the date of maturity, the holder returned and
He did not deposit any funds in her bank account. But
demanded payment and it was dishonored again, he need not give a second notice
Matias endorsed the checks to State Investment House and
because he already gave a first notice of dishonor due to non-acceptance.
the checks bounced. When she was sued, she raised the
o But if lets say, the drawee dishonored it and told the holder to come back next
defence that she was not given notice of dishonour.
week, and when the holder returned, it was accepted. No need to give notice of dishonor
o The Court said, you did not deposit any funds in your
o But when the holder now presented it for payment on maturity date (for
account. Therefore, you did not have the right to expect
example, it was payable 10 days after presentment), and the acceptor refused to
that the bank would pay. So theres no need to give you
pay because the drawer closed his account, notice of dishonor must still be
notice of dishonor.
given.
Where the drawer has countermanded payment (stop payment order)
You can see in those instances that the drawer need not be notified because he Sec. 117. Effect of omission to give notice of non-acceptance. - An omission to
was the one who dishonoured the instrument or he performed an act which give notice of dishonor by non-acceptance does not prejudice the rights of a
would result in the dishonour of the instrument. holder in due course subsequent to the omission.
Sec. 115. When notice need not be given to indorser. Notice of dishonor is Sec. 118. When protest need not be made; when must be made. - Where any
not required to be given to an indorser in either of the following cases: negotiable instrument has been dishonored, it may be protested for non-
(a) When the drawee is a fictitious person or person not having capacity acceptance or non-payment, as the case may be; but protest is not required
to contract, and the indorser was aware of that fact at the time he except in the case of foreign bills of exchange
indorsed the instrument; Protest is not required except if its a foreign bill of exchange. Why?
(b) Where the indorser is the person to whom the instrument is presented o Because theres a foreign element there and you have to go to the
for payment; notary public to make a protest. The notary public is the universally
(c) Where the instrument was made or accepted for his accommodation. recognized person to verify transactions. (Makes a long reference

about The Merchant of Venice. Basahin niyo nalang yung play.)
Now, Section 115 says when indorser need not be notified.
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DISCHARGE OF NEGOTIABLE INSTRUMENTS
(a) By any act which discharges the instrument;
Sec. 119. Instrument; how discharged. - A negotiable instrument is (b) By the intentional cancellation of his signature by the holder;
discharged (c) By the discharge of a prior party;
(d) By a valid tender or payment made by a prior party;
(a) By payment in due course by or on behalf of the principal debtor; (e) By a release of the principal debtor unless the holder's right of
(b) By payment in due course by the party accommodated, where the recourse against the party secondarily liable is expressly reserved;
instrument is made or accepted for his accommodation; (f) By any agreement binding upon the holder to extend the time of
(c) By the intentional cancellation thereof by the holder; payment or to postpone the holder's right to enforce the instrument
(d) By any other act which will discharge a simple contract for the unless made with the assent of the party secondarily liable or unless
payment of money; the right of recourse against such party is expressly reserved.
(e) When the principal debtor becomes the holder of the instrument at or
after maturity in his own right. Section 120 says when parties secondarily liable are discharged:
By any act which discharges the instrument
When is an instrument discharged? o Like Solar Beam ni Bulbasaur.
1) By payment in due course by or on behalf of the principal debtor o Kung Water Gun lang ni Squirtle, baka mabasa lang yung instrument
2) By payment in due course by the party accommodated (not by the kaya di pa sya intentionally cancelled.
accommodation party) because he is the party ultimately liable By the intentional cancellation of his signature by the holder
3) By the intentional cancellation of the instrument by the holder o No consideration is necessary here. It could be out of the goodness of
4) By any other act which will discharge a simple contract for the the holders heart.
payment of money (remission, novation, confusion/merger, etc.). By discharge of a prior party.
Here, you apply the Civil Code in a suppletory manner. o Example: Gay Hye Ivy Jag Kathleen Luigi
Loss of the instrument will not discharge it. o Suppose Luigi, the current holder, crossed out Jags signature. Jag
o You will recall that the obligation to pay money is a generic will be discharged. Kathleen will also be discharged, because she is
obligation because money will never go out of existence. prejudiced. She had lost her right of recourse against Jag.
o But other modes will apply, such as condonation, confusion, By valid tender of payment made by a prior party.
prescription, mutual desistance, etc. o Example: Gay Hye Ivy Jag Kathleen Luigi
But not performance of a resolutory condition because there o If Ivy offered to pay, but Luigi, the holder, refused and said, I want
is an unconditional order or promise to pay. to run after Jag, my mortal enemy. I want to see him crawl and beg!
State Investment House v. Court of Appeals: The intentional cancellation That will discharge Jag.
contemplated under Sec. 119(c) is effected either by destroying the instrument By a release of the principal debtor, unless the holders right of recourse
(by tearing, burning, shredding, obliterating, nuclear bomb, Solar Beam ni against the party secondarily liable is expressly reserved.
Bulbasaur, Dothraki attack, etc.), or writing the word CANCELLED on the
By any agreement binding upon the holder to extend the time of payment or
instrument. Of course, the holder must have intent to cancel the instrument.
to postpone the holders right to enforce the instrument.
When the principal debtor becomes holder at or after maturity in his own o Except: (1) when made with the consent of the party secondarily
right (i.e. it was indorsed back to him), the presumption is that the debtor has liable, or (2) unless the right of recourse against such party is
paid such an obligation. expressly reserved
There are other grounds for the discharge of the instrument found in other o If the holder grants an extension of time, he can still run after parties
provisions. Like in Secs. 48, 89, 122, 144, 172, 186 and 188. secondarily liable if he reserved the right to go after them or if they
agreed to the extension of time.
Sec. 120. When persons secondarily liable on the instrument are discharged. -
A person secondarily liable on the instrument is discharged:
There are other provisions providing for the discharge of parties secondarily
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liable. You can find them in Section 70, 89, 142, 144, 150, 188. defense because it was only said verbally. Renunciation
must be in writing. If the instrument was surrendered, then
Sec. 121. Right of party who discharges instrument. - Where the instrument is the renunciation need not be in writing. But no note was
paid by a party secondarily liable thereon, it is not discharged; but the party surrendered. Poor Arkaye.
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
Sec. 123. Cancellation; unintentional; burden of proof. - A cancellation made
negotiate the instrument, except:
unintentionally or under a mistake or without the authority of the holder, is
inoperative but where an instrument or any signature thereon appears to have
(a) Where it is payable to the order of a third person and has been paid
been cancelled, the burden of proof lies on the party who alleges that the
by the drawer; and
cancellation was made unintentionally or under a mistake or without authority.
(b) Where it was made or accepted for accommodation and has been paid

by the party accommodated.
Cancellation, if unintentional, made by mistake, or without authority, will not
Now, if the instrument is paid by a party secondarily liable, he will be restored operate to discharge the instrument.
to the position of a HIDC o Example: Kim got a stack of paper and fed it to the paper shredder.
o If he pays, he can still recover from the maker/drawer. She did not know that a promissory note was included in that stack.
On the other hand, if he was not a HIDC, he would revert to his status as a Kims act of shredding it will not operate to discharge the
person not a HIDC. If a party is not a HIDC, he cannot improve his standing instrument, because it was unintentional.
by negotiating it to a HIDC and then getting it back. o Example: Karen cancelled a note because she mistakenly thought
that it was already paid. It will not discharge the instrument.

RENUNCIATION
Date: November 13, 2014 (AJG)

Sec. 122. Renunciation by holder. - The holder may expressly renounce his
Sec. 124. Alteration of instrument; effect of.
rights against any party to the instrument before, at, or after its maturity. An
Where a negotiable instrument is materially altered without the assent
absolute and unconditional renunciation of his rights against the principal
of all parties liable thereon, it is avoided, except as against a party
debtor made at or after the maturity of the instrument discharges the
who has himself made, authorized, or assented to the alteration and
instrument. But a renunciation does not affect the rights of a holder in due
subsequent indorsers.
course without notice. A renunciation must be in writing unless the instrument
But when an instrument has been materially altered and is in the
is delivered up to the person primarily liable thereon.
hands of a holder in due course not a party to the alteration, he may

enforce payment thereof according to its original tenor.
The holder may renounce rights against any party before, at, or after maturity.
And that will discharge his debt. But, it will NOT bind a HIDC. Sec. 125. What constitutes a material alteration. - Any alteration which
o Example: Nette, a holder of an instrument, renounced all her rights changes:
before maturity. She then endorsed it to Jared, a HIDC. Jared will
not be prejudiced. He can still run after everybody. 1) The date;
2) The sum payable, either for principal or interest;
Renunciation, to be valid, must be in writing.
3) The time or place of payment;
o If it is not in writing, it must be surrendered to the person primarily 4) The number or the relations of the parties;
liable. 5) The medium or currency in which payment is to be made;
o Unknown Case: Arkaye obtained a loan from Sang Mee Bank. The 6) Or which adds a place of payment where no place of payment is
VP of the Bank verbally told Arkaye that his debt was being specified,
condoned. Later on, Sang Mee Bank sued Arkaye. 7) or any other change or addition which alters the effect of the
instrument in any respect, is a material alteration.
Held: Arkaye cannot use the VPs verbal renunciation as a

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Defines when there is material alteration. If the date is changed, the sum payables material because the alteration would then be not covered by the stop payment order.
changed, time or place of payment is changed considered material alteration because Example, if the number contains a 3, they will make it 8. So here is your signature
that will affect how soon parties held liable can be notified of the dishonor. The control, they will say Ah, this is not covered. This is material alteration. OR payable
numbers of relations of the parties, the currency in which payment is to be made, adds a to order, then made payable to bearer, still material alteration.
place of payment, or any other change which alters the effect of the instrument is
material alteration. Arreza spouses case
Their business was selling cars. Somebody went to their store and said he wanted to buy
Ultimate Test: Does it alter the effect of the instrument? two cars. They issued 9 checks for 200k each, drawn against Phil. Veterans Bank. Now,
somebody else offered it for payment. According to the couple, they were maintaining
Case of Montinola an account with Express Bank, a thrift bank. And the manager then offered to help
This case is about the USSAFE and General Jones Waywright. So check was drawn them, and said it would be arranged that the checks would be credited to their account.
against the PNB to be used supposedly for the expenses of the USSAFE. At that time, So their checks were accepted for deposit in their account. Then the thrift bank where
there was hyperinflation, so he indorsed a part of the check to Montinola. He indorsed the payee has a current account with Equitable Bank deposited it with Equitable Bank,
it partially. You know swindlers, they always study the law. So Montinola knew that Equitable Bank brought it to the clearing house, and then went to Philippine Veterans
partial indorsement is not valid, so he smudged the indorsement, then wrote again the Bank. Philippine Veterans Bank did not dishonor the check. 3 months later, Phil.
name of Montinola to make it appear that the entire check was indorsed to him. Now, Veterans bank says the checks were altered. Disputes in the clearing house are resolved
at that time, PNB has a branch in every province, and the provincial treasurers were the by arbitration, and the ruling was in favor of Veterans Bank, then went to Court. The
ex officio representatives of the PNB. Now, Montinola knew that in a bill of exchange, RTC invoked the 24-hour rule, that Philippine Veterans bank did not return the check
the drawee is not liable until he accepts. But if the drawer and drawee is the same, he can within 24 hours. SC ruled that the rule invoked by the RTC has already been
treat it as a promissory note. So he made it appear that it was issued by provincial abandoned. Before, it was the rule (return within 24 hours). The rule now is that you
treasurer in his capacity as representative of the PNB in that province. Then, drawer cannot just ask for completeness of the reversed entries. Court said Equitable bank
and drawee acceded, treated it as promissory note. So he sued to collect payment, and it should return the money. Equitable ran after Express bank, then Express ran after the
was decided by then Justice Sanchez that the instrument has been materially altered. couple, couple issued a check for 500k, then Express said that the account of the couple
First, regarding the indorsement on the portion the amount the indorsee made that the is under hold. Eventually, they debited their account for 1.8m from the account of the
entire check was indorsed. Then, the capacity in which it was signed, because this was couple. The couple sued express. SC said, it is the two collecting banks who should be
signed as provincial treasurer, not as a representative of the PNB. Proof? Because it was liable. When the checks were in the account of this couple with the thrift bank
countersigned by the provincial auditor, because if the provincial treasurer signed as (Express), it was a case of a restrictive indorsement. The checks were indorsed for
representative of the PNB, the provincial auditor would not have signed it. collection. The bank was merely an agent for collection. Hence, warranties under Sec.
66 do not apply. Court said the collecting bank circumvented the laws.
Case of Metropolitan bank
Somebody with a check for 1000 pesos, and to make it more secure, they put three Who will be liable on an altered instrument?
asterisks before the word one and three asterisks after the word thousand. However, it Now, lets say a check was drawn for 10k, and was altered to 40k. Remember
appeared that it was altered to 91,000 pesos. SC said the tampering was obvious to the that this is a contract. You cannot change terms without the consent of the
naked eye, and yet Metropolitan Bank paid that 91,000. The Court said Metropolitan parties. Hence, under the law, the altered amount will not be binding on
Bank has to return the 90,000, because the alteration here was obvious. parties who became parties to the instrument before the alteration. The one
who altered it will be liable to the altered tenor, as well as the succeeding
On the other hand, there are two cases where PNB honored check brought in the parties, because they warranted that the instrument is genuine and what it
clearing house, then later was asked to return the money because the serial number of purports to be. Hence, if the amount was raised to 40k, the one who altered it,
the checks were altered. SC said this is not material alteration. That did not change the and subsequent indorsers, will be liable to the holder, for the altered amount of
effect of the instrument. However, if there was a stop payment order, then it would be 40,000, irrespective of whether the holder is a holder in due course or not.
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Parties before the alteration: They are not bound for the altered tenor, they 2. TRADE ACCEPTANCE - we saw that in the Joson Case. It is no longer invoked.
will be liable for the original tenor IF the holder is a holder in due course. For Letters of credit are what used to pay now. An example of a letter of credit is
instance, the holder may collect until 10,000, If not HIDC, he cannot collect bankers acceptance. Because in a letter of credit, the bank will tell the seller, okay,
anything, parties not bound to the alteration have no liability. deliver the goods, our customer is buying, and we will pay you.
Thus:
o Party who altered liable to any holder for the altered tenor Other types of documents
o Parties subsequent to the alteration liable to any holder for the 1. CLAIM BILL OF EXCHANGE no doc is required to be submitted to collect
altered tenor 2. DOCUMENTARY BILL OF EXCHANGE documents are required to be
o Parties prior to the alteration submitted to collect. This is what they use for letters of credit, where seller has to
HIDC: liable for the original tenor attach certain documents to the bill of exchange in order to collect.
Not HIDC: not liable 3. DOCUMENT AGAINST ACCEPTANCE document must be submitted upon
acceptance.
BILLS OF EXCHANGE 4. DOCUMENT AGAINST PAYMENT Documents have to be submitted when
the bill is paid. When the government sponsors a championship fight between Ali
Sec. 126. Bill of exchange, defined. - A bill of exchange is an unconditional and Frazier, expenses were paid with letters of credit opened by PNB to collect,
order in writing addressed by one person to another, signed by the person and L/C requires that they have to submit together with the draft, a certain
giving it, requiring the person to whom it is addressed to pay on demand or at document, newspaper with the account of the fight.
a fixed or determinable future time a sum certain in money to order or to
5. BILLS IN SET we find this in letters of credit. Usually, the beneficiary will sign
bearer.
the two parts and they will be forwarded to the bank on different dates. This is to
CLVs example: provide for the contingency that one copy will be lost in the mails. Well take this
up in letters of credit.
Pay to Nenzo Cruz or order P500.00 6. INLAND BILL drawn here payable here
To: Jella Gan (sgd.) Leon Caguioa 7. FOREIGN BILL drawn here payable abroad.
Treasury warrants and money orders are not bills of exchange.

Leon can order this from Jella because Leon either has money or credit with Jella. Even
Sec. 127. Bill not an assignment of funds in hands of drawee. - A bill of itself
so, until Jella accepts, she is not liable as acceptor, because under Sec. 18, drawee is never does not operate as an assignment of the funds in the hands of the drawee
liable because her signature does not appear on the face of the instrument. Hence, under Sec. 127, available for the payment thereof, and the drawee is not liable on the bill
the bill above does not operate as an assignment of funds until Jella, the drawee, accepts. unless and until he accepts the same.
Sec. 128. Bill addressed to more than one drawee. - A bill may be addressed to
two or more drawees jointly, whether they are partners or not; but not to two
or more drawees in the alternative or in succession.
There are two types of Bill of Exchange.
1. DRAFT - It is nothing more than a check drawn by a bank here against its current Sec. 129. Inland and foreign bills of exchange. - An inland bill of exchange is a
account its bank (lets say in New York). Other banks maintain a dollar account bill which is, or on its face purports to be, both drawn and payable within the
with a bank in New York (lets say Citibank because they have a branch here). So, Philippines. Any other bill is a foreign bill. Unless the contrary appears on the
if another bank wants to buy a bank draft for 200 dollars, they will issue a check face of the bill, the holder may treat it as an inland bill.
drawn against their bank in New York. This is a draft.
A bill does not operate as an assignment of funds in the hands of the drawee,
while the payment of the bill can be stopped.
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Bill may be addressed to two drawees. Ex: Juan Cruz and Jose Cruz. 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
Sec. 130. When bill may be treated as promissory note. - Where in a bill the except in favor of a person to whom it is shown and who, on the faith thereof,
drawer and drawee are the same person or where the drawee is a fictitious receives the bill for value.
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 by separate instrument Here, the instrument/bill has already
been drawn, and the person to whom the acceptance is shown can demand
If drawer/drawee is the same, (managers check/cashiers check), or the drawee payment from the acceptor, because if that was not shown to him, he cannot
is fictitious, or lacks the capacity to contract, holder may treat it as Bill of claim that it is because of that acceptance that I agree to take the bill.
Exchange or Promissory Note.
Example: There is a foreign instrument, and it was dishonored. In bills of Sec. 135. Promise to accept; when equivalent to acceptance. - An
exchange, a protest must be made. Applying this to Section 130, it means that unconditional promise in writing to accept a bill before it is drawn is deemed
an actual acceptance in favor of every person who, upon the faith thereof,
a note need not be made. The holder may say I have the option to treat this as receives the bill for value.
promissory note and I will exercise this option. I will collect.
Section 135 contemplates a situation where there is already acceptance on the
Sec. 131. Referee in case of need. - The drawer of a bill and any indorser may
instrument, but the bill has not yet been drawn. This is applicable to letters of
insert thereon the name of a person to whom the holder may resort in case of
need; that is to say, in case the bill is dishonored by non-acceptance or non- credit, where the instrument will be drawn in the future, but the bank is
payment. Such person is called a referee in case of need. It is in the option of already liable.
the holder to resort to the referee in case of need or not as he may see fit.
Sec. 136. Time allowed drawee to accept. - The drawee is allowed twenty-four
ACCEPTANCE 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.
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 The drawee is allowed 24 hours to make up his mind time whether to accept
acceptance must be in writing and signed by the drawee. It must not express or not. If it accepts, it will retroact to the date of the presentation.
that the drawee will perform his promise by any other means than the payment Ex: A bill was issued, payable 30 days after presentation. It was presented on
of money.
July 1, Monday, and it was accepted on July 2, Tuesday. It will be deemed

dated July 1, and it will fall due 30 days later, on July 31.
Acceptance should be in writing and signed by the drawee.
It must not express that the drawee will perform his promise other than the Sec. 137. Liability of drawee returning or destroying bill. - Where a drawee to
payment of money. whom a bill is delivered for acceptance destroys the same, or refuses within
But correlate this with Sec. 5. Recall in Sec. 5, the law provides that it is valid twenty-four hours after such delivery or within such other period as the holder
to provide in an instrument that a holder may demand cash or something else in may allow, to return the bill accepted or non-accepted to the holder, he will be
deemed to have accepted the same.
lieu of cash. And, if he exercise this option, for example to be paid in rice
If the drawee destroys the bill of exchange, or does not return it within 24
instead, then it is valid.
hours or a shorter period, the holder may demand that the bill to be deemed
Sec. 133. Holder entitled to acceptance on face of bill. - The holder of a bill accepted
presenting the same for acceptance may require that the acceptance be The law gives the drawee 24 hours to make up his mind, whether he will
written on the bill, and, if such request is refused, may treat the bill as accept or not. But he is not entitled to keep the bill for 24 hours while he is
dishonored. making up his mind. He must return the bill within 1 hour, otherwise, he will
be deemed to have accepted it.
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o Example: Glorie presented a bill to Mandy, the drawee, at 8am. Sec. 141. Qualified acceptance. - An acceptance is qualified which is:
Glorie returned at 9am, and told Mandy, give me back the bill. If
Mandy does not give back the bill, it will be deemed accepted. But, if (a) Conditional; that is to say, which makes payment by the acceptor
dependent on the fulfillment of a condition therein stated;
Mandy returns the bill to Glorie at 9am, Mandy will have 23 hours (b) Partial; that is to say, an acceptance to pay part only of the amount for
more to make up her mind as to whether she will accept or not. But, which the bill is drawn;
in the meantime, the bill remains with Glorie. (c) Local; that is to say, an acceptance to pay only at a particular place;
(d) Qualified as to time;
Sec. 138. Acceptance of incomplete bill. - A bill may be accepted before it has (e) The acceptance of some, one or more of the drawees but not of all.
been signed by the drawer, or while otherwise incomplete, or when it is
overdue, or after it has been dishonored by a previous refusal to accept, or by Conditional acceptance accept, provided on the date of payment, the
non payment. But when a bill payable after sight is dishonored by non- condition has been fulfilled.
acceptance and the drawee subsequently accepts it, the holder, in the
absence of any different agreement, is entitled to have the bill accepted as of Partial acceptance bill is for 100,000, but drawee accepted up to 2,000 only;
the date of the first presentment. Local accepted, payable only at the head office of PNB
Qualified as to time order to pay 30 days later only, acceptor ordered
A bill may be accepted payable 60 days after sight.
1. before it has been signed by the drawer, or Acceptance of some, one or ore of the drawees but not of all of drawees
2. while incomplete, or
3. when it is overdue, or Sec. 142. Rights of parties as to qualified acceptance.
4. after it has been dishonored by refusal to accept or non-payment. The holder may refuse to take a qualified acceptance and if he does
But, when a bill payable after sight is dishonored by non-acceptance and is not obtain an unqualified acceptance, he may treat the bill as
dishonored by non-acceptance.
later on accepted, the holder is entitled to have it dated as of the date of the
Where a qualified acceptance is taken, the drawer and indorsers are
first presentment discharged from liability on the bill unless they have expressly or
o Example: Cyndy, a holder, presented a bill for payment on a impliedly authorized the holder to take a qualified acceptance, or
Monday to Daisy, the drawee. But Daisy said: Vino, the drawer, subsequently assent thereto.
has no funds with me. Come back after three days, since Vino will When the drawer or an indorser receives notice of a qualified
have funds with me by then. So Cyndy went back to Daisy on acceptance, he must, within a reasonable time, express his dissent to
Thursday. Daisy accepted the bill. The acceptance done by Daisy will the holder or he will be deemed to have assented thereto.

be dated as of Monday, even if it was done on Thursday.
If a party is offered qualified acceptance, he should reject it and treat the bill as
Sec. 139. Kinds of acceptance. - An acceptance is either general or qualified. A dishonored, and give second notice to parties liable; otherwise they shall be
general acceptance assents without qualification to the order of the drawer. A discharged.
qualified acceptance in express terms varies the effect of the bill as drawn. Otherwise, if he decides to take qualified acceptance, the drawer and indorsers
are discharged unless they agreed to the qualified acceptance.
Acceptance may be General or Qualified. The law provides that if the drawer does not object after being notified of the
1. General assents to the order without qualification. qualified acceptance, he must express dissent or he will be deemed to have
2. Qualified varies the effect of the bill. assented thereto.

Sec. 140. What constitutes a general acceptance. - An acceptance to pay at a
PRESENTMENT FOR ACCEPTANCE
particular place is a general acceptance unless it expressly states that the bill

is to be paid there only and not elsewhere.
Sec. 143. When presentment for acceptance must be made.- Presentment for
acceptance must be made:
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b) Where the drawee is dead, presentment may be made to his personal
a. Where the bill is payable after sight, or in any other case, where representative;
presentment for acceptance is necessary in order to fix the maturity c) Where the drawee has been adjudged a bankrupt or an insolvent or
of the instrument; or has made an assignment for the benefit of creditors, presentment may
b. Where the bill expressly stipulates that it shall be presented for be made to him or to his trustee or assignee.
acceptance; or
c. Where the bill is drawn payable elsewhere than at the residence or Section 145 - Presentment must be made on a reasonable hour in a business day before
place of business of the drawee. the bill is overdue. Drawer is first authorized to accept, and:
1. Where a bill is addressed to two or more drawees, presentment should be made
In no other case is presentment for acceptance necessary in order to render
any party to the bill liable. to all of them unless they are partners or one has authority over the others.
2. If the drawee his dead, presentment may be made to his personal
When presentment for acceptance must be made: representative.
1. Bill is payable after sight you need presentment to fix the date of 3. When the drawee is bankrupt, presentment may be made to the drawee or to
maturity. his administrator approved by the court (trustee/assignee).
2. Where the bill expressly provides that it should be presented for
Sec. 146. On what days presentment may be made. - A bill may be presented
acceptance; or
for acceptance on any day on which negotiable instruments may be presented
3. When the bill is drawn in a place that is not the residence or place of for payment under the provisions of Sections seventy-two and eighty-five of
business of the drawee. this Act. When Saturday is not otherwise a holiday, presentment for
o Example: Nat resides in Manila, office is in Makati, payable acceptance may be made before twelve o'clock noon on that day.
in Cebu City this should be presented in acceptance, so
the drawee is informed in advance that there is a bill drawn Distinguish between presentment for acceptance and presentment for payment:
against you to be paid not in your residence/place of Presentment for acceptance may be made on any day, even up to Saturday.
business, so you better be there in the date of maturity. o In presentment for acceptance, parties are not asked to pay, but
whether it will accept or not.
Sec. 144. When failure to present releases drawer and indorser. - Except as In case of presentment for payment, it should be made on the next business day.
herein otherwise provided, the holder of a bill which is required by the next
preceding section to be presented for acceptance must either present it for Sec. 147. Presentment where time is insufficient. - Where the holder of a bill
acceptance or negotiate it within a reasonable time. If he fails to do so, the drawn payable elsewhere than at the place of business or the residence of the
drawer and all indorsers are discharged. drawee has no time, with the exercise of reasonable diligence, to present the
bill for acceptance before presenting it for payment on the day that it falls due,
If the bill is required to be presented for acceptance, the holder must present to the delay caused by presenting the bill for acceptance before presenting it for
the acceptor within a reasonable period. payment is excused and does not discharge the drawers and indorsers.
If he fails to do so, the drawer/indorser will be discharged.
Sec. 145. Presentment; how made. - Presentment for acceptance must be If presentment will have to be made in a remote place, and there is no time to
made by or on behalf of the holder at a reasonable hour, on a business day present it before maturity, delay is excused.
and before the bill is overdue, to the drawee or some person authorized to
accept or refuse acceptance on his behalf; and Sec. 148. Where presentment is excused. - Presentment for acceptance is
excused and a bill may be treated as dishonored by non-acceptance in either
a) Where a bill is addressed to two or more drawees who are not of the following cases:
partners, presentment must be made to them all unless one has
authority to accept or refuse acceptance for all, in which case a. Where the drawee is dead, or has absconded, or is a fictitious person or
presentment may be made to him only; a person not having capacity to contract by bill.
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b. Where, after the exercise of reasonable diligence, presentment can not Because of this, even if no protest was made, the bank can get back the money because of
be made. that document.
c. Where, although presentment has been irregular, acceptance has been
refused on some other ground. Sec. 152. In what cases protest necessary. - Where a foreign bill appearing on its face to
be such is dishonored by nonacceptance, it must be duly protested for nonacceptance,

by nonacceptance is dishonored and where such a bill which has not previously been
Presentment is excused and the bill should be treated as dishonored, and notice dishonored by nonpayment, it must be duly protested for nonpayment. If it is not so
should be given: protested, the drawer and indorsers are discharged. Where a bill does not appear on its
face to be a foreign bill, protest thereof in case of dishonor is unnecessary.
1) When the drawee is dead, absconded, or is a fictitious person;
2) Despite due diligence it cannot be made; If it is a foreign bill of exchange and it is dishonored, a protest must be made.
3) Or although presentment is irregular, acceptance is refused on some Foreign element present
other ground. Protest is made by a notary public or by a respectable resident of the place where the bill
is dishonored in the presence of two or more credible witnesses (Sec. 154)

Law requires that there must be somebody who is acceptable internationally to make the
Sec. 149. When dishonored by nonacceptance. - A bill is dishonored by non- protest
acceptance:
a. When it is duly presented for acceptance and such an acceptance as is Sec. 153. Protest; how made. - The protest must be annexed to the bill or must contain a
prescribed by this Act is refused or can not be obtained; or copy thereof, and must be under the hand and seal of the notary making it and must
b. When presentment for acceptance is excused and the bill is not specify:
accepted.
a. The time and place of presentment;
b. The fact that presentment was made and the manner thereof;
Bill is dishonored when it is duly presented for acceptance and was not c. The cause or reason for protesting the bill;
accepted, or presentment is excused and bill not accepted. d. The demand made and the answer given, if any, or the fact that the drawee or
acceptor could not be found.
Sec. 150. Duty of holder where bill not accepted. - Where a bill is duly
Sec. 154. Protest, by whom made. - Protest may be made by:
presented for acceptance and is not accepted within the prescribed time, the
person presenting it must treat the bill as dishonored by nonacceptance or he a. A notary public; or
loses the right of recourse against the drawer and indorsers. b. By any respectable resident of the place where the bill is dishonored, in the
presence of two or more credible witnesses.
Sec. 151. Rights of holder where bill not accepted. - When a bill is dishonored
by nonacceptance, an immediate right of recourse against the drawer and Sec. 155. Protest; when to be made. - When a bill is protested, such protest must be
indorsers accrues to the holder and no presentment for payment is necessary made on the day of its dishonor unless delay is excused as herein provided. When a bill
has been duly noted, the protest may be subsequently extended as of the date of the
noting.

Protest must be made on the day of its dishonor unless delay is excused
If it has been noted in the notarial register, he may make the protest at anytime

NOTE: Even in the original transcript, there is not much on protest and acceptance/payment for Sec. 156. Protest; where made. - A bill must be protested at the place where it is
dishonored, except that when a bill drawn payable at the place of business or residence
honor. Its not even included in the bar exam coverage. So Ill just copy-paste whatever was written of some person other than the drawee has been dishonored by nonacceptance, it must
in the original transcript, plus the codal. Mwahugzp0whzZzZzZz. be protested for non-payment at the place where it is expressed to be payable, and no
further presentment for payment to, or demand on, the drawee is necessary.
PROTEST
Sec. 157. Protest both for non-acceptance and non-payment. - A bill which has been
The rule on protest is only required for foreign bills of exchange because it has an international protested for non-acceptance may be subsequently protested for non-payment.
element here. Notary public must be an internationally recognized person. What some banks
are doing is to require parties to sign a separate undertaking, that they will return the money. Sec. 158. Protest before maturity where acceptor insolvent. - Where the acceptor has
been adjudged a bankrupt or an insolvent or has made an assignment for the benefit of
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creditors before the bill matures, the holder may cause the bill to be protested for better also that is shall have been duly presented for payment and protested for non-payment
security against the drawer and indorsers. robles virtual law library and notice of dishonor given to him.
A protest for better security may be made if the acceptor has been adjudged bankrupt or Sec. 166. Maturity of bill payable after sight; accepted for honor. - Where a bill payable
insolvent after sight is accepted for honor, its maturity is calculated from the date of the noting for
Section is merely permissive non-acceptance and not from the date of the acceptance for honor.
Purpose is to notify drawer/indorsers that the acceptor is insolvent therefore he cannot
pay, and that they should already make arrangements to pay Sec. 167. Protest of bill accepted for honor, and so forth. - Where a dishonored bill has
If it is not done, they will still not be discharged been accepted for honor supra protest or contains a referee in case of need, it must be
protested for non-payment before it is presented for payment to the acceptor for honor
Sec. 159. When protest dispensed with. - Protest is dispensed with by any or referee in case of need.
circumstances which would dispense with notice of dishonor. Delay in noting or
protesting is excused when delay is caused by circumstances beyond the control of the Sec. 168. Presentment for payment to acceptor for honor, how made. - Presentment for
holder and not imputable to his default, misconduct, or negligence. When the cause of payment to the acceptor for honor must be made as follows:
delay ceases to operate, the bill must be noted or protested with reasonable diligence. a. If it is to be presented in the place where the protest for non-payment was made,
it must be presented not later than the day following its maturity.
Protest is dispensed with under the same circumstances which would dispense with giving
a notice of dishonor b. If it is to be presented in some other place than the place where it was
Delay is also excused if caused by a fortuitous event beyond the control of the holder protested, then it must be forwarded within the time specified in Section one
hundred and four.
Sec. 160. Protest where bill is lost and so forth. - When a bill is lost or destroyed or is
wrongly detained from the person entitled to hold it, protest may be made on a copy or Sec. 169. When delay in making presentment is excused. - The provisions of Section
written particulars thereof. eighty-one apply where there is delay in making presentment to the acceptor for honor
or referee in case of need.
When a bill is lost or destroyed or wrongly detained, protest may be made on a copy of it
Sec. 170. Dishonor of bill by acceptor for honor. - When the bill is dishonored by the
ACCEPTANCE FOR HONOR acceptor for honor, it must be protested for non-payment by him.
Sec. 161. When bill may be accepted for honor. - When a bill of exchange has been PAYMENT FOR HONOR
protested for dishonor by non-acceptance or protested for better security and is not
overdue, any person not being a party already liable thereon may, with the consent of Sec. 171. Who may make payment for honor. - Where a bill has been protested for non-
the holder, intervene and accept the bill supra protest for the honor of any party liable payment, any person may intervene and pay it supra protest for the honor of any person
thereon or for the honor of the person for whose account the bill is drawn. The liable thereon or for the honor of the person for whose account it was drawn.
acceptance for honor may be for part only of the sum for which the bill is drawn; and
where there has been an acceptance for honor for one party, there may be a further Sec. 172. Payment for honor; how made. - The payment for honor supra protest, in order
acceptance by a different person for the honor of another party. to operate as such and not as a mere voluntary payment, must be attested by a notarial
act of honor which may be appended to the protest or form an extension to it.
Sec. 162. Acceptance for honor; how made. - An acceptance for honor supra protest
must be in writing and indicate that it is an acceptance for honor and must be signed by Sec. 173. Declaration before payment for honor. - The notarial act of honor must be
the acceptor for honor. chanrobles law founded on a declaration made by the payer for honor or by his agent in that behalf
declaring his intention to pay the bill for honor and for whose honor he pays.
Sec. 163. When deemed to be an acceptance for honor of the drawer. - Where an Sec. 174. Preference of parties offering to pay for honor. - Where two or more persons
acceptance for honor does not expressly state for whose honor it is made, it is deemed offer to pay a bill for the honor of different parties, the person whose payment will
to be an acceptance for the honor of the drawer. discharge most parties to the bill is to be given the preference.
Sec. 164. Liability of the acceptor for honor. - The acceptor for honor is liable to the Sec. 175. Effect on subsequent parties where bill is paid for honor. - Where a bill has
holder and to all parties to the bill subsequent to the party for whose honor he has been paid for honor, all parties subsequent to the party for whose honor it is paid are
accepted. discharged but the payer for honor is subrogated for, and succeeds to, both the rights
and duties of the holder as regards the party for whose honor he pays and all parties
Sec. 165. Agreement of acceptor for honor. - The acceptor for honor, by such liable to the latter.
acceptance, engages that he will, on due presentment, pay the bill according to the
terms of his acceptance provided it shall not have been paid by the drawee and provided
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Sec. 176. Where holder refuses to receive payment supra protest. - Where the holder of a Addressed to X D ------ F ------- H
bill refuses to receive payment supra protest, he loses his right of recourse against any
party who would have been discharged by such payment.
A with a bill in set, addressed X that bill is payable to B. B indorsed one part to C and
Sec. 177. Rights of payer for honor. - The payer for honor, on paying to the holder the the other part to D. If the endorsement was first made to C, as between C and D, C
amount of the bill and the notarial expenses incidental to its dishonor, is entitled to will have a better right. However, if D was able to go to X first and get the bill
receive both the bill itself and the protest.
accepted, then D will be the one who will be entitled to collect from X.
[BACK TO REGULAR PROGRAMMING]
Remember: priority in time is priority in right.

Date: November 17, 2014 (JM) Section 180. Liability of holder who indorses two or more parts of a set to
different persons. Where the holder of a set indorses two or more parts to
BILL IN SET different person he is liable on every such part, and every indorser
subsequent to him is liable on the part he has himself indorsed, as if such
Section 178. Bills in set constitute one Bill. Where a bill is drawn in a set, parts were separate bills.
each part of the set being numbered and containing a reference to the other
parts, the whole of the parts constitutes on bill.
If the two parts of the bill in set is negotiated to separate parties, they will be treated as if
This is used in letters of credit. When the exporter of the good will collect they are separate bills. Furthrmore, the holder who indorsed the bill to different parties
from the bank the proceeds of the letters of credit, for the goods he sold to an will be liable on each part and to every endorser subsequent to him.
importer, he will draw a bill in set usually in 2 parts: (He gave an example: First
of two parts, second part unpaid. Second of two parts, first unpaid). The beneficiary In the same example:
will not collect directly from the bank which opened the letter of credit. He C ------ E ------- G
will negotiate that with his own bank and such bank will present the two A - Draws a Bill in Set payable to B
parts, on two separate dates two the bank who issued the letter of credit. Addressed to X D ------ F ------- H
There are two parts precisely to provide for the contingency that one part will
be lost in the mail. This is to enhance the probability that one part will reach B will be liable to C and D as indorser. If ever C indorses it to E, and E indorses it to G,
the drawee. C and E will be liable to G as indorsers. D and F will be liable to H as indorsers.

Section 179. Right of Holders where different parts are negotiated. Where
Section 181. Acceptance of bills drawn in sets. The acceptance may be
two or more parts of a set are negotiated to different holders in due course,
written on any part and it must be written on one part only. If the drawee
the holder whose title first accrues is, as between such holders, the true
accepts more than one part and such accepted parts are negotiated to
owner of the bill. But nothing in this section affects the right of a person who,
different holders in due course, he is liable on every such part as if it were a
in due course, accepts or pays the parts first presented to him.
separate bill.

If bills in set are negotiated to holders in due course, the one whose title first accrues is
Acceptance can be written on any part but should be written on one part only.
the true owner. But, if the other party is able to get acceptance or payment first, then he
The drawee should only accept one part. If the drawee accepts both parts, then
is the one who will be able to collect.
he will be liable on both parts.

(The example below is lifted from the original transcript) Section 182. Payment by acceptor of bills drawn in sets. When the acceptor
C ------ E ------- G of a bill drawn in a set pays it without requiring the part bearing his
acceptance to be delivered up to him, and the part at maturity is outstanding
A - Draws a Bill in Set payable to B in the hands of a holder in due course, he is liable to the holder thereon.
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Caltex v. CA3:
Example:
o The part without the acceptance is presented to and paid by the FACTS
drawee without requiring the part with the acceptance to be On various dates, Security Bank and Trust Company (SBTC), through its Sucat Branch
delivered as well. issued 280 certificates of time deposit (CTD) in favor of Angel dela Cruz. Dela Cruz
o The other part with the acceptance is somewhere out there, standing lost the CTDs.
at maturity and falls in the hands of a holder in due course.
o If someone presents the part with acceptance, the drawee is liable to Date of Maturity FEB. 23, 1984 FEB 22, 1982, 19____
pay.
This is to Certify that B E A R E R has deposited
Section 183. Effect of discharging one of a set. - Except as herein otherwise in this Bank the sum of PESOS: FOUR
provided, where any one part of a bill drawn in a set is discharged by payment THOUSAND ONLY, SECURITY BANK
or otherwise, the whole bill is discharged. SUCAT OFFICE P4,000& 00 CTS Pesos,
Where any one part of a bill in set is discharged by payment, the whole bill is Philippine Currency, repayable to said
discharged because the different parts constitute only one bill. If the acceptor depositor 731 days. after date, upon presentation
pays, he cannot require the holder to produce all the parts. Precisely the bill is and surrender of this certificate, with interest at
in set is provided for the contingency that one part may be lost so that the the rate of 16% per cent per annum.
holder can still collect in the event one part is lost. (Sgd. Illegible)

Section 184. Promissory note, defined. A negotiable promissory note within Caltex went to the SBTC Sucat branch and presented for verification the CTDs
the meaning of this Act is an unconditional promise in writing made by one declared lost by Angel dela Cruz. Caltex alleged that the same were delivered to them as
person to another, signed by the maker, engaging to pay on demand, or at a security for purchases made with Caltex Philippines, Inc. by Dela Cruz. SBTC rejected
fixed or determinable future time, a sum certain in money to order or bearer.
Where a note is drawn to the makers own order, it is not complete until Caltexs demand and claim. Caltex sued SBTC but the case was dismissed by the lower
indorsed by him. court on the ground that CTDs are non-negotiable instruments.

ISSUE: Whether or not Certificate of Time Deposit (CTD) is a negotiable instrument.
When a promissory note is made payable to order of the maker, it is not

complete until it is indorsed by him. A promissory note is a contract and this
RULING
means there must be two parties. Until it is indorsed, you do not have two
YES. The CTDs undoubtedly meet the requirements of the law for negotiability under
parties.
Section 1 of the Negotiable Instruments Law. The accepted rule is that the negotiability
When the maker indorses a note, he will not be liable as maker and not
or non-negotiability of an instrument is determined from the writing, that is, from the
indorser.
face of the instrument itself. In the construction of a bill or note, the intention of the
Types of notes:
parties is to control, if it can be legally ascertained. Here, if it was really the intention of
The book of Agbayani mentions certain types of notes.
respondent bank to pay the amount to Angel de la Cruz only, it could have with facility
1. Certificate of deposit. If it complies with the requisites of Section 1, as stated
so expressed that fact in clear and categorical terms in the documents, instead of having
in the case of Caltex, Inc. v. Court of Appeals (G.R. No. 97753, August 10,
1992), then that will be treated as a negotiable instrument.

3
I edited the digest I found on https://engrjhez.wordpress.com/2014/03/24/caltex-inc-v-court-
of-appeals-g-r-no-97753-august-10-1992/ ;credit goes to the owner.
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the word BEARER stamped on the space provided for the name of the depositor in o If you bought it in the head office, then the cashier signs it
each CTD. hence it is called a Cashiers Check.
While the writing may be read in the light of surrounding circumstances in order to o If you bought if in the branch office, then the manager
more perfectly understand the intent and meaning of the parties, yet as they have signs it hence it is called a Managers Check.
constituted the writing to be the only outward and visible expression of their meaning, The drawer and the drawee are the same, hence it is equivalent to a
no other words are to be added to it or substituted in its stead. promissory note (Section 113). Hence, a bank is liable on a Managers
Check that it issued without need for the holder presenting it for payment. It
2. Due BillsDue bills are not used anymore because settlement of accounts in is an absolute, unconditional and primary obligation.
the clearing house is now done by computer. The amounts are debited from Case: Adrian bought a Managers Check from the Bank. In his
the accounts of the drawee bank and collecting bank. application, it had the statement debit my account. Later on, it was
3. BondsWell, Iba na ngayon eh. In the olden days, bonds were like nice- discovered that Adrians account was already closed. The Bank
looking diplomas. Ngayon, electronic na. The bank will just give this to confirm refused to pay the Managers Check. Held: if a bank issues such a
that you bought so much check, the banks obligation to pay is absolute and unconditional.
4. Bank NotesWe used to have this before the war but not anymore. Before, The Bank must still pay.
the Bank of P.I., Philippine National Bank, will issue bank notes for amounts Another case: Roselee bought from Jourd a Managers Check payable
equivalent to denominations in legal tender. People know that if they to bear, in cash. Roselee subsequently lost the check and tried to
surrender them to the bank, the bank will replace them with legal tender, order the Bank to stop payment on the check. Held: The court said
hence they freely treated these notes like legal tender. But this is now that Roselee cannot stop payment on a Managers Check because it is
prohibited in order for the government to control monetary policy. If you payable to bearer and is a principal and primary obligation on the
have such bank notes floating, which people treat as legal tender, the part of the Bank.
government loses control over the volume of currency circulating. Although
in Hong Kong, they still have this. HSBC still issues bank notes. 2. Memorandum Checkchecks which are not intended to be encashed.
When we still had U.S. bases in the Philippines, there was a person
Section 185. Check defined. A check is a Bill of Exchange drawn on a bank
payable on demand. Except as herein otherwise provided, the provisions of
who had a store in Ayala Center. She would buy PX goods from the
this Act applicable to a bill of exchange payable on demand apply to a check. bases. I had a classmate in college whose wife who would buy PX
goods from that store and give the seller post-dated checks. After she
The British spell it as cheque.
would be able to resell the PX goods, she would return to the store
A check is a special type of bill of exchange because unlike other types, they and give cash for payment because the post-dated checks she gave
have serial numbers. To verify the authenticity of that instrument, you will do were memorandum checks which she did not intend to be encashed.
it by checking the serial numberhence, check. After some time, she asked for the checks back but the owner of the
o Chandler Bing asks, why is it called a check? Why not Yugoslavian? store said that such checks were in the province. The owner of the
The provisions of the law governing bills payable on demand apply mutatis store deposited all the checks and all of them bounced. The owner of
mutandis to checks. the store alleged that the checks were given simultaneously with the
release of the goods with the assurance that such would be good
when they are presented for payment. And although they transacted
The book of Agbayani mentions different types of checks. business in Makati, she filed the case in Cavite and made it appear
that the business transactions took place in the latter. The fiscal
1. Cashiers Checks and Managers Checksthey are both drawn by the bank dismissed the case. (Thats where Atty. Jimenez ended this story.)
against itself.
Difference between cashiers check and managers check:
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San Miguel Corp. requires its distributors to deposit a memorandum 1. General
check. One distributor went to the office and asked if he could see his 2. Specialit indicates where it can be deposited
files to reconcile it with his own records. Then that dealer A crossed check remains negotiable.
surreptitiously stole the memorandum check. San Miguel Corp. filed Effects of a crossing a check (Bataan Cigar)
a case for theft. The court, however, said that the check is a It cannot be encashed over the counter. You can only
memorandum check and is not intended to be encashed. Therefore, deposit it.
when that was given by the distributor, title did not pass to San o Chan Wan v. Tan Kim and Chen So (G.R. L-
Miguel. Hence, the dealer cannot be held liable for theft. 15380): A holder of a crossed-check tried to
encash it over the counter. Since the bank did not
3. Certified Checks a certification is an agreement whereby the bank, against allow him to, he tried to hold the drawer liable for
whom a check is drawn, undertakes to pay it any future time when presented dishonor of the check.
for payment (Sec. 187) Held: The court said he did not make
Wala na yan. Banks dont certify personal checks anymore. Instead, the proper presentation. A crossed check
they would suggest that you buy a Managers Check. The banks cannot be paid over-the-counter because
avoid a situation wherein a certified check might be altered (i.e. the it must be deposited.
amount to be paid is changed). You can only endorse it once.
Atty. Jimenez said that when the Rules of Court were amended in To be HIDC, you must make inquiries as to the:
1997, he was surprised to find that in the provision pertaining to 1. nature of the title of the title of the payee
execution, it stated that the sheriff who is armed with a writ of 2. the purpose for which he acquired it
execution, before starting to levy on the properties, should give the Usually a check is crossed to make sure that the intended payee gets
judgment debtor one day to pay in cash or with a certified check. the money. Should the check get stolen, the thief has to open an
During this time, certified checks were no longer used. account in the name of the payee before he can get the amount. This
means he needs to fabricate two government IDs to open the
4. Travelers Check account, deposit the check, wait for it to be cleared (in short: hassle!).
When traveling, anywhere in the world, it is dangerous to carry cash. The greatest enemy of a swindler is time, the goal is to consummate
The advantage with a travelers check is if they get lost, they will be the crime as soon as possible. By the time he is able to open an
replaced by the bank, no questions asked. These checks will also be account and deposit the check, the payee would have discovered that
honored, no questions asked, because they have insurance against his check is missing and could ask for the payment to be stopped.
fraud. But nowadays, with international credit cards, they are not as
common as before. Section 186. Within what time a check must be presented. A check must be
When you buy these checks, you sign your name at the bottom. presented for payment within a reasonable time after its issue or the drawer
will be discharged from liability thereon to the extent of the loss caused by the
When you use it abroad, you sign again and the signature at the
delay.
bottom will be used as comparison. They will check if the signatures
are the same and will ask for your passport to confirm. Banking practice: they will honor checks for 6 months. After that, the check
This was pioneered by American Express. will be considered stale.
5. Crossed Check What happens to the underlying obligation when a check issued for payment for a debt
A check is crossed when you have two parallel lines drawn becomes stale? Two lines of decisions (Atty. Jimenez did not mention any of the case titles)
transversely on the upper left-hand corner. 1. In 2 unnamed decisions the SC held the underlying obligation subsists because
there was no prejudice to the drawerhis bank account is intact. Atty.
The crossing may be:
Jimenez thinks this is the correct view, because the law says he will only be
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discharged to the extent that he was prejudiced. That will only happen if the Jamal v. Estacio
bank became closed. For example, he had 1M in his current account. He issued Jamal sold ladies underwear to Estacio. Estacio issued a check. However,
a check for P100,000. The bank subsequently closed. PDIC paid him 500,000. Jamal never presented the check so it became stale. So now he sued Estacio for
So in effect, he lost of the value of his current account. He should then be payment.
discharged only to the extent of of the value of the checkP50,000. SC: It there was delay in the presentment of the check, under the law Estacio
But if the bank did not become insolvent, there was no prejudice. This was will be discharged only to the extent of the loss. He has not shown that he has suffered
reiterated in another case. loss because of the delay. Hindi naman nabawasan iyong bank account nya e sapagkat
2. In 2 other cases, the court held that the liability is extinguished. The decisions walang DINEBIT.
invoked the provisions in the Civil Codewhen payment is made with a
check it will produce such effect if it is encashed or if its value was impaired Therefore, there will be a loss only when the bank is bankrupt. I mentioned
through the fault of the creditor (i.e. when the check becomes stale). But Atty. this case because there was an occasion where J. Kapunan said that if there was delay the
Jimenez thinks the first view is correct because the Negotiable Instruments DRAWER is discharge from liability/onerous obligation because the civil code
Law is a Special Law and should be applied ahead of the Civil Code (which provides when you pay an obligation with a negotiable instrument. The obligation is
only applies in a suppletory manner). deemed paid if the negotiable instrument is paid OR it is impaired through the fault of
the payee JACK REITERATES: being impaired through the fault of the payee DOES
In the case of endorsers, they are discharged from liability in case there was delay in NOT contemplate a situation where it was not presented for payment. For example,
presenting the check for payment. Why? It is in his interest to terminate as soon as the payee altered the amount and the bank discovered it, payee cannot go back to the
possible his potential primary liability. drawer and ask for another check. This is the penalty that the law imposes upon him.
end
Since Atty Jimenez did not discuss in detail the cases that covered the two diff views, the discussion
in the original transcript is replicated below:
PNB v. Sito
The SC said, if there is delay in presenting the check for payment, the indorser
is discharged. He need not prove that he is prejudiced. Prejudice is presumed. By the
fact that there was undue delay, the potential liability was unduly prolonged. So long as
there is undue delay in the presentment of check for payment, indorsers are discharged.
But the drawer, according to this case will only be discharged to the extent he suffered
the loss because of the delay.
This will only happen if the bank goes bankrupt such that if the check were
presented on time, the check would have been fully paid, but because of the delay, the
bank became bankrupt hence could only probably get 10 centavo per peso.
If the bank did not go bankrupt, there is no prejudice.
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TRUST RECEIPTS LAW The Civil code provides when the depositary is given the right to make use of
the property, it ceases to be a deposit. It becomes mutuum/ loan.

It is settled in American jurisprudence that a trust receipt is not a trust. It is
Date: November 18, 2014 (RL) like arguing that a baby sitter sits on a baby.

Primary reference: PD 115 Section 4. What constitutes a trust receipt transaction. A trust receipt
transaction xxx is a transaction xxx whereby the entruster, who owns or holds
absolute title or security interests over certain specified goods, documents or
How it works: Buyer wants to import materials from Seller, but he does not have any
instruments, releases the same to the possession of the entrustee upon the
money. He goes to the Bank and asks the Bank to pay the Seller directly, for with the latter's execution and delivery to the entruster of a signed document called a
Bank issues a trust receipt. The Seller then sends the goods to the Bank, who releases "trust receipt" wherein the entrustee binds himself to hold the designated
them to the Buyer in trust, where the Buyer has the two-fold obligation (1) to hold the goods, documents or instruments in trust for the entruster and to sell or
goods in trust, for the purpose of selling or otherwise disposing them, and (2) to turn otherwise dispose of the goods, documents or instruments with the obligation
over to the Bank either the proceeds of his sales, to the extent of the amount the Bank to turn over to the entruster the proceeds thereof to the extent of the amount
owing to the entruster or as appears in the trust receipt or the goods,
paid to the Seller, or the goods left unsold, in accordance with the terms specified in the
documents or instruments themselves if they are unsold or not otherwise
trust receipts. In issuing a trust receipt, the Bank retains ownership over the goods, and disposed of, in accordance with the terms and conditions specified in the trust
the Buyer only possesses them in trust for the Bank. receipt xxx

PD 115 is constitutional Vitola Case
The Trust Receipts Laws constitutionality was challenged for criminalizing the failure Facts: A couple were involved in the business of selling Puka Shell necklaces,
to pay the loan. The court said that PD 115 is constitutional. It does not violate the which became a fad back then. They obtained a loan from a bank, which issued
provision on the prohibition against imprisonment for non-payment of debt. The a TR. But the trouble with fad is that they are passing fancies, which is exactly
trustee is being criminally prosecuted for not complying with his obligation under the what happened in this case. They could not sell the puka shells so they went to
TR, which is separate from the main document. the bank saying that, according to this document, we are holding these shells in trust
for you, so here you are, help yourself with the Puka Shells. We dont owe you
Remember that the law says that the trustee can be prosecuted for Estafa anymore.
under Article 315. Held: NO! A TR is merely a security arrangement. The entruster does not
Section 13. Penalty clause. The failure of an entrustee really own the goods. Ownership belongs to the entrustee.
to turn over the proceeds of the sale of the goods,
documents or instruments covered by a trust receipt
to the extent of the amount owing to the entruster or
Consolidated Bank Case
as appears in the trust receipt or to return said goods, Facts: If the entrustee got the goods before he signed the TR, this is a simple
documents or instruments if they were not sold or loan instead of a TR transaction. Theres somebody who bought petroleum
disposed of in accordance with the terms of the trust products sixty (60) days after the delivery of a domestic letter of credit in
receipt shall constitute the crime of estafa, punishable favor of the petroleum company. The bank required the TR. The bank who
under the provisions of Article Three hundred and was not paid filed a criminal case.
fifteen, paragraph one (b) of xxx the Revised Penal
Code. xxx Held: In a TR transaction, the property is with the bank. It will then release
The RPC was promulgated in Spanish in 1932 and it is the Spanish text that is them to the trustee in connection with the loan. But in this case, the entrustee
controlling. The word used in that provision (Art. 315) is deposito, which acquired ownership over the petroleum long before the issuance of the TR.
was erroneously translated as trust in the English version.
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Untitled Case PNB Case
Facts: Entrustee used the loan obtained from the bank to purchase materials Facts: A person obtained a loan with PNB and he failed to pay the same. PNB
for the making a certain product. However, there were no buyers. He was repossessed the goods. The loan was also secured by a real estate mortgage
stuck with such products. He was charged with Estafa. (REM). PNB filed a petition to foreclose the REM. The entrustee argued that
Held: Court said NO. He did not misappropriate the goods. He did not sell bank already acquired the goods so his obligation was already extinguished.
them and misappropriate the money. In fact, he offered to deliver the goods to Held: Court said no. The TR gave the bank a lien over the goods and the
the bank but the latter refused to accept it. mere repossession will produce the effect of payment. The law further
provides that the sale may be done through public auction or private sale. The
Untitled Case lien must still be foreclosed. Otherwise it would be tantamount to pactum
Facts: Entrustee sold the goods and delivered the proceeds of such sale to the commissorium. And since repossession is not equivalent to payment, the bank
bank. He had another loan with the same bank. The bank applied the money can still foreclose the REM.
he delivered to the other loan. It then sued him for Estafa.
Held: Court said no, he complied with his obligation. It was the bank who Landl v. Metrobank: Full turn-over of the goods subject of the trust receipts
wrongly applied such payment to another loan. There is thus no criminal does not suffice to divest debtors of their obligation to repay the principal
liability. amount of the loan. The entrustee shall remain liable to the entruster for any
deficiency
Untitled Case Rosario Textile v. Home Bankers: The entrustee-borrower cannot be relieved
Facts: A person was contracted to put up a tower for a TV network. He of his obligation to pay the loan simply by abandoning property with the bank
applied for a loan from the bank to buy materials for the construction of the
tower. And that is exactly what he didhe bought materials. But then, the Remedies of the Entruster (from Sundiang)
TV network could not pay him. So he defaulted from his obligation and the If the goods are sold or disposed by the entrustee, and the latter did not remit
bank sued him. the proceeds
Held: No Estafa. He did not divert the money for a different purpose. He did 1. file estafa against the entrustee, or
buy the materials. The reason why he could not pay the bank was because the 2. file a separate case to collect the proceeds or the money obligation
owner of the TV network did not pay him. secured by the trust receipt (collection of sum of money)
If the goods are unsold, and are still with the entrustee
Section 7. Rights of the entruster. The entruster shall be entitled to the 1. cancel the trust and take possession of the goods, documents, and
proceeds from the sale of the goods, documents or instruments released instruments subject of the trust,
under a trust receipt to the entrustee to the extent of the amount owing to the 2. after taking possession, sell the goods and apply the proceeds to the
entruster or as appears in the trust receipt, or to the return of the goods,
expenses of the sale and retaking, and the entrustees debt, and
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 3. as an alternative to retaking possession and sale, the entruster can file
contrary to the provisions of this Decree. a case to collect the indebtedness secured by the trust receipt
(collection of sum of money)
The entruster may cancel the trust and take possession of the goods,
documents or instruments subject of the trust or of the proceeds realized Section 8. Entruster not responsible on sale by entrustee. The entruster
therefrom at any time upon default or failure of the entrustee to comply with holding a security interest shall not, merely by virtue of such interest or
any of the terms and conditions of the trust receipt or any other agreement having given the entrustee liberty of sale or other disposition of the goods,
between the entruster and the entrustee, xxx documents or instruments under the terms of the trust receipt transaction be
responsible as principal or as vendor under any sale or contract to sell made
by the entrustee.
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Section 9. Obligations of the entrustee. The entrustee shall Held: Court said that the law expressely provides that as an entrustee, it
(1) hold the goods, documents or instruments in trust for the entruster and assumed the risk of loss, including losses due to fortuitous events. Hence, it
shall dispose of them strictly in accordance with the terms and conditions of remains to be liable.
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 Section 11. Rights of purchaser for value and in good faith. Any purchaser of
the trust receipt; goods from an entrustee with right to sell, or of documents or instruments
(3) insure the goods for their total value against loss from fire, theft, pilferage through their customary form of transfer, who buys the goods, documents, or
or other casualties; instruments for value and in good faith from the entrustee, acquires said
(4) keep said goods or proceeds thereof whether in money or whatever form, goods, documents or instruments free from the entruster's security interest.
separate and capable of identification as property of the entruster;
(5) return the goods, documents or instruments in the event of non-sale or Section 12. Validity of entruster's security interest as against creditors. The
upon demand of the entruster; and entruster's security interest in goods, documents, or instruments pursuant to
(6) observe all other terms and conditions of the trust receipt not contrary to the written terms of a trust receipt shall be valid as against all creditors of the
the provisions of this Decree. entrustee for the duration of the trust receipt agreement.

Untitled Case Untitled Case
Facts: Car dealer bought 10 cars and obtained a loan from a bank. A TR was issued. It Facts: Company imported goods covered by a TR. An employee filed a case
states that failure to resell the cars, the dealer should pay the bank. If not, upon demand, with the NLRC, got a favorable judgment. Upon finality, a writ of execution
the cars must be surrendered. was issued and the goods covered by the TR was levied upon.
X bought a car, which turned out to be a lemon (yes, the fruit. Point is, its Held: Court said that the goods are exempt from levy. The law provides that
different from what you bought). Can X sue the bank? NO. X has to sue the the entrusters security interest shall be valid against all creditors of the
car dealer and the car dealer would, in turn, sue the manufacturer. entrustee.
X bought the car and paid the dealer. If the dealer does not give Xs payment Untitled Case
to the bank, bank cannot repossess the car from X and sue him because X is a Facts: X imported goods, got a letter of credit from Prudential Bank and
buyer in GF and bought the same for value. X will take the car free from the signed a TR. The goods arrived. The entrustee obtained a loan from DBP and
lien in favor of the bank. executed a chattel mortgage over the goods. The loan was not paid. DBP was
ready to foreclose the chattel mortgage. Prudential Bank filed a third party
Section 10. Liability of entrustee for loss. The risk of loss shall be borne by the claim.
entrustee. Loss of goods, documents or instruments which are the subject of Held: DBP cannot foreclose the mortgage. It was void. To have a valid chattel
a trust receipt, pending their disposition, irrespective of whether or not it was mortgage, the mortgagor must have free disposition of the property. In this
due to the fault or negligence of the entrustee, shall not extinguish his case, the entrustee does not have free disposition of the proper990ty covered
obligation to the entruster for the value thereof.
by the TR.

Entrustee must ensure the goods and keep it separate from other properties entrusted to
Section 13. Penalty clause. xxx If the violation or offense is committed by a
him. He bears the risk of loss, including loss due to fortuitous events. Even if there is a corporation, partnership, association or other juridical entities, the penalty
loss due to a fortuitous event, his obligation to pay will survive. provided for in this Decree shall be imposed upon the directors, officers,
employees or other officials or persons therein responsible for the offense,
Textile Mills Case without prejudice to the civil liabilities arising from the criminal offense.
Facts: X imported goods and signed a trust receipt. The factory where such
goods were kept was blazed to the ground. It argued that it was no longer If there is criminal liability, the officer, who signed the TR, is the one criminally liable.
liable because the goods covered by the TR was lost due to a fortuitous event. Usually the bank will require the company president to bind himself solidarily. But if,
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for example, the TR provides that the one who will sign it will be solidarily liable and
the officer did not sign it, or someone else signed it, he cannot he held solidarily liable to
the company. end

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LETTERS OF CREDIT Main purpose: ensure certainty of payment by substituting the undertaking
of the bank or the obligation of the customer of the bank.
Date: November 19, 2014 (JT) Two types of LOC (theoretical types)
Revocable
NOTE: This subject does NOT have any codal provisions. Just a bunch of doctrines Irrevocable
culled from the Uniform Customs on Practice and Documentary Credits and from
jurisprudence. The rules say: Unless expressly stated otherwise, a LOC is always presumed to be
irrevocable. Jack never saw a LOC that is revocable.
Definition, origin and purpose of Letters of Credit (LOC)
A LOC is an instrument issued by a bank in behalf of a customer authorizing a Phil. Virginia Tobacco Administration case
beneficiary to draw a draft or drafts which will be honored on presentation to the bank Phil Tobaccco sold tobacco to someone, who paid through a domestic LOC.
if drawn in accordance with the terms and conditions specified in the letter of credit. Buyer sued, and obtained a court order ordering the bank not to pay the said
Transfield v. Luzon Hydro: A LOC is a written instrument whereby the writer beneficiary, and instead turn over the proceeds to the buyer.
requests or authorizes the addressee to pay money or deliver goods to a third SC = the action is void, because it contrary to the idea that LOC is irrevocable.
person, and assumes responsibility for payment of debt therefor to the BUT see the case where there was fraud (in which case, payment may be
addressee. enjoined through an injunction)
Keng Hua v. CA: In a LOC arrangement, there are three distinct and
independent contracts, to wit Dunkin Donuts case (not SC case, but a case handled by Jack before):
3. sale between buyer and seller They offered this deal. Instead of paying 30 days credit, we will pay you cash
4. contract of buyer with issuing bank on delivery (COD), and 10% discount.
5. LOC proper, in which the bank promises to pay the seller pursuant Then they entered into a revolving letter of credit with the bank.
to the terms and conditions stated therein
Every month, it will be automatically remitted by the bank.
How it works: Buyer goes to Seller to buy goods, but Buyer does not have
To collect, they would draw and submit a draft of the commercial invoice and
money. Buyer will go to the Bank to procure a LOC, on the condition that
receipt.
Buyer will reimburse the Bank for the money that the Bank will disburse to
So 10% discount every month. There are substantial savings
Seller as payment for the goods that Buyer will buy from Seller. Buyer gives
the LOC to Seller as security for the transaction. Seller will present the LOC
Basic types of LOC:
to the Bank, who must pay the Seller after determining that the Seller has
submitted the required documents. If Seller submits the documents, the Bank Commercial LOC
will pay Seller. The Bank can now run to the Buyer to be reimbursed. Standby LOC
Letters of credit are governed by the Uniform Customs on Practice and
Documentary Credits, promulgated by the International Chamber of Commerce Commercial LOC
(ICC) Commercial LOC involves payment for a contract of sale.
o The ICC received queries on letters of credit, and they compiled the Its the most common type.
queries, and on the average of every ten years, they will revise the Before the bank will pay, the sellers will prove that they complied with the
Uniform Customs to incorporate the answers they made to the queries. obligation as a seller.
Thats why they would put there UCP-600 (present version), usually But there is a basic principle: banks deal with documents only
contained at the bottom.
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o Like when the govt sponsored a heavyweight championship fight of a commercial invoice and a bill of lading. When the seller does
Muhammad Ali. The sponsors were paid by LOCs issued by the submit these documents required, BPI will pay the seller. However,
PNB. The LOCs stipulated that they must submit a document to De Reny said that when the crates arrived, the crates did not contain
prove they complied with a contract. The document required was a dyes, but chalk. De Reny refused to pay.
newspaper with an account of the fight. Held: Court said NO. Banks deal with documents only.
The docs to be submitted by the seller will be agreed upon by the buyer and And this must be strictly construed. As long as the seller
seller. submitted the documents required, and the bank paid
o Usually involves commercial invoice or bills of lading. according to that document, the customer (De Reny) has to
reimburse the bank.
Standby LOC o FEATI Bank v. CA: The documents required by the bank were a
Bank will pay if its customer committed breach of contract. certification from the buyer that the goods were properly delivered.
o That happens in the construction industry. The construction The buyer refused to issue the certification. What was submitted
company, instead of getting performance fund, is required to give instead was a certification from the Bureau of Forestry.
Standby LOC. Held: SC said that the Bank is not responsible. The
o If it commits breach of contract, the bank and the owner can collect certification from the Bureau of Forestry was not compliant
and draw a draft and submit a certification to the bank that the with the terms of the LOC, since what was required was
contractor breached the contract. the buyers certification. The rule of strict compliance must
be strictly complied with.
Primary, Absolute, Unconditional Obligation
A LOC is not an accessory contract/obligation. Cases involving LOC:
Its a primary, absolute, unconditional obligation. 1. Timber The LOC required invoice for fine timber. But the trees were
Philamlife Case: already chopped down and became lumber. So, the invoice instead contained
o Life insurance companies can grant housing loans. For example, a fine lumber instead of fine timber. Here, bank is not required to pay.
couple applied for a housing loan from Philamlife. Philamlife was not 2. Marble In a LOC which provides for the delivery of Italian marble, but
satisfied with a mortgage. It required standby LOC. The LOC instead the invoice had just marble, then the bank can refuse to pay. That
provided that the moment Philamlife submitted a certification that marble can be from anywhere, like marble from Romblon. Thats very
this couple breached, the Bank will pay. different from marble from Italy.
o But then the couple said that they made partial payments. The Bank 3. Dupont In a case where a Philippine company wanted to buy chemicals from
said it should not pay full amount, it should pay according to the Dupont (an American company), the Phil company applied for a LOC with
partial payments. BPI. There were three contracts involved: the underlying contract, the
o Held: Supreme Court said no, a LOC is not an accessory obligation. application for LOC (where the customer says it will reimburse the bank and
It is an independent absolute principal. So the bank must pay the full face pay the bank charges), and the LOC.
value of the LOC. Its up to them sue to get back what they paid.
The bank does not guarantee the correctness or genuineness of the document submitted
Rule of strict compliance by the beneficiary.
Banks deal with documents only. They dont deal with goods. Unnamed case: In one case, the seller submitted a spurious bill of lading. The
bank paid in good faith.
The docs to be submitted must strictly conform to the terms of the LOC.
o Held: SC said that the buyer should still reimburse. Banks do not
o BPI v. De Reny Fabrics (GR No. L-2421): De Reny Fabric
guarantee the genuineness of the documents, unless the bank knew
imported some dyes. The LOC provided that the seller must submit
that the documents were spurious.
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.Random doctrines blurted out Court issued an injunction: it was a fraud. What was sent were not goods, but
Back in the olden days, when a local company applies for a LOC, the bank will trash!
send a text of the LOC to its correspondent bank. In the old days, it was To stop payment (via injunction), there must be:
through telex. Now, its through SWIFT (e-communications between banks). 1. a clear proof of fraud,
The notifying bank does NOT assume an obligation except to notify the 2. fraudulent abuse of the independence principle, and
beneficiary. 3. irreparable injury.
The seller might require that the LOC be confirmed by the bank in the Otherwise, you cannot recover damages.
country of the seller. This occurs in situations in countries having foreign But if its a case of not meeting specifications (e.g. not adequate quality), then
exchange problems, because the government can order a freeze on forex an injunction cannot be obtained.
transactions. Sofraud = injunctionable; not meeting specs = not injunctionable!
Cojack/Cora Jacob case [There was a time when a bank in Vietnam issued a LOC, but refused to pay the draft.
"A lawyer can draw an air-tight contract, but it is still a piece paper. But still there was an LOC. So what happened? Bank was blacklisted. No one accepted
In the case of Cojack, Mrs Cora Jacob made native handbags. Then someone their LOC.]
from Hawaii (the buyer) wanted to buy 3 million pesos worth of bags to be
sold in Hawaii. Cora Jacob accepted the obligation and made bags 24/7. LOC cannot be indefinite
The buyer applied for a LOC, which provided that the buyer must submit a They have a maximum period. Because the moment you import goods, you
commercial invoice issued by Cojac, which is the name of Cora Jacobs are required to open a LOC.
business. o Sometimes, the seller has not yet found a ship that will bring the
The bags arrived for the buyer, and he praised the quality. goods here.
However, in the invoice, the buyer deliberately misspelled Cojac into If the seller and buyer had dealt with each other for quite some time, and they
Cojack (with a K at the end). trust each other, the buyer will not ask the bank to renew the LOC anymore.
So when Cora Jacob presented the invoice at the bank, the bank refused to pay Cause everytime you want the bank to renew a LOC, the bank puts charges.
because of the discrepancy. So when the goods arrive and the seller submits the draft, the bank will
However, the bank offered that instead of paying Cora 3 million, it can pay communicate with the buyer saying, There is a discrepancy: LOC expired.
her 1 million instead, then get the bags back. Will you waive discrepancy? If you say yes, the bank will pay. So, by not
renewing it, they were able to save on bank charges.
Independence Principle
Transfield v. Luzon Hydro: The so-called independence principle assures the (from orig. transcript) Where a letter of credit was issued for the importation
Seller of prompt payment independent of any breach of the main contract, and of noodles, and the invoice said woodle, the bank can refuse to pay, because
precludes the Issuing Bank from determining whether the main contract is bank doesnt know. It might think that a woodle is some exotic food coming
actually accomplished or not. from Timbuktu.
Stop payment due to fraud SC case, no title mentioned:

The first thing to do before giving your trust is to require as a document a surveyor, There was a case where the LOC expired. It was for importation for equipment
who had examined the goods according to the specifications in the contracts. from Taiwan. The bank paid anyway, so it sued the buyer. Buyer said, why
Like in the landmark case of New York Court of Appeals, where there was an did you pay when the LOC had expired?
importation from India. When the cases arrived, they contained a rubbish. o Held: You actually received, installed, and used the equipment. The
principle of unjust enrichment applies. So, buyer must pay the bank.
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Red Clause From CLV: What a LOC is not (Transfield v. Luzon Hydro)
This phrase means that the beneficiary can get payment in advance although LOC is NOT a third-party beneficiary contract (pour autrui), because the
the goods being sold has not yet been delivered. (from orig. transcript) issuing bank must honor drafts drawn against the LOC, regardless of problems
In the old days, we have these expensive coats for women. However, there subsequently arising in the underlying contract
were lots of people making campaigns against cruelty on animals. But this LOC, if properly used, is not a contract of suretyship or guarantee, because it
American factory that manufactures clothes would send people to buy skin entails a primary liability on the part of the issuer following a default
and fur from hunters in the mountains of China. But the hunters had no idea LOC is not a negotiable instrument, because it is not payable to order or
how LOCs work. So the bank will open the LOC with a representative and a bearer, and is generally conditional. But, the draft presented under it is often
beneficiary. They would put there a provision telling the bank that the negotiable.
beneficiary (the hunters) can collect the proceeds, although it is not yet
shipping the fur. Thus, it is like cash advance. That provision would be
written in red ink. Kaya red clause.
(from orig. transcript): Because in those days, the said clause was written in red
ink. This is common in sugar trading. An American company will buy sugar
here. Company will open a letter of credit with the trader as beneficiary, who
will in turn buy from the sugar central. If the beneficiary fails to deliver the
goods, thats just too bad. Buyer will have to reimburse the bank.
Evergreen Clause #edsheeran #thinkingoutloud #srsly

This phrase means that the bank commits to continue renewing the letter of
credit. (from orig. transcript)
LOC has a specific date of termination. If you are a taxpayer, you file a
petition for review with the CTA, you ask for an injunction to enjoin BIR
from enforcing the deficiency tax assessment. Insurance company then posts
an injunction bond, saying that since this is a tax case (its very risky), the
insurance company will require a standby LOC from the bank, stating that
they will pay the insurance company the moment the insurance company
submits a certification that it is being held liable on the injunction bond.
And the SC issued circulars twice to all courts: Judicial bonds cannot be
cancelled until there is a final judgment. And the standby LOC will expire. So
there is a requirement for the LOC to contain an evergreen clause: a provision
that the bank will continue renewing the standby LOC automatically until it
receives written communication not to do it anymore. Evergreen clauses are
always alive, always fresh. Very easy to remember: Christmas colors! end
CORPORATION CODE / FOREIGN INVESTMENTS ACT
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Being an artificial person:
CORPORATION CODE It has a personality separate and distinct from its stockholders.

As a rule, it cannot recover moral damages because it cannot experience mental anguish,
TITLE I
anxiety, and wounded feelings.
GENERAL PROVISIONS EXC: It can recover damages for besmirched reputation because a corporation
has a reputation. There was that case involving a medical school which sued a
Date: February 4, 2015 (MR) journalist for damages because the latter lambasted the quality of education in
that school. You recall, in the RPC, the provision provides: a libel case can be
Section 1. Title of the Code. - This Code shall be known as "The Corporation filed based on a libelous imputation made against a corporation.
Code of the Philippines". (weh di nga)
Sec. 2. Corporation defined. - A corporation is an artificial being created by The properties belong to the corporation and not the stockholders.
operation of law, having the right of succession and the powers, attributes and Case: Corporation was liquidated and stockholders divided assets among
properties expressly authorized by law or incident to its existence. themselves. Of course the BIR was running after them. They argued that this
is not conveyance of property: We are co-owners! We only partitioned.
In a corporate form of business, your exposure (as a stockholder) is limited to the Court said no. The properties belonged to the corporation. When you divided
amount of your subscription, so you dont lose all your properties when it turns out the properties and distributed among yourselves, thats conveyance. So if the
that it was a bad business decision. Unlike when youre a single proprietor and you lose amount you received is greater in value than your subscription of shares, the
your business, your creditors can run after all your properties. difference is taxable.
Case: Court said that the corporation can sue the stockholder to recover a
DEFINITION OF CORPORATION piece of property that the stockholder was occupying. A stockholder cannot
The law defines a corporation as an: sue to recover property belonging to the corporation. A stockholder cannot
Artificial being created by operation of law. So it exists by fiction of law. intervene in an action involving validity of ownership of property of the
It is not a natural person; it is an artificial person. You can never smell the corporation.
armpit of a corporation! Cant argue with that. Case: stockholder filed action to annul real estate mortgage executed by the
Having the right of successionmeans even if there are changes in the corporation and he annotated a notice of lis pendens on the title. The court
composition of the stockholders, the juridical personality remains the same. It granted motion to cancel notice. Court said the property belongs to the
is not affected. An English writer said: A corporation is like the River Thames corporation. You are not the owner so you cannot annotate.
and stockholders are like the waters; the waters are constantly changing, but When the stockholder dies, the properties of the corporation should not be
its the same river. included in the inventory of the stockholders estate.
Having powers authorized by law. It can only exercise the powers A judgment against a corporation cannot be enforced against properties of
conferred by law. Natural persons can do anything as long as it is not stockholder and vice versa (general rule).
prohibited by law. But a juridical person created by law can only exercise such A stockholder cannot file a case to enforce a contract of the corporation.
powers conferred by law. Someone made a comparison of juridical systemsin Stockholder cannot be sued for breach of contract of the corporation.
American legal system, you can perform any act except what is prohibited by law. In o Stonehill v. Diokno: He questioned validity of search warrants
German law you can perform only those authorized by law. In Russian legal system, you against the corporation. Court said it was not his right that was
cannot perform any act even if its authorized by law. But in the French system, you can violated but the corporations, so he could not question the validity
perform an act even if its prohibited by law. of the search warrants.
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PIERCING THE VEIL OF CORPORATE FICTION Employees of a bus company formed a union and then accused management of
When the law creates a device, it will not allow it to be used for fraud. You have the ULP. The daughter of the mother, who was the controlling stockholder of the
doctrine of piercing the veil of corporate fiction: bus company, formed another corporation engaged in the business of a
When the separate juridical personality is used to defeat public convenience, to justify common carrier and all the buses and equipment of the original corporation
wrong, fraud, its separate legal personality will be disregarded and the veil of corporate were transferred so that the court said that it was organized to thwart the ULP
fiction pierced. case filed against the original corporation.
Somebody owned a jeepney that was involved in a vehicular accident. The
But first, the underlying basis of the doctrine is that the separate legal personality is victim sued for damages. The owner formed another corporation, transferring
being used to commit fraud. Therefore, it can be invoked against a corporation. A the jeepney to that corporation and the stockholders were members of his
corporation cannot invoke it in its favor. family. Court said the corporation was formed to frustrate the satisfaction of
Case: The government entered into a mining contract with a corporation. The the claim. The decision favored the victim.
contract provided it cannot be assigned without the consent of the But if the corporation is merely an alter ego of the stockholder, this doctrine
government. Corporation assigned it to a subsidiary of the corporation cannot be invoked against a minority stockholder. (I dont get how the case
without govts consent. Corporation argued and the CA agreed: you pierce explained this point)
the veil so in effect there was no invalid assignment. Now there was this case there was this married couple who have a single
o Held: SC said no, you cannot invoke the doctrine in your favor; it proprietorship. It was a factory, producing furniture. The couple went to the
can only be invoked against the corporation. US to market the furniture. Their daughter was the one managing the business
Likewise there was a majority stockholder who filed an action involving here. The couple executed a PA authorizing their daughter to mortgage their
contract pertaining to the corporation. He argued he should be allowed to conjugal properties to secure the payment of any loan, which the daughter
maintain the suit because the separate legal personality should be disregarded. might obtain. Later on they decided to incorporate the business, so they
o Held: The Court said no, you cannot invoke it in your favor. formed a corporation and transferred that factory to the corporation and the
stockholders were the couple, their daughter, and other family members. The
But mere majority control is not enough basis to disregard the separate legal personality. daughter now obtained a loan in behalf of the corporation and mortgaged the
It must have control plus another factor. The Court has said that the mere fact that a conjugal properties. The corporation did not pay, so the bank wanted to
holding company has the majority shares in a corporation is not sufficient basis, even if foreclose. The couple now preempted the filing of the case via an action to
it involves management. It must be shown: (Requisites to pierce the veil of corporate enjoin the foreclosure and said that the mortgage was invalid. The PA given to
fiction) the daughter was for mortgaging properties to obtain a loan for the couple,
1. There is control and it involves management not for the corporation. The court said that the corporation is merely their
2. It is exercising the power to perpetrate fraud alter ego. The same line of business was involved; the factory was in fact
3. Somebody was injured because of it transferred to the corporation; and the couple stayed in the US and continued
to market the furniture produced by the factory like the old set up; and the
Liddle & Co. Case: There was a Liddle & Co.where the first sale of cars was daughter was still the one running the factory.
subjected to an ad valorem tax. It was percentage tax, so the higher the selling
price, higher tax. Company stopped selling cars to the public. The wife of This doctrine also applied when in their internal dealings, the stockholders indicate that
Liddle formed a new corporation, Liddle & Motors, and owned 90% of the they were not treating the corporation as a separate entity.
shares; and Liddle and Co. would only sell cars to that corporation at a very Case: A controlling stockholder gave 1 share of stock to 4 employees to
low price. Liddle & Motors would then sell the cars to the public at a very qualify them to be members of the board. But they endorsed all the stock
high price. Now the Court said that the creation of the new corporation was certificates and gave them to her. They retained possession of the stock
done to evade tax. Because of tax fraud, the separate personality should be certificates. And they never held any stockholders meeting or elect members
disregarded.
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of the board or hold a board meeting. And the controlling stockholder would Corporations created by special laws are governed by the special law that created it and
commingle her personal funds with the funds of the corporation. Its common by the Corporation Code suppletorily.
in the Philippinesmajority are family corporations: Oh, shopping tayo sa In a previous bar exam it was asked: A government corporation was created
MOA! Kuha ka muna ng pera sa kaha! by special law. By-laws amended to say that it can have only 3 directors. Not
valid, because the Corporation Code applies suppletorily and it provides that a
Citizenship of corporations corporation must have at least 5 directors.
Different tests for the citizenship of corporations: Sec. 5. Corporators and incorporators, stockholders and members.
1. Place of incorporationIf incorporated in the Philippines, its a Philippine Corporators are those who compose a corporation, whether as
corporation; if incorporated in a foreign country, its a foreign corporation. But what is stockholders or as members.
usually applied is the citizenship of the holding company, because there are many Incorporators are those stockholders or members mentioned in the
articles of incorporation as originally forming and composing the
nationalization issues
corporation and who are signatories thereof.
2. Nationality of controlling stockholders Corporators in a stock corporation are called stockholders or
Teves case: Teves, a stockholder of PLDT questioned the capital structure of shareholders.
PLDT, claiming that the Filipino ownership of the common voting shares is Corporators in a non-stock corporation are called members.
less than 60%. PLDT argued that it has common voting shares and non-voting
preferred shares. If you put them together, Filipinos will own at least 60% of Incorporatorsthose who sign the articles of incorporation. Only natural persons can
the shares. But the Court said the 60% test applied to the common holding be incorporators. A corporation cannot be an incorporator. But a corporation can be a
shares because it must be under the control of Filipinos; and control requires subscriber to shares of another corporation.
voting rights because voting rights are exercised to elect board members.
In stock corporations you have stockholders. In non-stock corporations, you have
Sec. 3. Classes of corporations. - Corporations formed or organized under this members.
Code may be stock or non-stock corporations. Corporations which have
capital stock divided into shares and are authorized to distribute to the Sec. 6. Classification of shares.
holders of such shares dividends or allotments of the surplus profits on the The shares of stock of stock corporations may be divided into classes
basis of the shares held are stock corporations. All other corporations are or series of shares, or both, any of which classes or series of shares
non-stock corporations. may have such rights, privileges or restrictions as may be stated in
the articles of incorporation:
STOCK AND NON-STOCK CORPORATIONS o Provided, That no share may be deprived of voting rights
Corporations may be stock or non-stock. except those classified and issued as "preferred" or
Stockif it has shares and can declare dividends (those are the 2 requisites) "redeemable" shares, unless otherwise provided in this
Code:
o Ex. Manila Polo Clubit has proprietary shares but it cannot declare
o Provided, further, That there shall always be a class or series
dividends. It is non-stock. of shares which have complete voting rights.
Non-stockno part of its income is distributable as dividends (secs. 87-88) Any or all of the shares or series of shares may have a par value or
have no par value as may be provided for in the articles of
Sec. 4. Corporations created by special laws or charters. - Corporations incorporation:
created by special laws or charters shall be governed primarily by the o Provided, however, That banks, trust companies, insurance
provisions of the special law or charter creating them or applicable to them, companies, public utilities, and building and loan
supplemented by the provisions of this Code, insofar as they are applicable. associations shall not be permitted to issue no-par value
shares of stock.
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Preferred shares of stock issued by any corporation may be given 2. Banks, trust companies, insurance companies, public utilities are not allowed
preference in the distribution of the assets of the corporation in case to have no par value shares. Their shares must be par value. Other special laws
of liquidation and in the distribution of dividends, or such other which created companies which required large paid in capital would usually
preferences as may be stated in the articles of incorporation which
contain a provision like that like investment houses. Why? Because they are
are not violative of the provisions of this Code:
o Provided, That preferred shares of stock may be issued only required to have minimum paid in capital so you can tell right away if theyve
with a stated par value. complied with that requirement. Because they are par value shares you will
The board of directors, where authorized in the articles of know right away how much is the paid in capital. Otherwise (meaning if you
incorporation, may fix the terms and conditions of preferred shares of allowed no par value shares), just say: the authorized capital stock shall consist
stock or any series thereof: of PHP 200K no par value shares. How much was paid? You dont know.
o Provided, That such terms and conditions shall be effective 3. Preferred shares must be par value shares. You cannot issue no par value
upon the filing of a certificate thereof with the Securities and
Exchange Commission.
preferred shares because you will not know how much are given preference.
Shares of capital stock issued without par value shall be deemed fully 4. Preferred shares cannot be given preference ahead of creditors, because that
paid and non-assessable and the holder of such shares shall not be will violate the trust fund doctrine. The assets of the corporation are
liable to the corporation or to its creditors in respect thereto: considered trust fund to answer for claims of creditors. You cannot provide
o Provided; That shares without par value may not be issued that in case the corporation is dissolved, holder of preferred shares will be paid
for a consideration less than the value of five (P5.00) pesos first, ahead of creditors. That is void.
per share:
o Provided, further, That the entire consideration received by
the corporation for its no-par value shares shall be treated as On par value shares (Quite difficult to understand if you dont read other materials)
capital and shall not be available for distribution as The articles would read something like this: The authorized capital stock shall consist of
dividends. PHP 200K no par value shares. But no par value shares will still have value. It is stated
A corporation may, furthermore, classify its shares for the purpose of value. But it can change.
insuring compliance with constitutional or legal requirements.
Except as otherwise provided in the articles of incorporation and Now we were organizing a corporation with no par value shares for factories who
stated in the certificate of stock, each share shall be equal in all
wanted to engage in estate planning. Suppose theres a family that formed a corporation
respects to every other share.
with no par value shares. The children subscribed the shares. Stated value = PHP 5 per
SHARES share. Later on, the father subscribed shares of stock and he paid for his subscription
The law gives wide leeway for classifying shares. All classes of shares have equal rights with property. Stated value = PHP 100K per share. If you dissolve the corporation,
unless the articles or by-laws provide otherwiselike voting rights and amount of who will get most of the properties? The children, when par value was PHP 5; the
dividends. fathers was PHP 100K.
One can classify shares to ensure compliance with nationalization requirements. We had a client like that who formed a corporation with no par value shares, initially at
stated value PHP 100, then declared stock dividends, stated value PHP 300; then
Example: mining companyIt can classify shares as class A and class B. Class
another declaration PHP 600; and then again a stated value PHP 1000. Irrespective of
A shares represent 60% capital and only Filipinos can own these shares. Class B
stated value, theyre equal. They have the same voting rights. If cash dividends were to
shares, anyone can own. So there you ensure that at any point in time, Filipino
be declared, they will receive the same amount irrespective of stated value. But there
ownership of shares will be maintained.
was a time they said they couldnt understand all of this so they asked if we could just
amend the articles to turn the no par value shared to par value shares, to simplify
However, there are limitations on the right to classify shares:
matters. So we complied. What happened? Each stockholder received 15 par value
1. Common shares may not be denied voting rights. Only preferred and
shares, irrespective of the stated value (100, 300, 600, 1000). They all received 15 par
redeemable shares may be denied voting rights.
value shares.
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Sec. 6 contd Where the articles of incorporation provide for non-voting words, we will not allow subscription to all 2000 shares. Magtira tayo ng kaunti. We
shares in the cases allowed by this Code, the holders of such shares shall might need to get someone in whos important in the future. So every one founder
nevertheless be entitled to vote on the following matters: [AASIIMID] share, you subscribe to 19 common shares. Someone from a bank found this scheme
1. Amendment of the articles of incorporation;
bankable: We will not shell out money. You will borrow money from the bank,
2. Adoption and amendment of by-laws; sufficient to pay in full for the subscription to the 19 shares. And then now turn around.
3. Sale, lease, exchange, mortgage, pledge or other disposition of all or Sell 4 of the 19 shares to the public at a premium price, computed in that the proceeds
substantially all of the corporate property; paid from 4 shares would be sufficient to pay for the loan obtained from the bank
4. Incurring, creating or increasing bonded indebtedness; including interest. So at the end of the exercise, we will own 15 shares, which he can
5. Increase or decrease of capital stock; now sell to anybody without having spent a single centavo. Its a brilliant financial
6. Merger or consolidation of the corporation with another corporation
scheme! (Na-gets nyo ba? Ako kasi hindi)
or other corporations;
7. Investment of corporate funds in another corporation or business in
accordance with this Code; and Sec. 8. Redeemable shares. - Redeemable shares may be issued by the
8. Dissolution of the corporation. corporation when expressly so provided in the articles of incorporation. They
may be purchased or taken up by the corporation upon the expiration of a
Except as provided in the immediately preceding paragraph, the vote fixed period, regardless of the existence of unrestricted retained earnings in
necessary to approve a particular corporate act as provided in this Code shall the books of the corporation, and upon such other terms and conditions as
be deemed to refer only to stocks with voting rights. may be stated in the articles of incorporation, which terms and conditions
must also be stated in the certificate of stock representing said shares.
Non-voting shares
Non-voting shares are given voting rights with respect to fundamental corporate Redeemable shares
actions which require the stockholder approval, like amending the articles, enacting by- Redeemable sharesthey may be redeemed at a fixed period, regardless of the existence
laws, sale/mortgage of all of the properties, increasing the capital stock, of unrestricted retained earnings. When the Corporation Code has been passed, UP Law
merger/consolidation, investment in a new line of business, dissolution of corporation. Center organized a seminar to explain the amendments vis--vis the old Corporation
Law. I raised this question: Why did you provide here that redeemable shares must be
Sec. 7. Founders' shares. - Founders' shares classified as such in the articles redeemed regardless of unrestricted retained earnings? What happened to the trust fund
of incorporation may be given certain rights and privileges not enjoyed by the doctrine? They said this Code was the product of the work of 3 entitiesSEC, UP Law
owners of other stocks, provided that where the exclusive right to vote and be Center and Batasang Pambansa. It was a member of the Batasan who insisted on
voted for in the election of directors is granted, it must be for a limited period inserting that. And the majority of the Batasan supported it.
not to exceed five (5) years subject to the approval of the Securities and
Exchange Commission. The five-year period shall commence from the date of
the aforesaid approval by the Securities and Exchange Commission.
Case: There was someone who bought a redeemable share from Republic
Bank. That bank was closed by the Central Bank for being insolvent. This
Founders shares stockholder now filed a case for mandamus to compel the bank to redeem his
Then you have founders sharesgiven certain rights like exclusive right to vote that is shares. The bank said, We cannot redeem, were insolvent! SC said the share
valid only for 5 years. can be redeemed provided there will be enough assets left to answer for
liabilities to creditors.
Baguio Country Club was organized by Gov. Forbes, created by special law, passed by
the Philippines Commission. It had 100 proprietary shares. But this financial wizard Sec. 9. Treasury shares. - Treasury shares are shares of stock which have
been issued and fully paid for, but subsequently reacquired by the issuing
made a suggestion: create 2000 common shares, which will have voting rights only after
corporation by purchase, redemption, donation or through some other lawful
5 years. But we will classify our shares as founders shares and we will put in the articles means. Such shares may again be disposed of for a reasonable price fixed by
that for 5 years we will have exclusive voting rights. So for 5 years we will retain full the board of directors.
control. And a right of preemption will be given to subscribe to 19 shares. In other
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Treasury shares from treasury shares. If they are not authorized but unissued shares, they
Shares issued and fully paid but subsequently reacquired by the corporation. should be declared as property dividends. Therefore, there will be taxes to be
The SC said treasure shares are in limbo. They are neither cancelled nor paid. In the same way that Philex Mining declared property dividends shares
outstanding. They are dormant, waiting to be awakened and they will be of stock they acquired in a corporation.
awakened if reissued. If the board reissues them then they will subsist again.
Meanwhile, they are sleeping; but not cancelled, because they can be reissued. Date: February 5, 2015 (MB)
Sec. 57: Treasury shares have no voting rights as long as they remain treasury
TITLE II
shares. INCORPORATION & ORGANIZATION OF PRIVATE CORPORATIONS
Case: The controlling stockholder of a corporation wanted to transfer his Sec. 10. Number and qualifications of incorporators. - Any number of natural
shares to other stockholders who were his friends without their shelling out persons not less than five (5) but not more than fifteen (15), all of legal age and
any money. He consulted a law office and they came up with this scheme. A a majority of whom are residents of the Philippines, may form a private
corporation for any lawful purpose or purposes. Each of the incorporators of
deed of trust was executed. He appointed the law office to be trustees of his stock corporation must own or be a subscriber to at least one (1) share of the
shares of stock. The deed of trust provided that the law office would have the capital stock of the corporation.
authority to vote the shares of stock and they also provided that the deed of
trust would include stock dividends that might be declared in the future. And Incorporators
the deed mandated that the trustees should have the shares purchased by the You must be a natural person. A mother corporation cannot be an
corporation. So thats what happened. The corporation bought the shares, incorporator.
they became treasury shares and the trustees now declared them as stock You must be at least 5 but not more than 15.
dividend. And you know that stock dividends are not taxable, because if for The majority must be resident of the Philippines.
example you own 100 shares in a corporation with a par value of PHP 100K Incorporator is required to own at least 1 share of stock.
(book value); and the corporation declared 100% stock dividends, at the end of o This is an amendment which was not required in the old Corporation
the exercise, the pie did not become bigger. It was only cut into more slices. law.
o Held: The SC said these shares cannot be treasury shares, because
treasury shares are not outstanding. And the trust provided that the
law office would vote the shares. That is inconsistent with the Sec. 11. Corporate term.
dormant nature of treasury shares, because they are not outstanding. A corporation shall exist for a period not exceeding fifty (50) years
How can they be voted? And also, the treasury shares are not from the date of incorporation unless sooner dissolved or unless said
period is extended.
outstanding, so they cannot be recipients of stock dividends. So the The corporate term as originally stated in the articles of incorporation
court said, this is a tax evasion scheme and slapped them with 25% may be extended for periods not exceeding fifty (50) years in any
surcharge. The only thing you can do is reissue the shares. single instance by an amendment of the articles of incorporation, in
accordance with this Code;
There was a bank that asked for a legal opinion from their (Jacks) office: Can we accept o Provided, That no extension can be made earlier than five (5)
treasury shares as collateral for a loan? Treasury shares are properties so they can be years prior to the original or subsequent expiry date(s) unless
there are justifiable reasons for an earlier extension as may
issued as collateral. Wrong!
be determined by the Securities and Exchange Commission.
Delimondo case: They are properties but they are not outstanding. They have
not been cancelled. You reissue them first. Term - 50 years
Manning case: Court said its wrong to declare them as stock dividends. Why? o In the old code, extension of the life of a corporation was not
You can declare stock dividends from the authorized but unissued shares, not allowed so that after 50 years, a corporation will be dissolved.
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o Filipinas Companias de Seguros established by Ayalas. Its corporate 2. When the board of the directors recall the amount of the unpaid
life expired in 1953. They had to dissolve it and form a new subscription (upon call by the board)
corporation to take over. But in 1968, the Corporation Code was
Sec. 14. Contents of the articles of incorporation. - All corporations organized
amended to allow extension of corporate life and that has now been
under this code shall file with the Securities and Exchange Commission
retained in the present code. articles of incorporation in any of the official languages duly signed and
Extension acknowledged by all of the incorporators, containing substantially the
o You cannot incorporate today and ask for an extension tomorrow. following matters, except as otherwise prescribed by this Code or by special
o You can only do so during the last 5 years. law:
o Recent SEC Circular So long as a corporation passed a resolution
1. The name of the corporation;
extending its corporate life during its last year in existence, SEC will
Name The registration of business names has been transferred from the DTI
allow its continuance provided that the corporation complies with
to the SEC. SEC will now require you to include that in your corporate name.
the requirements for extension within 3 years after the date in the
articles for dissolution. This is because in the code, a corporation is 2. The specific purpose or purposes for which the corporation is being
given 3 years to wind up its affairs. incorporated.
Where a corporation has more than one stated purpose, the articles of
Sec. 12. Minimum capital stock required of stock corporations. - Stock incorporation shall state which is the primary purpose and which
corporations incorporated under this Code shall not be required to have any is/are the secondary purpose or purposes:
minimum authorized capital stock except as otherwise specifically provided o Provided, That a non-stock corporation may not include a
for by special law, and subject to the provisions of the following section. purpose which would change or contradict its nature as
such;
Sec. 13. Amount of capital stock to be subscribed and paid for the purposes of Primary purpose you can state a secondary purpose so that if the primary
incorporation. - At least twenty-five percent (25%) of the authorized capital
stock as stated in the articles of incorporation must be subscribed at the time
purpose turns out to be unprofitable, the corporation can shift into another
of incorporation, and at least twenty-five (25%) per cent of the total line of business without need of amending the articles.
subscription must be paid upon subscription, the balance to be payable on a
date or dates fixed in the contract of subscription without need of call, or in 3. The place where the principal office of the corporation is to be located,
the absence of a fixed date or dates, upon call for payment by the board of which must be within the Philippines;
directors: Provided, however, That in no case shall the paid-up capital be less Place where the principal office is located now they require you to indicate
than five Thousand (P5,000.00) pesos. the street and the number in the address.
o If you will transfer your office within the same city or municipality,
The law made a rule requiring minimum capitalization (25% of authorized you need not amend your articles. You just need to fill up a form
capital stock subscribed, 25% of which is paid) subject to exceptions. that will be provided notifying the SEC of your new address.
In the old code, at least 20% of the authorized capital stock must be subscribed,
4. The term for which the corporation is to exist;
at least 25% of these must be paid.
o People had a hard time differentiating which is required to be 20 or 5. The names, nationalities and residences of the incorporators;
25%.
o To facilitate recollection, the lawmakers made it 25-25. 6. The number of directors or trustees, which shall not be less than five (5) nor
Requirement is met so long as when add up all that was paid the total would more than fifteen (15);
reach 25% even if 1 stockholder only paid 10% but somebody else paid 100%.
7. The names, nationalities and residences of persons who shall act as
The balance of the unpaid subscription would fall due in 2 cases: directors or trustees until the first regular directors or trustees are duly
1. When there is a stipulation in the subscription agreement when the elected and qualified in accordance with this Code;
balance will be paid (without need of call)
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8. If it be a stock corporation, the amount of its authorized capital stock in Sec. 15. Forms of Articles of Incorporation. SEE CODAL.
lawful money of the Philippines, the number of shares into which it is divided,
and in case the share are par value shares, the par value of each, the names, Sec. 16. Amendment of Articles of Incorporation. - Unless otherwise
nationalities and residences of the original subscribers, and the amount prescribed by this Code or by special law, and for legitimate purposes, any
subscribed and paid by each on his subscription, and if some or all of the provision or matter stated in the articles of incorporation may be amended by
shares are without par value, such fact must be stated; a majority vote of the board of directors or trustees and the vote or written
Eg. Authorized capital stock shall be P10M divided into 100,000 shares with assent of the stockholders representing at least two-thirds (2/3) of the
par value of at least P100 per share. outstanding capital stock, without prejudice to the appraisal right of
dissenting stockholders in accordance with the provisions of this Code, or the
We usually use the value P100 because its easier because if you use P5, for vote or written assent of at least two-thirds (2/3) of the members if it be a non-
example, you will end up with fractions. stock corporation.
9. If it be a non-stock corporation, the amount of its capital, the names, The original and amended articles together shall contain all provisions
nationalities and residences of the contributors and the amount contributed required by law to be set out in the articles of incorporation. Such articles, as
by each; and amended shall be indicated by underscoring the change or changes made,
and a copy thereof duly certified under oath by the corporate secretary and a
10. Such other matters as are not inconsistent with law and which the majority of the directors or trustees stating the fact that said amendment or
incorporators may deem necessary and convenient. amendments have been duly approved by the required vote of the
Eg. A statement where a stockholder would like to sell his share, the other stockholders or members, shall be submitted to the Securities and Exchange
stockholders would have a right of redemption and the selling stockholder Commission.
must notify them first.
The amendments shall take effect upon their approval by the Securities and
The Securities and Exchange Commission shall not accept the articles of Exchange Commission or from the date of filing with the said Commission if
incorporation of any stock corporation unless accompanied by a sworn not acted upon within six (6) months from the date of filing for a cause not
statement of the Treasurer elected by the subscribers showing that at least attributable to the corporation.
twenty-five (25%) percent of the authorized capital stock of the corporation
has been subscribed, and at least twenty-five (25%) of the total subscription Amendment must be approved by majority of directors and at least 2/3 of the
has been fully paid to him in actual cash and/or in property the fair valuation stockholders.
of which is equal to at least twenty-five (25%) percent of the said subscription,
such paid-up capital being not less than five thousand (P5,000.00) pesos.
o Eg. Transferring place of business --- new place of business should be
underlined, indicating that it is amended, the date will be enclosed in
The treasurer will open a bank account. It can be in his own name as treasurer parenthesis as amended
in trust for the corporation. Certificate should be signed by majority of directors,
o You get a certification signed by the branch manager of the bank The one who presided as chairman at the meeting and the
attesting that this person has opened a bank account for this corporate secretary will certify that the document attached
corporation. is a true copy of the articles as last amended.
o Until the certificate of registration is signed and released, the bank Sec. 17. Grounds when articles of incorporation or amendment may be
will not allow you to make any withdrawal. rejected or disapproved. - The Securities and Exchange Commission may
Today, there is no more waiver of confidentiality of bank deposits for reject the articles of incorporation or disapprove any amendment thereto if the
corporations such that the SEC can no longer go to the bank and inspect. same is not in compliance with the requirements of this Code:
If a corporation enters a business that is nationalized, the SEC would require Provided, that the Commission shall give the incorporators a
reasonable time within which to correct or modify the objectionable
that the articles indicate that transfers of shares shall comply with minimum portions of the articles or amendment.
Filipino ownership required by law to be registered in the books of account.
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The following are grounds for such rejection or disapproval: 2. Hospitals to the Secretary of Health
3. Insurance company to the Insurance Commission
1. That the articles of incorporation or any amendment thereto is not
substantially in accordance with the form prescribed herein; Sec. 18. Corporate name.
o Eg. AOI does not conform with the form prescribed in the law No corporate name may be allowed by the Securities and Exchange
Commission if the proposed name is identical or deceptively or
2. That the purpose or purposes of the corporation are patently confusingly similar to that of any existing corporation or to any other
unconstitutional, illegal, immoral, or contrary to government rules name already protected by law or is patently deceptive, confusing or
and regulations; contrary to existing laws.
o Philippine Statehood Movement --- They wanted to make the When a change in the corporate name is approved, the Commission
Philippines the 51st state. The SEC disallowed the incorporation of shall issue an amended certificate of incorporation under the
that. The purpose is unconstitutional because it would run against amended name.

the provision that the Philippines is a sovereign state.
Philippine First Insurance v. Hartigan: The change of name of a corporation
o Japanese War Notes --- A lot of people suffered damages during the
does not result in its dissolution.
war, a lot of people were stuck with these Japanese War Notes. This
bunch of swindlers telling people that they'll form a coroporation if Not allowed: identical or deceptively or confusingly similar name to an
you suffered damages during the war, if you have jap war notes, you existing corporation and the line of business is the same
join them and they will work for the government to pay reparations o Universal Textile Mills case --- UNIVERSAL TEXTILE MILLS was in
and indemnity to those who suffered damages during the war, and to existence and somebody else formed another corporation UNIVERSAL
redeem jap war notes. So the SEC disallowed the incorporation of MILLS. SC: The latter should not be allowed because the dominant word
that, and the SEC was sustained by the CA. This really is a scheme is universal, and they both engage in the same line of business.
for fraud. o Phillips case --- There was this Philippine corporation that wanted the
name "Standard Phillips Corporation". SC: that is part of the name of
3. That the Treasurer's Affidavit concerning the amount of capital Phillips Electrical Lamps, Phillips export. Phillips is the dominant word
stock subscribed and/or paid if false; and both of them manufacture electrical appliances.
o Telephone Directory case --- A telephone directory is prepared by the
4. That the percentage of ownership of the capital stock to be owned General Telephone Directory Corporation. PLDT merely collects the
by citizens of the Philippines has not been complied with as payment from the advertisers in the yellow pages but they don't
required by existing laws or the Constitution.
own/publish that directory. There was this bunch of swindlers who
No articles of incorporation or amendment to articles of incorporation of formed a corporation GENERAL DIRECTORY which contacted and
banks, banking and quasi-banking institutions, building and loan collected from advertisers in the yellow pages. If you file a case against
associations, trust companies and other financial intermediaries, insurance them for estafa, and they'll say they are printing their own directory. SEC
companies, public utilities, educational institutions, and other corporations ordered them to change their name because it is confusingly similar with
governed by special laws shall be accepted or approved by the Commission
unless accompanied by a favorable recommendation of the appropriate General Telephone Directory.
government agency to the effect that such articles or amendment is in o If your line of business is different, that will be allowed. Jollibee has been
accordance with law. allowed as a trademark for sandals.
o This music lounge in Quezon City was allowed to use the word Rolex
Other grounds: even though Rolex watches objected to that.
A practice in the SEC is the line of business is regulated by government
Sec. 19. Commencement of corporate existence.
agencies, the SEC will endorse the matter to the agency for comment.
A private corporation formed or organized under this Code
1. For schools to the CHED or Secretary of Education commences to have corporate existence and juridical personality and
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is deemed incorporated from the date the Securities and Exchange The corporation must have performed acts which are peculiar to a
Commission issues a certificate of incorporation under its official corporation like entering into a subscription agreement, adopting
seal; by-laws, electing directors.
and thereupon the incorporators, stockholders/members and their
successors shall constitute a body politic and corporate under the
If the majority of the directors are not residents of the Philippines, or the
name stated in the articles of incorporation for the period of time statement regarding the paid-up capital stock is not true, those are defects that
mentioned therein, unless said period is extended or the corporation may make the corporation de facto.
is sooner dissolved in accordance with law. A de facto corporation shall have the same rights, powers, authority and
liabilities as a de jure corporation.
A juridical person will begin to exist on the date the certificate of registration The officers shall have the same powers, rights and obligations as the officers
is signed by the Commissioner of SEC with the blue ribbon and the gold seal. of a de jure corporation.
Cagayan Fishing v. Sandiko: A transfer was made by T to CFD Corp. on May The existence of a de facto corporation can only be attacked directly by the state
31, but the certificate of incorporation was acquired only on October 22. At through quo warranto proceedings acting through the Solicitor General.
the time the transfer was made, CFD was not even a de facto corporation. Not o Jack says, then you file it with the SEC because Rule 66 of the Rules
being in legal existence then, it did not possess juridical capacity to enter into of Court no longer covers dissolution of the corporation. (But
the contract. Quimson says file under Rule 66)
Sec. 20. De facto corporations. - The due incorporation of any corporation o This is pursuant to Sec. 121 of Corp. Code which says, A
claiming in good faith to be a corporation under this Code, and its right to corporation may be dissolved by the SEC upon filing of a verified
exercise corporate powers, shall not be inquired into collaterally in any private complaint and after proper notice and hearing on the grounds
suit to which such corporation may be a party. Such inquiry may be made by provided by existing laws, rules and regulations.
the Solicitor General in a quo warranto proceeding. If the corporation does not qualify as a de facto corporation, its existence may be
attacked collaterally. This doctrine is based on public policy to ensure stability
De facto corporation --- one that is defectively created so as not to become a
in business transactions.
de jure corporation. It is the result of a bona fide attempt to incorporate under an
existing law coupled with the exercise of corporate powers. Sec. 21. Corporation by estoppel. -
Requisites of a de facto corporation: All persons who assume to act as a corporation knowing it to be
1. Attempt in good faith to form a corporation according to the without authority to do so shall be liable as general partners for all
debts, liabilities and damages incurred or arising as a result thereof:
requirements of the law.
Provided, however, That when any such ostensible
You must have filed with the SEC articles of incorporation and corporation is sued on any transaction entered by it as a
a certificate with the blue ribbon and gold seal. corporation or on any tort committed by it as such, it shall
Hall v. Piccio: If theres no certificate of incorporation, then it is not be allowed to use as a defense its lack of corporate
not a de facto corporation. personality.
So the moment, for example, there is a decision declaring the On who assumes an obligation to an ostensible corporation as such,
corporation was not validly created, it can no longer claim good cannot resist performance thereof on the ground that there was in fact
no corporation.
faith.
2. Existence of a valid law under which the corporation was incorporated.
Corporation by estoppel --- association of a persons, which is so defectively
Eg. You cannot form a corporation to practice a profession. You
formed so that it is not a de jure or even a de facto corporation but is
cannot make that a primary purpose. Unlike in the US, they
considered as a corporation with respect to those who cannot deny its
allow lawyers to form corporations
existence because of some agreement or admission or conduct on their part.
3. Use of corporate powers.
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o This doctrine requires that there must be dealings among the parties o SC: In the editorial page there is a drop box and it says there that it is
on a corporate basis. a corporation. You are estopped and you can be sued.
Differences between a de facto corporation and a corporation by estoppel: Philippine Football Association case --- The national football team participated
1. A de facto corporation has a real existence in law, while a in an international competition. They bought tickets from a travel agency.
corporation by estoppel has none. When the travel agency was not paid, it sued the president of the Philippine
2. A de facto corporation must comply with the abovementioned Football Association. The president invoked corporation by estoppel and said
requisites, while a corporation by estoppel does not have to. dont sue me, but the association.
3. Where not all requisites for corporation de facto are present, you can o SC: No. You are turning the doctrine upside down. The doctrine of
have corporation by estoppel. estoppel applies when somebody has been sued and he tries to avoid
4. A de facto corporation may exist even if there are no dealings among liability by claiming that the corporation is not incorporated. But it is
parties on a corporate basis, while in corporations by estoppel, not applicable when the third person is the one suing. So the people
dealings on a corporate basis among the parties involved are required. running the corporation know that they are not incorporated so they
Albert v. University Publishing --- CA Justice Mariano Albert had a book on are not misled. It should be the plaintiff and not the defendant who is
criminal law. It was published by University Publishing (UP) but he was not raising corporation by estoppel.
paid royalties. He sued UP, its president was Jose Aruego, and he litigated all Liable as general partners --- means that they will be jointly and severally
the way to the SC and won. When he was executing he found out that UP liable.
was never incorporated. So at the execution stage, he asked execution against o Case --- There was an agency recruiting workers to work abroad.
Jose Aruego. Aruego then claimed UP was a corporation by estoppel because But the agency was not actually incorporated.
Albert has already treated it as a corporation. SC: Those who represented themselves as the officers are
o SC: No, Aruego knew all along that they were not incorporated. liable jointly and severally to the victims who were
How could Aruego claim that Albert is estopped when Aruego knew swindled.
all along that they were not incorporated?
Sec. 22. Effects on non-use of corporate charter and continuous inoperation of
Lozano v. de los Santos --- 2 associations of jeepney drivers agreed to merge.
a corporation.
Elections were held. The president of one of the associations won. The If a corporation does not formally organize and commence the
president of the other association refused to recognize the victory, so he transaction of its business or the construction of its works within two
continued to collect dues from the members of his association. So the president (2) years from the date of its incorporation, its corporate powers
who won filed a case. This occurred at the time when 902-A was not yet cease and the corporation shall be deemed dissolved.
repealed. This was filed with the SEC, the SEC claimed it was an intra- However, if a corporation has commenced the transaction of its
corporate dispute. business but subsequently becomes continuously inoperative for a
period of at least five (5) years, the same shall be a ground for the
o Issue: Whether this is an intra-corporate dispute. suspension or revocation of its corporate franchise or certificate of
o SC: NO, because the 2 associations agreed to merge but did not draw incorporation.
articles of merger. The merger was not incorporated so there is no This provision shall not apply if the failure to organize, commence the
intra-corporate dispute. But the president who filed the case said the transaction of its businesses or the construction of its works, or to
respondent is in estoppel. The court said no, because corporation by continuously operate is due to causes beyond the control of the
estoppel applies when you are dealing with an outsider, a third corporation as may be determined by the Securities and Exchange
Commission.
person. Here the two of you know that although you merged, you
have not been incorporated.
Failure to formally organize and commence transaction of business or the
Abante Tonite case --- Corporation who appeared as publisher was sued for
construction of its works within 2 years corporate powers cease, and the
libel. The chairman moved to dismiss saying that there is no such corporation. corporation is deemed dissolved
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o Under Sec. 25, the corporation formally organizes by the election of books of the corporation multiplied by the whole number of
its first officers directors to be elected:
o Provided, however, That no delinquent stock shall be voted.
After commencing business transactions, its continuous inactivity for 5 years is
Unless otherwise provided in the articles of incorporation or in the by-
a ground for suspension or revocation laws, members of corporations which have no capital stock may cast
as many votes as there are trustees to be elected but may not cast
TITLE III more than one vote for one candidate.
BOARD OF DIRECTORS / TRUSTEES / OFFICERS Candidates receiving the highest number of votes shall be declared
elected.
Sec. 23. The board of directors or trustees. Any meeting of the stockholders or members called for an election
Unless otherwise provided in this Code, the corporate powers of all may adjourn from day to day or from time to time but not sine die or
corporations formed under this Code shall be exercised, all business indefinitely if, for any reason, no election is held, or if there not
conducted and all property of such corporations controlled and held present or represented by proxy, at the meeting, the owners of a
by the board of directors or trustees to be elected from among the majority of the outstanding capital stock, or if there be no capital
holders of stocks, or where there is no stock, from among the stock, a majority of the member entitled to vote.
members of the corporation, who shall hold office for one (1) year
until their successors are elected and qualified. Sec. 25. Corporate officers, quorum.
Every director must own at least one (1) share of the capital stock of Immediately after their election, the directors of a corporation must
the corporation of which he is a director, which share shall stand in formally organize by the election of a president, who shall be a
his name on the books of the corporation. director, a treasurer who may or may not be a director, a secretary
Any director who ceases to be the owner of at least one (1) share of who shall be a resident and citizen of the Philippines, and such other
the capital stock of the corporation of which he is a director shall officers as may be provided for in the by-laws.
thereby cease to be a director. Any two (2) or more positions may be held concurrently by the same
Trustees of non-stock corporations must be members thereof. a person, except that no one shall act as president and secretary or as
majority of the directors or trustees of all corporations organized president and treasurer at the same time.
under this Code must be residents of the Philippines. The directors or trustees and officers to be elected shall perform the
duties enjoined on them by law and the by-laws of the corporation.
Sec. 24. Election of directors or trustees. Unless the articles of incorporation or the by-laws provide for a
At all elections of directors or trustees, there must be present, either greater majority, a majority of the number of directors or trustees as
in person or by representative authorized to act by written proxy, the fixed in the articles of incorporation shall constitute a quorum for the
owners of a majority of the outstanding capital stock, or if there be no transaction of corporate business, and every decision of at least a
capital stock, a majority of the members entitled to vote. majority of the directors or trustees present at a meeting at which
The election must be by ballot if requested by any voting stockholder there is a quorum shall be valid as a corporate act, except for the
or member. election of officers which shall require the vote of a majority of all the
In stock corporations, every stockholder entitled to vote shall have members of the board.
the right to vote in person or by proxy the number of shares of stock Directors or trustees cannot attend or vote by proxy at board
standing, at the time fixed in the by-laws, in his own name on the meetings.
stock books of the corporation, or where the by-laws are silent, at the
time of the election; and said stockholder may vote such number of Sec. 26. Report of election of directors, trustees and officers. - Within thirty
shares for as many persons as there are directors to be elected or he (30) days after the election of the directors, trustees and officers of the
may cumulate said shares and give one candidate as many votes as corporation, the secretary, or any other officer of the corporation, shall submit
the number of directors to be elected multiplied by the number of his to the Securities and Exchange Commission, the names, nationalities and
shares shall equal, or he may distribute them on the same principle residences of the directors, trustees, and officers elected. Should a director,
among as many candidates as he shall see fit: trustee or officer die, resign or in any manner cease to hold office, his heirs in
o Provided, That the total number of votes cast by him shall not case of his death, the secretary, or any other officer of the corporation, or the
exceed the number of shares owned by him as shown in the
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director, trustee or officer himself, shall immediately report such fact to the o otherwise, said vacancies must be filled by the stockholders
Securities and Exchange Commission. in a regular or special meeting called for that purpose.
A director or trustee so elected to fill a vacancy shall be elected only
Sec. 27. Disqualification of directors, trustees or officers. - No person or the unexpired term of his predecessor in office.
convicted by final judgment of an offense punishable by imprisonment for a A directorship or trusteeship to be filled by reason of an increase in
period exceeding six (6) years, or a violation of this Code committed within the number of directors or trustees shall be filled only by an election
five (5) years prior to the date of his election or appointment, shall qualify as a at a regular or at a special meeting of stockholders or members duly
director, trustee or officer of any corporation. called for the purpose, or in the same meeting authorizing the
increase of directors or trustees if so stated in the notice of the
Sec. 28. Removal of directors or trustees. meeting.
Any director or trustee of a corporation may be removed from office
by a vote of the stockholders holding or representing at least two- Sec. 30. Compensation of directors.
thirds (2/3) of the outstanding capital stock, or if the corporation be a In the absence of any provision in the by-laws fixing their
non-stock corporation, by a vote of at least two-thirds (2/3) of the compensation, the directors shall not receive any compensation, as
members entitled to vote: such directors, except for reasonable pre diems:
o Provided, That such removal shall take place either at a o Provided, however, That any such compensation other than
regular meeting of the corporation or at a special meeting per diems may be granted to directors by the vote of the
called for the purpose, and in either case, after previous stockholders representing at least a majority of the
notice to stockholders or members of the corporation of the outstanding capital stock at a regular or special stockholders'
intention to propose such removal at the meeting. meeting.
A special meeting of the stockholders or members of a corporation In no case shall the total yearly compensation of directors, as such
for the purpose of removal of directors or trustees, or any of them, directors, exceed ten (10%) percent of the net income before income
must be called by the secretary on order of the president or on the tax of the corporation during the preceding year.
written demand of the stockholders representing or holding at least a
majority of the outstanding capital stock, or, if it be a non-stock DIRECTORS AND OFFICERS
corporation, on the written demand of a majority of the members
entitled to vote. Directors are elected by the SHs. And the law says they should be elected annually
Should the secretary fail or refuse to call the special meeting upon except in the case of corps where the law allows directors to hold a longer term like
such demand or fail or refuse to give the notice, or if there is no schools, non-stock corps. But for ordinary stock corps, they have to be elected every
secretary, the call for the meeting may be addressed directly to the year. So you cannot put a provision there that the outgoing president will
stockholders or members by any stockholder or member of the automatically be a director because they must be elected.
corporation signing the demand.
Notice of the time and place of such meeting, as well as of the 2 peculiar devises used in election of directors:
intention to propose such removal, must be given by publication or by 1. Cumulative voting since the law allows cumulative voting, it cannot be prohibited
written notice prescribed in this Code. by resolution or the by-laws. This is a devise for the minority SH to get himself
Removal may be with or without cause: elected to the board. So you get his share, multiply it by the number of seats to be
o Provided, That removal without cause may not be used to filled up, lets say there are 16. And this fellow owns 1,000 shares so he will have
deprive minority stockholders or members of the right of
15,000 votes. So he can cumulate that and vote it for himself. Of course he should
representation to which they may be entitled under Section
24 of this Code. also solicit proxies to get enough votes.
2. Election by proxies The board and by-laws cant prohibit this.
Sec. 29. Vacancies in the office of director or trustee. Election shall be viva voce or by show of hand, or by balloting if there is a request. A
Any vacancy occurring in the board of directors or trustees other than typical SHs meeting: 9 seats, only 9 nominations are made. No need for election.
by removal by the stockholders or members or by expiration of term,
may be filled by the vote of at least a majority of the remaining Only natural persons can be directors. The law requires that a director must own at
directors or trustees, if still constituting a quorum; least 1 share of stock in the books of the corp. So long as he appears in the books of the
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corporation as a SH, it is sufficient, even it he actually has only legal title, not beneficial After the election of the directors, they will immediately meet for the organizational
title, in other words, he is holding it in trust. Thats why if a director executes a voting meeting to elect the officers: the president who must be a director, the treasurer, the
trust, automatically he is disqualifies because he is not a SH because of the voting trust. secretary who must be a Filipino citizen and resident of the Philippines. And as a rule
If a director ceases to be a SH automatically he is unseated. End even if he gets a share one can hold two or more positions like one can be director and president. However,
of stock again, he will not be restored to the position. the law prohibits the same person from being president and secretary, or president and
Now the question is at what point should the director be a SH? During the election or treasurer at the same time. Like your minutes of the meeting that will be signed by the
when he assumes office? Majority view in the US is that he is only required to be a SH president attested by the secretary. If the same person will occupy the two positions,
when he assumes office. The minority view holds that it should be during the election. there will be no check and balance. Or the president-treasurer. The president will sign
The SEC opinions are conflicting. But it seems the minority view is what is applicable the checks; there will be no 2nd person to counter-sign the check.
here because of the peculiar wording of our corp code, which says that the directors And then youre supposed to report to the SEC. You have the general information
shall be elected from among the holders of stocks. That is the text of the law in the sheet which you must file, where you will report who were elected directors and
sates where the minority view was adopted. Out law is worded similarly to the law in officers w/in 30 days.
those states. There was one case where a civil action was filed in the name of the corp by a group
The by-laws may prescribe additional qualifications over and above those prescribed by which claimed to be the directors. But the law office of Siguion-Reyna filed a motion
law. The SC has time and again said that the by-laws m ay prescribe that to qualify for withdrawing the case. They said, no, that was not authorized by the board. Issue: who
the board a SH must hold a minimum number of shares, not only one, e.g., SMC by- are the directors? The court said that the board who asked that the case be withdrawn
laws requires 50,000 shares of stock. They want to knock out people who want to are the directors because they are those whose names appear in the General Information
make a nuisance of themselves. They buy one share and solicit proxies to get Sheet that is required by the SEC, and the submission of the report is required by the
themselves elected. corp code precisely to know who are the officers of the corp. And since that was the
The Code provides that a person if a person is convicted by final judgment of a crime report filed in compliance with the code, then that is the one that will control.
punishable by imprisonment for over 6 years or of a violation of the Corp Code, and
committed the crime within 5 years before the election, he will be disqualified. But the POWERS OF A CORPORATION
way cases drag, by the time he is convicted, the 5-year period has lapsed.
They may be classified into three: express, implied, incidental
There are some disqualifications imposed by law. For example the Banking Act
provides that no public official can be elected director of a bank except, for example, the 1. Express powers- those grated by law or contained in the articles of incorporation.
case of development banks. It is required to invest in rural banks, thats to facilitate the For instance in the corporation code, sec 36.
creation of rural banks. So necessarily, they will have to have a representative in the 2. Implied powers- refers to the means of attaining the purposes of the corp. For
board. Or the insurance code, if you recall, it prohibits interlocking directors. You example, the corporation may borrow money, issue checks, take steps to protect
cannot be a director of an insurance company and an adjusting company at the same debts owing to the corp. So it can bid to buy its debtors properties in the
time. There would be conflict of interest. Or cabinet members, they cannot be execution sale. Or it can perform acts which increases its volume of business. The
directors of private corps. court has said the corporation may hire entertainers to attract customers to increase
And the by-laws again may impose disqualifications over and above what are found in its volume of business. The corporation may perform activities for the welfare of
the law. its employees, but thats also expressly mentioned in the code. Thats why the
court has said that it may grant gratuity pay to its employees because corporations
Gokongwei Case have the power to grant benefits to its employees. Theres this old case where the
The court said the by-laws may provide that somebody who is a SH or officer of a corp court said a mining corporation may enter into a contract with the post office at its
which is engaged in a competing line of business will be disqualified to run for the mining camp so that its employees could receive and send letters to and from their
board. The court said that is to avoid conflict of interest. families faster.
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Pilipinas Cement v. Theresa Electric: They built their own power plant for The total yearly compensation to directors, as such directors, should not exceed
their factory. Theresa Electric wanted to compel them to patronize its 10% of the net income before tax during the preceding year. But, if they are
services. They filed a case in court. The court said, no that is connected with holding another position (eg. President or General Manager), they can receive
the manufacture of cement. Theyre using the power plant to produce additional income for that.
electricity for their factory.
Mao(?) Sugar Central: A sugar central may buy a company engaged in the Sec. 45. Ultra vires acts of corporations. - No corporation under this Code
manufacture of sugar bags. They would need that for packaging the sugar shall possess or exercise any corporate powers except those conferred by
this Code or by its articles of incorporation and except such as are necessary
they are producing.
or incidental to the exercise of the powers so conferred.
National Power Corp Case: Their power plant was fired by coal. The were
bringing the coal to the plant themselves. The arrastre wanted to force them ULTRA VIRES
to hire its services, so they said that NAPOCPOR cannot do that, its ultra Notes from Atty. Quimsons book:
vires. The court said no, NAPOCOR is engaged in the generation of Ultra Vires Acts acts that a corporation cannot perform because they are
electricity and for that purpose, they can bring the coal to their power plant. outside its express, implied, or incidental powers
It is not required to hire an arrastre stevedoring company. o As conferred by the Corporation Code
El Hogar Filipino: Where a corporation owns a multi-story building and it o OR as stated in its articles of incorporation
occupies only some of the floors, it can lease the other floors it is not using so Ultra vires acts are merely voidable.
it can maximize the use of its property and maximize its profits. The same way o They can be enforced by performance, ratification (by stockholders)
companies can sell computer time which it doesnt need. or by estoppel (on equitable grounds)
Atrium(?) Management Corporation Case: A corporation can issue a check to
be used as collateral for the loan of another From the original transcript:
Now, if a contract is ultra vires, it can be ratified by the stockholders, unless the
3. Incidental powers- the powers that are inherent in a corporation. Like the power contract is illegal because it is against public policy, law or public morals. But any
of succession, to adopt by-laws, to sue and be sued. stockholder who doesnt agree with it can always question it in court.
If the contract is ultra vires but has been completely performed by both parties, it
A director may be removed by a vote of at least 2/3 of the SHs. That can be done in a
can no longer be set aside.
regular or special meeting but the notice must indicate that that is one of the matters to
If it has been performed by one party and the other party doesnt comply, if he is
be taken up. And if theres a vacancy, the remaining directors will elect a replacement.
sued, he cannot raise the defense that the contract is ultra vires because having
Removal may be with or without cause. Except that if the director represents the
benefited from the performance of that contract, he will be in estoppel to raise that
minority, he may not be removed without cause. This was not in the old corporation
defense.
code. This was placed here to protect the minority SHs. Without this proviso, the
But if the contract hasnt been performed by either party, the defense of ultra vires
majority SHs can oust the minority director and his vacant seat will now be filled up by
the remaining directors who represent the majority. can be raised.
Sec. 31. Liability of directors, trustees or officers. - Directors or trustees who

COMPENSATION willfully and knowingly vote for or assent to patently unlawful acts of the
Western Institute v. Salas: There are only two ways which members of the corporation or who are guilty of gross negligence or bad faith in directing the
Board can be granted, apart from reasonable per diems: affairs of the corporation or acquire any personal or pecuniary interest in
conflict with their duty as such directors or trustees shall be liable jointly and
a) provision in the by-laws
severally for all damages resulting therefrom suffered by the corporation, its
b) majority stockholders agree to give it to them stockholders or members and other persons.
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When a director, trustee or officer attempts to acquire or acquires, in violation Where the officers were aware that the corporation was not complying with
of his duty, any interest adverse to the corporation in respect of any matter the labor law. They were not complying with labor standards and yet they did
which has been reposed in him in confidence, as to which equity imposes a
nothing.
disability upon him to deal in his own behalf, he shall be liable as a trustee for
the corporation and must account for the profits which otherwise would have Where the directors falsely made it appear that the corporation was incurring
accrued to the corporation. losses so they could invoke it as an excuse to dismiss employees on the ground
that there was a need to retrench employees. These were considered bad faith.
Tramat Mercantile v. Court of Appeals Example under the second paragraph of Sec. 31: he receives kickbacks from
o Personal liability of a corporate director, trustee, or officer along contracts with the corporation.
(although not necessarily) with the corporation may so validly attach,
as a rule, only when CONFLICT OF INTEREST
1. he assents Section 32. Dealings of directors, trustees or officers with the corporation
a. to a patently unlawful act of the corporation (eg. A contract between a corporation and (one of its directors or trustees or) its
bribing a public official) officers is voidable at the option of such corporation, unless all the following
b. for bad faith or gross negligence in directing its (4) conditions are satisfied/ present:
affairs 1. That the presence of such director or trustee in the board meeting
c. for conflict of interest, resulting in damages to the in which the contract was approved was not necessary to
corporation, its stockholders, or other persons constitute a quorum for such meeting;
2. That the vote of such director or trustee was not necessary for the
2. he consents to the issuance of watered stocks or who,
approval of the contract;
having knowledge thereof, does not forthwith file with 3. That the contract is fair and reasonable under the circumstances;
the corporate secretary his written objection (sec. 65) and
3. he agrees to hold himself personally and solidarily liable 4. That in case of an officer, the contract has been previously
with the corporation authorized by the board of directors.
4. he is made, by a specific provision of law, to personally
answer for his corporate action Where any of the first two conditions set forth in the preceding paragraph is
absent, in the case of a contract with a director or trustee, such contract may
a. Sec. 13 of the Trust Receipts Law, where the be ratified by the vote of the stockholders representing at least two-thirds (2/3)
failure of turnover is committed by a corporation of the outstanding capital stock or of at least two-thirds (2/3) of the members
b. BP 22, where the signer of the check is liable in a meeting called for the purpose:
c. Migrant Overseas Workers Act Provided, That full disclosure of the adverse interest of the directors
d. Among others or trustees involved is made at such meeting:
We have some cited cases where the Court said that the officers should be held Provided, however, That the contract is fair and reasonable under the
circumstances.
personally liable because they were in bad faith. There was a case where the
corporation assigned its receivables to a bank. They discounted their
receivables. Then they fraudulently collected payment from the debtors If the presence of that director is needed to have a quorum or to approve the contract,
whose receivables they assigned and did not remit the money to the bank. to validate the contract, it should be ratified by the stockholders. You would need the
There was a case where the general manager introduced reforms and remedial 2/3 vote of the stockholders to ratify the contract. When the stockholders are asked to
measures to prevent irregularities but the directors did not like that so they ratify the contract, there must be full disclosure. In other words, you must tell the
fired him. The Court said that the directors were in bad faith. stockholders that theres this contract, one of our directors wants to buy this parcel of
land and these are the terms and conditions.
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In a typical stockholders meeting, somebody sympathetic with management will stand o The Court said he could not enforce the contract because it was not
up and say, Mr. Chairman, I move that we pass a resolution ratifying the actions of the fair and reasonable. He knew that the price of cement was very
directors and officer. Another will say I second the motion. Is there any objection? volatile and it tended to go up yet he tied down the corporation to a
The Chair hears none. Approved. That is not enough because there, there is no 5-year contract with the price fixed. He knew that, thats why he
disclosure of what these actions are. made his contracts with the hardware stores for one year only and
In that meeting, the director whos a stockholder can vote to ratify that contract with thats why he did not fix the price.
himself. But in any event, the law says the contract must be fair and reasonable. So
even if it is ratified by the stockholders, if there is a dissenting stockholder, he can Atty. Quimsons notes for Sections 32-33:
question that on the ground that it is not fair and reasonable. The contract must be at
arms length. In other words, if the contract had not been with this officer, but with Section 32 (self-dealing directors/officers)
somebody else, would the terms and conditions be the same? Voidable at the option of the corporation, unless: (all four conditions must be
present)
INTERLOCKING DIRECTORS o The presence of the director is not needed for a quorum (in a Board
If the contract is between two corporations with interlocking directors, the same four meeting) and
conditions must be satisfied. o His vote is not necesssary, and
o The contract is fair and reasonable, and
Sec. 33. Contracts between corporations with interlocking directors. - Except o If an officer, the contract with the officer has been previously
in cases of fraud, and provided the contract is fair and reasonable under the authorized by the Board.
circumstances, a contract between two or more corporations having Where the first two conditions are absent, the stockholders/members must
interlocking directors shall not be invalidated on that ground alone: ratify it
Provided, That if the interest of the interlocking director in one o By a vote of 2/3 of outstanding stock or members
corporation is substantial and his interest in the other corporation or o Full disclosure of the adverse interest of the director/trustee involved
corporations is merely nominal, he shall be subject to the provisions in the contract must be made, and
of the preceding section insofar as the latter corporation or o The contract must be fair and reasonable
corporations are concerned.
Stockholdings exceeding twenty (20%) percent of the outstanding capital Section 33 (interlocking directors)
stock shall be considered substantial for purposes of interlocking directors. Interlocking Directors directors in one corporation who are also directors in
another corporation (i.e. different corporations have common directors)
If a director owns more than twenty percent (20%) of the shares in one of the o General rule: a contract between the two corporations is valid
corporations, then the four conditions under Section 32 must be present. And if the first (cannot be invalidated on this ground alone), provided:
two are absent (meaning, his presence is not necessary to have a quorum in a board There is no fraud, and
meeting and his vote is not necessary to approve the contract), then that should be It is fair and reasonable
ratified by at least 2/3 of the stockholders. o Where the interest of the director is substantial (exceeds 20%) in one
Prime White Cement case. The Prime White Cement Company manufactures and nominal (20% or less) in another, Section 32 applies with respect
white cement. There was a director who got a 5-year distributorship contract to the latter (the corporation where the director has nominal shares)
with the corporation and the price was fixed for the next 5 years. Then he Determine if directors interest is minimal/nominal or
went around and entered into 1-year contracts with hardware stores and the substantial
price was not fixed, it was left open. Then after one year, the price of white If minimal in both or if substantial in both, the
cement went up and then he was sued for specific performance. contract is VALID. [Rationale: no incentive for
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the director to favor one corporation over the committee may act, by majority vote of all its members, on such
other] specific matters within the competence of the board, as may be
delegated to it in the by-laws or on a majority vote of the board,
If minimal in one and substantial in the other,
except with respect to: (1) approval of any action for which
apply Section 32 shareholders' approval is also required; (2) the filing of vacancies in
the board; (3) the amendment or repeal of by-laws or the adoption of
Sec. 34. Disloyalty of a director. - Where a director, by virtue of his office, new by-laws; (4) the amendment or repeal of any resolution of the
acquires for himself a business opportunity which should belong to the board which by its express terms is not so amendable or repealable;
corporation, thereby obtaining profits to the prejudice of such corporation, he and (5) a distribution of cash dividends to the shareholders.
must account to the latter for all such profits by refunding the same, unless
his act has been ratified by a vote of the stockholders owning or representing Usually, the committee would be composed of five directors. The Board can
at least two-thirds (2/3) of the outstanding capital stock. This provision shall delegate its powers to the Executive Committee who will wield those powers
be applicable, notwithstanding the fact that the director risked his own funds in between meetings. But the code says that the Board cannot make a blanket
in the venture. delegation of its powers. It must specify the matters which it is delegating.
Where a director acquiresfor himself a business opportunity amd resulting The law mentions the matters which cannot be delegated: An example of
profits, to the prejudice of the corporation, he mus refund all profits to the number 1 (approval of any action for which shareholders' approval is also
corporation, even if he used his own funds, unless ratified by 2/3 outstanding required) is increasing the authorized capital stock.
stock The usual practice is that at the next Board meeting, the actions taken by the
For instance, heres a hotel corporation looking for a suitable site and theres a Executive Committee will be submitted to the Board for it to ratify.
vacant property that was available and a director bought it. Then he offered Executive Committee cannot declare cash dividends, because a Board action is
instead to lease the property to the corporation that would be grabbing a needed (Sec. 43). It cannot also declare stock dividends, because 2/3 of the
business opportunity. outstanding stock must approve it (Sec. 43)
Theres this old Pepsi Cola case where a softdrink company became available
and a director bought the company for himself. Tsk tsk. Sec. 36. Corporate powers and capacity. - Every corporation incorporated
under this Code has the power and capacity:
Of course, if the corporation rejected the opportunity, the director can acquire 1. To sue and be sued in its corporate name;
it, provided that he did not maneuver to have it rejected by the corporation so that he could o In one case where an acronym was used, the Court said that was not
get it for himself. correct.
o Here, you may consider an example where a corporation which 2. Of succession by its corporate name for the period of time stated in
the articles of incorporation and the certificate of incorporation;
operates has decided to limit its operations to Metro Manila. Theres
3. To adopt and use a corporate seal;
a mall in Dagupan that was offered for sale. This other corporation 4. To amend its articles of incorporation in accordance with the
had no plans of going out of Metro Manila. Then a director could provisions of this Code;
buy that mall for himself. No violation of Section 34. 5. To adopt by-laws, not contrary to law, morals, or public policy, and to
amend or repeal the same in accordance with this Code;
The Code also contains a provision on executive committees which was in 6. In case of stock corporations, to issue or sell stocks to subscribers
recognition that this was a practice of many corporations. The board often and to sell stocks to subscribers and to sell treasury stocks in
meets probably once a month at the most. And yet, in between meetings, accordance with the provisions of this Code; and to admit members
there are matters that would require Board approval. to the corporation if it be a non-stock corporation;
7. To purchase, receive, take or grant, hold, convey, sell, lease, pledge,
So the Code says: Sec. 35. Executive committee. - The by-laws of a mortgage and otherwise deal with such real and personal property,
corporation may create an executive committee, composed of not less including securities and bonds of other corporations, as the
than three members of the board, to be appointed by the board. Said transaction of the lawful business of the corporation may reasonably
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and necessarily require, subject to the limitations prescribed by law Sec. 38. Power to increase or decrease capital stock; incur, create or increase
and the Constitution; bonded indebtedness. - No corporation shall increase or decrease its capital
8. To enter into merger or consolidation with other corporations as stock or incur, create or increase any bonded indebtedness unless approved
provided in this Code; by a majority vote of the board of directors and, at a stockholder's meeting
9. To make reasonable donations, including those for the public welfare duly called for the purpose, two-thirds (2/3) of the outstanding capital stock
or for hospital, charitable, cultural, scientific, civic, or similar shall favor the increase or diminution of the capital stock, or the incurring,
purposes: Provided, That no corporation, domestic or foreign, shall creating or increasing of any bonded indebtedness. Written notice of the
give donations in aid of any political party or candidate or for proposed increase or diminution of the capital stock or of the incurring,
purposes of partisan political activity; creating, or increasing of any bonded indebtedness and of the time and place
10. To establish pension, retirement, and other plans for the benefit of its of the stockholder's meeting at which the proposed increase or diminution of
directors, trustees, officers and employees; and the capital stock or the incurring or increasing of any bonded indebtedness is
11. To exercise such other powers as may be essential or necessary to to be considered, must be addressed to each stockholder at his place of
carry out its purpose or purposes as stated in the articles of residence as shown on the books of the corporation and deposited to the
incorporation. addressee in the post office with postage prepaid, or served personally.
A certificate in duplicate must be signed by a majority of the directors
Montelibano v. Bacolod-Murcia: The test to be applied is whether the act in of the corporation and countersigned by the chairman and the secretary of the
question is in direct and immediate furtherance of the corporations business, stockholders' meeting, setting forth:
fairly incident to the express powers, and reasonably necessary to their (1) That the requirements of this section have been complied with;
(2) The amount of the increase or diminution of the capital stock;
exercise. If so, the corporation has the power to do it; otherwise, not. (3) If an increase of the capital stock, the amount of capital stock or
number of shares of no-par stock thereof actually subscribed, the
Sec. 37. Power to extend or shorten corporate term. - A private corporation names, nationalities and residences of the persons subscribing, the
may extend or shorten its term as stated in the articles of incorporation when amount of capital stock or number of no-par stock subscribed by
approved by a majority vote of the board of directors or trustees and ratified at each, and the amount paid by each on his subscription in cash or
a meeting by the stockholders representing at least two-thirds (2/3) of the property, or the amount of capital stock or number of shares of no-par
outstanding capital stock or by at least two-thirds (2/3) of the members in case stock allotted to each stock-holder if such increase is for the purpose
of non-stock corporations. Written notice of the proposed action and of the of making effective stock dividend therefor authorized;
time and place of the meeting shall be addressed to each stockholder or (4) Any bonded indebtedness to be incurred, created or increased;
member at his place of residence as shown on the books of the corporation (5) The actual indebtedness of the corporation on the day of the meeting;
and deposited to the addressee in the post office with postage prepaid, or (6) The amount of stock represented at the meeting; and
served personally: Provided, That in case of extension of corporate term, any (7) The vote authorizing the increase or diminution of the capital stock, or
dissenting stockholder may exercise his appraisal right under the conditions the incurring, creating or increasing of any bonded indebtedness.
provided in this code.
Any increase or decrease in the capital stock or the incurring, creating or
A corporation can shorten or extend its corporate term. That will need inreasing of any bonded indebtedness shall require prior approval of the
approval of at least 2/3 of the stockholders. Likewise, if you will increase or Securities and Exchange Commission.
decrease capital stock, or create bonded indebtedness, you need approval of One of the duplicate certificates shall be kept on file in the office of
not only of the majority of the Board but that of at least 2/3 of the the corporation and the other shall be filed with the Securities and Exchange
Commission and attached to the original articles of incorporation. From and
stockholders.
after approval by the Securities and Exchange Commission and the issuance
Right of appraisal (available only to dissenting stockholders and not to by the Commission of its certificate of filing, the capital stock shall stand
dissenting members of non-stock corporations): increased or decreased and the incurring, creating or increasing of any
o In case of extension of term right of appraisal exists bonded indebtedness authorized, as the certificate of filing may declare:
o In case of shortening of term right of appraisal is recognized, but Provided, That the Securities and Exchange Commission shall not accept for
under Sec. 81(1) filing any certificate of increase of capital stock unless accompanied by the
sworn statement of the treasurer of the corporation lawfully holding office at
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the time of the filing of the certificate, showing that at least twenty-five (25%) Second, when the stock ownership is being offered to the public to
percent of such increased capital stock has been subscribed and that at least comply with the law.
twenty-five (25%) percent of the amount subscribed has been paid either in
o For instance, to get a telephone, you must be a stockholder
actual cash to the corporation or that there has been transferred to the
corporation property the valuation of which is equal to twenty-five (25%) of PLDT with a Subscriber Investment Plan. So, the right
percent of the subscription: Provided, further, That no decrease of the capital of pre-emption will not apply there. Or when the Board of
stock shall be approved by the Commission if its effect shall prejudice the Investments grants incentives under the Foreign
rights of corporate creditors. Investments Act. It usually imposes as a condition that the
Non-stock corporations may incur or create bonded indebtedness, or company must go public or for a bank to become a
increase the same, with the approval by a majority vote of the board of
universal commercial bank, it is required to go public.
trustees and of at least two-thirds (2/3) of the members in a meeting duly
called for the purpose. Third, when the shares are being issued with the approval of at least
Bonds issued by a corporation shall be registered with the Securities and 2/3 of the stockholders in exchange for property needed by the
Exchange Commission, which shall have the authority to determine the corporation.
sufficiency of the terms thereof. o For instance, here is a suitable site for a hotel. The owner
says I am not interested in selling nor in leasing. I wioll
PRE-EMPTIVE RIGHTS only consider if you will make me a stockholder and I will
Sec. 39. Power to deny pre-emptive right. All stockholders of a stock use this property to pay for my subscription. In such a case,
corporation shall enjoy pre-emptive right to subscribe to all issues or
the right of pre- emption will not apply.
disposition of shares of any class, in proportion to their respective
shareholdings, unless such right is denied by the articles of incorporation or Fourth, when the shares are being issued in payment of a previously
an amendment thereto: Provided, That such pre-emptive right shall not extend contracted debt because youre converting debt to equity.
to shares to be issued in compliance with laws requiring stock offerings or Before, the only 5-star hotels were the Manila Hotel, The Hilton (now the
minimum stock ownership by the public; or to shares to be issued in good Holiday Inn), Sherraton and the Intercontinental. Then the Marcoses asked
faith with the approval of the stockholders representing two-thirds (2/3) of the
the IMF and the World Bank to hold their annual meeting here so they had to
outstanding capital stock, in exchange for property needed for corporate
purposes or in payment of a previously contracted debt. rush the construction of new hotels. After the conference, the hotel
occupancy was down. They borrowed money to put up these hotels and they
As a rule, stockholders have the right of pre-emption to preserve their could not pay for the installments. In some cases, the indebtedness was
percentage of equity in the corporation In the old Corporation Law, the right converted to equity.
of pre-emption was limited to increase in the authorized capital stock. So that A few years ago, we had a Convention of Law Professors. There was this one
if the Board offered for subscription a portion of the authorized but unissued professor from the province who was complaining that they were being paid 6
shares, there would be not right of pre-emption. That has been changed pesos per hour. Another professor said they were not being paid at all. The
because the Code now says the right extends to all dispositions. So if the Board law school was instead paying them with shares of stock. So that is converting
offered for subscription a portion of the authorized but unissued shares, the debt to equity.
right will apply. Chairman Haidee Yorac is saying that when San Miguel
decided to sell shares to Kirin Beer, that was subject to the right of pre- Sec. 40. Sale or other disposition of assets. - Subject to the provisions of
existing laws on illegal combinations and monopolies, a corporation may, by a
emption of stockholders. That was why Mr. Cojuangco was calling a
majority vote of its board of directors or trustees, sell, lease, exchange,
stockholders meeting to ratify the sale. mortgage, pledge or otherwise dispose of all or substantially all of its property
and assets, including its goodwill, upon such terms and conditions and for
There will be no right of pre-emption in several cases. such consideration, which may be money, stocks, bonds or other instruments
First, if the articles of incorporation (or an amendment thereto) for the payment of money or other property or consideration, as its board of
directors or trustees may deem expedient, when authorized by the vote of the
expressly provide.
stockholders representing at least two-thirds (2/3) of the outstanding capital
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stock, or in case of non-stock corporation, by the vote of at least to two-thirds countries in the Middle East donated money for the Muslims to acquire that
(2/3) of the members, in a stockholder's or member's meeting duly called for property. When Martial Law was declared, the Board of Trustees fled to the
the purpose. Written notice of the proposed action and of the time and place Middle East and a bunch of people who were not directors sold that property
of the meeting shall be addressed to each stockholder or member at his place
of residence as shown on the books of the corporation and deposited to the
to Iglesia Ni Cristo. The Supreme Court said the sale was not valid because
addressee in the post office with postage prepaid, or served personally: the people who sold it were not the elected directors and secondly, that was
Provided, That any dissenting stockholder may exercise his appraisal right the only property of that corporation and therefore, stockholder approval was
under the conditions provided in this Code. required.
A sale or other disposition shall be deemed to cover substantially all A corporation can acquire its own shares but it is required that it should have
the corporate property and assets if thereby the corporation would be
unrestricted retained earnings, as a rule. Remember that we said the assets of a
rendered incapable of continuing the business or accomplishing the purpose
for which it was incorporated. corporation constitute a trust fund to answer for its obligations to its creditors.
After such authorization or approval by the stockholders or members, If you allow a corporation when it has no retained earnings, in effect, it is
the board of directors or trustees may, nevertheless, in its discretion, abandon returning the investment of its stockholders. Thus, that will prejudice the
such sale, lease, exchange, mortgage, pledge or other disposition of property creditors.
and assets, subject to the rights of third parties under any contract relating
thereto, without further action or approval by the stockholders or members. Sec. 41. Power to acquire own shares. - A stock corporation shall have the
Nothing in this section is intended to restrict the power of any power to purchase or acquire its own shares for a legitimate corporate
corporation, without the authorization by the stockholders or members, to sell, purpose or purposes, including but not limited to the following cases:
lease, exchange, mortgage, pledge or otherwise dispose of any of its property Provided, That the corporation has unrestricted retained earnings in its books
and assets if the same is necessary in the usual and regular course of to cover the shares to be purchased or acquired:
business of said corporation or if the proceeds of the sale or other disposition
of such property and assets be appropriated for the conduct of its remaining 1. To eliminate fractional shares arising out of stock dividends;
business.
For example, SMC declares 25% stock dividend and here is somebody who
In non-stock corporations where there are no members with voting rights, the owns 17 shares. Hell end up with fractional shares and its very cumbersome
vote of at least a majority of the trustees in office will be sufficient if you have fractional shares. At the stockholders meeting, how will you
authorization for the corporation to enter into any transaction authorized by compute his cumulative votes? Because of that, the corporation will buy that.
this section. Sometimes, a stockholder will receive a stock certificate for 25 shares and a
check for about P6.09that is the payment for the fractional share.
In the sale, lease, exchange, mortgage or disposition of all or substantially all of
the properties or assets of the corpration, you need approval not only of the
majority of the Board but also of at least 2/3 of the stockholders. 2. To collect or compromise an indebtedness to the corporation, arising out of
unpaid subscription, in a delinquency sale, and to purchase delinquent shares
According to the law, the test of whether the sale covers all or substantially all
sold during said sale;
of the assets of the corporation is this: will the corporation be capable of continuing
its business or accomplishing its purpose? Where a stockholder did not pay for his subscription, his shares were sold at
o For example, Jollibee must have more than 400 stores all over the public auction, the corporation can buy that at the public auction.
country. If they sell 5 stores, you dont have to get stockholder
approval. 3. To pay dissenting or withdrawing stockholders entitled to payment for their
shares under the provisions of this Code.
You have a case where the assets of a corporation were foreclosed and the only
remaining asset of the corporation was the right of redemption and they sold This is a dissenting stockholder who disagreed with a fundamental action
it. The Court said you need stockholder approval. requiring stockholder approval and the corporation decided to embark on a
I dont know whatever happened to this but you have that property in different line of business and the stockholder is not willing to go into that new
Commonwealth Avenue owned by the Islamic Directorate. The Muslim line of business. He can ask the corporation to buy him out.
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Sec. 42. Power to invest corporate funds in another corporation or business or also constitute a majority of the members of the board of directors of the
for any other purpose. - Subject to the provisions of this Code, a private managed corporation, then the management contract must be approved by the
corporation may invest its funds in any other corporation or business or for stockholders of the managed corporation owning at least two-thirds (2/3) of
any purpose other than the primary purpose for which it was organized when the total outstanding capital stock entitled to vote, or by at least two-thirds
approved by a majority of the board of directors or trustees and ratified by the (2/3) of the members in the case of a non-stock corporation. No management
stockholders representing at least two-thirds (2/3) of the outstanding capital contract shall be entered into for a period longer than five years for any one
stock, or by at least two thirds (2/3) of the members in the case of non-stock term.
corporations, at a stockholder's or member's meeting duly called for the
purpose. Written notice of the proposed investment and the time and place of The provisions of the next preceding paragraph shall apply to any
the meeting shall be addressed to each stockholder or member at his place of contract whereby a corporation undertakes to manage or operate all or
substantially all of the business of another corporation, whether such
residence as shown on the books of the corporation and deposited to the
addressee in the post office with postage prepaid, or served personally: contracts are called service contracts, operating agreements or otherwise:
Provided, That any dissenting stockholder shall have appraisal right as Provided, however, That such service contracts or operating agreements
provided in this Code: Provided, however, That where the investment by the which relate to the exploration, development, exploitation or utilization of
corporation is reasonably necessary to accomplish its primary purpose as natural resources may be entered into for such periods as may be provided by
stated in the articles of incorporation, the approval of the stockholders or the pertinent laws or regulations.
members shall not be necessary. Management contract where one corporation undertakes to manage all or
Under Section 42, the corporation can invest its funds in another corporation substantially all of the business of another corporation, whether the contract is
but it is with the same purpose, you only need approval by the Board, you called service contract, operating agreement or otherwise.
dont need stockholder approval. This is why the Court has said SMC can buy A corporation can enter into a management contract. What the law really
a brewery in Hong Kong without need of getting stockholder approval because that does here is to regulate management contracts. Mgt contracts can be necessary
is consistent with the primary purpose of the corporation. at times. Like here is a mining company whose directors and officers dont
In the same way that the Court has said that Mau Sugar Central could buy a know anything about mining. They can enter into a contract with a
company that manufactures sugar bags. It doesnt have to get SH approval corporation which has technical expertise to manage its mines.
because that is related to its primary purpose. Because you need sugar bags to You have that case of Nielson & Co. v. Lepanto where Lepanto entered into a
pack the sugar that it is selling. managment contract with Nielson & Co. to manage its mines. When the war
The Court has said that when a corporation has been formed to sell spare parts broke out, the Japs took over the mines of Lepanto. (Yamashita must have
of a motor vehicle, it cannot acquire a company that provides taxicab service been there.) After the war, Nielson wanted to continue the contract because
because that has no connection with its primary purpose. there was a stipulation there that if the contract is interrupted, it will be
extended. Lepanto did not agree. Nielson & Co. sued. The contract provided
that they would be provided a certain percentage of the gross income as their
Sec. 43. Power to declare dividends. SEE BELOW
management fee. In addition, Nielson & Co. would get a certain percentage of
Sec. 44. Power to enter into management contract. - No corporation shall the stock dividends that will be declared. Lepanto lost in the SC in December
conclude a management contract with another corporation unless such 1966. The award reached about 30 Million pesos. (That case was handled by
contract shall have been approved by the board of directors and by
Ike Bello (for Lepanto) who was devastated by the decision.) Lepanto went to
stockholders owning at least the majority of the outstanding capital stock, or
by at least a majority of the members in the case of a non-stock corporation, our office which drafted a motion for reconsideration. One of the arguments
of both the managing and the managed corporation, at a meeting duly called raised was that a management contract is a contract of agency. Therefore, it
for the purpose: Provided, That (1) where a stockholder or stockholders can be terminated at any time. But the Court rejected that argument. The
representing the same interest of both the managing and the managed Court said that a management contract is a contract for lease of services. It
corporations own or control more than one-third (1/3) of the total outstanding does not involve a representation so you cannot terminate it at any time. The
capital stock entitled to vote of the managing corporation; or (2) where a
Court, however, eliminated the award for stock dividend. It said that Nielson
majority of the members of the board of directors of the managing corporation
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& Co. was not a stockholder and only a stockholder can be given stock initial fee will be collected + the franchiser gets 6% of gross sales.
dividends. The business purpose is the expansion of the venture.)
The law tries to regulate management contracts because it has been used too 2. It is a subsidiary. That constitutes investment of the corporation.
often to _______ money for the corporation. When Soriano was still It is in the interest of the mother company for the subsidiary to
managing PAL, he was a minority stockholder but he had this compania which succeed and be practicable. Here, the mother company must be the
had a management contract. So Soriano & Co. was getting a percentage of the controlling stockholder because if it just owns a few shares its not
gross income of PAL. Everytime PAL would buy or sell anything, it had a sound business to risk all its assets which may be disproportionately
commission. When Toda(?) took over PAL, he did the same thing with his more valuable than its subscription in the subsidiary corporation
Rubicon which had a management contract. Thats why when Mr. Fred where it is just a minority SH. So thats a small investment and it
Ramos of National Bookstore was questioning this/ was waging a proxy fight will risk all its assets.
against Soriano III in Atlas Mines, that was an issue he raised. He said that 3. To enable a debtor of the corporation to keep going so it will
Atlas Mining had a management contract with Soriano Compania which was increase chances of the corporation to collect payment from it.
charging a fee based on the gross income. This was a time when Atlas was Like, here is a contractor (that is a debtor of the corporation) that
incurring losses. In fact, later, Atlas Mining closed. cannot finish a project and it needs working capital. The corporation
This is why the laws says that a management contract should be approved by will guarantee the loan so it can get working capital otherwise it will
majority of the Board, by majority of the stockholders, of both the managed not be able to liquidate the down payment/ loan.
and managing corporation. And if a stockholder of the managed corporation
owns more than 1/3 of the managing corporation, the management contract PARTNERSHIPS (P)
must be approved by at least 2/3 of the stockholders of the managed SEC says corporations cannot get into partnerships because the management of
corporation. a partnership is vested in the partners and that will run counter to the idea that
A management contract should not be valid for more than 5 years for any one any exposure of the corporatin should be within the control of the directors.
term. You can just keep renewing it provided, that it is not for more than 5 However, a corporation can enter into Ps subject to several conditions:
years at any one time. 1. Articles of incorporation authorize the corporation
2. Corp must participate in the management and as a result, it must be
TRUST FUND DOCTRINE jointly and severally liable for the obligations of the partnership.
A corporation cannot act as a surety or guarantor because the law says the But, they [who they, though?] changed that and said that a
assets of a corporation constitute a trust fund to answer for obligations to corporation can be a limited partner in a partnership. The
creditors. So if they will be used to guarantee the obligations of others then justification for this is that if a corporation can be a passive
they will prejudice the ability of the corporation to pay its obligations to its investor in another corporation and it has no say in the
creditors and besides when the SH put in their money in the corporation it is management, there is no reason why it cant be a passive
understood that it will be used for the purpose for which the corporation was investor in a limited partnership.
organized.
However there are exceptions to that, justified by the fact that it is being done DIVIDENDS
for a business purpose: Sec. 43. Power to declare dividends. - The board of directors of a stock
1. When it will increase the assets of the corporation (Mr. George corporation may declare dividends out of the unrestricted retained earnings
Yang can borrow money from Citibank anytime without any which shall be payable in cash, in property, or in stock to all stockholders on
the basis of outstanding stock held by them: Provided, That any cash
collateral because McDo US is guaranteeing his loans. The more dividends due on delinquent stock shall first be applied to the unpaid balance
outlets, the more royalties McDo will get. For every outlet, an on the subscription plus costs and expenses, while stock dividends shall be
withheld from the delinquent stockholder until his unpaid subscription is fully
paid: Provided, further, That no stock dividend shall be issued without the
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approval of stockholders representing not less than two-thirds (2/3) of the and if we stop now there might be a bank run. Well you tell me now,
outstanding capital stock at a regular or special meeting duly called for the katwiran ba yan ng taong matino? They attacked the CB for closing
purpose. Philbanking.
Stock corporations are prohibited from retaining surplus profits in Assuming it has retained earnings, once cash dividends have been declared,
excess of one hundred (100%) percent of their paid-in capital stock, except: (1) they cannot be revoked because you can use that to manipulate the price. For
when justified by definite corporate expansion projects or programs approved example they declare that 25% cash dividend so the price moves up. The
by the board of directors; or (2) when the corporation is prohibited under any
loan agreement with any financial institution or creditor, whether local or
directors sell their shares then they revoke the declaration so the price goes
foreign, from declaring dividends without its/his consent, and such consent down they buy back the shares.
has not yet been secured; or (3) when it can be clearly shown that such In the case of property dividends you only need board approval but in the case
retention is necessary under special circumstances obtaining in the of stock dividends you need the approval of the stockholders. Now, a stock
corporation, such as when there is need for special reserve for probable dividend has no taxable consequence because it is the same pie but you are
contingencies. slicing it into more pieces.
Quimson: For instance, here is somebody whose shares represent 10% of the net worth of
Only Board action is needed (except for stock dividends, where stockholder the corp. The corp declared a 100% stock dividend. What will happen? He
action is needed) will still own 10 % of the net worth of the corporation. The book value of his
o But for stock dividends, 2/3 vote of outstanding stock is required original share plus his stock dividend will be the same. It is only when he sells
and makes a profit will there be a taxable consequence. And, because of that,
How to apply dividends declared:
even if a stock dividend has been declared, it can still be revoked because its
o Cash dividends due delinquent stock should first be applied to unpaid
the same pie, only youre slicing it in more pieces. So even if you declare it
balance, plus cost and expenses
you can revoke, as long as you love me by the Backstreet Boys. Loljk. You can
o Stock dividends shall be withheld from delinquent stockholders until
revoke, as long as the stock certificates have not yet been distributed.
the unpaid subscription is fully paid
The SEC has said that paid-in surplus cannot be declared as dividends whether stock
Dividends are paid out of unrestricted retained earnings
or cash. For instance, here is a corporation that made a public offering. The
Stock corporations cannot retain surplus profits more than 100% of the paid-in
par value of the shares is 10 pesos per share, but they offer to the public for 16
capital stock, unless:
pesos, so the buyers will be paying 6 pesos more. Now, that paid-in surplus
o Needed for corporate expansion projects with Board approval
cannot be declared as a stock or cash dividend because according to the SEC,
o Prohibited by a loan agreement, which prohibits declaration of
you can only declare dividends from earnings from operations. That paid-in surplus was
dividends without financial institutions consent
not from operations
o Needed under special circumstances, like reserves for contingencies
Itong si Agbayani, sabi it cannot be declared but the SEC said it can be
Jack: declared, subject to certain qualifications. One of the tricks for window
Most common types: cash, property, stock dividends. Only the board dressing the financial statement is when the value of the corp is negative you
approval is needed to declare cash dividends but the corporation must have have your real property re-appraised. Now, the appraisal will increase the
retained earnings. value of the property and that wipes out your negative value. Thats why
o Now when the corporation declares cash dividends and it has no normally your external auditor will put a footnote in your financial statement
retained earnings, this is illegal and SH must return what they for several years indicating that there has been a re-evaluation. Now,
received and in fact directors will be made liable. according to Agbayani it cannot be declared but the SEC says it can be
You have that Philbanking Corporation Case before which became bankrupt declared subject to certain conditions. The property must be subject to
because it kept declaring dividends at the time it was incurring losses and the depreciation so if it is land you cannot declare a dividend. It must be subject to
justification: Eh you see we have always been declaring dividends regularly
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depreciation and then you charge depreciation allowance and you have 3. Special circumstances to build up reserves for contingencies
retained earnings then you can declare that as dividends. There is a strike and the union filed a case for ULP because
Treasury shares, if they are declared, should be considered property, not stock many employees were terminated. Corp said, if we lose we
dividends. Now the law provides (taken from a decree issued before) that if the will be made to pay backwages and that will amount to a
surplus profits exceed 100% of the paid-in capital, you must declare dividends hefty amount. So, we better start building reserves.
whether cash or stock otherwise you will be fined by the SEC. That is one of Now the dividends will be given to the stockholder of record. If he sells his
the rackets of SGV. O, mataas na yung retained earnings nyo, lagpas ng 100% shares, but the transfer has not been recorded in the corp books, it goes to the
mumultahan kayo ng SEC, you have to declare dividends. So at the end of seller but he will have to deliver that to the buyer. That is between him and
the year in your financial statement wala na yan and of course because of that, the buyer because remember it is the books that are controlling.
they will have to prepare a long-form report kasi hindi na kasali sa fiscal year
and siyempre tatagain ka for the long-form report. Sec. 45. Ultra vires acts of corporations. already discussed above
However you can be excused from not declaring subject to certain conditions
1. Justified by definite corporate expansion projects approved by SUMMARY OF VOTES/ACTIONS/APPROVALS NEEDED FOR CERTAIN
the board. CORPORATE POWERS (from Atty. Quimsons book)
For instance, when you get a franchise from abroad, there Power to extend or shorten corporate term (sec. 37)
will be a development schedule. They will tell you to open o Majority of Board
so many outlets within 5 years. So when Dunkin Donuts o Ratified by 2/3 of outstanding stock or members [mere written
first opened, they were required to open 5 outlets within 5 assent is not enough]
years, so the company was not declaring any dividends. Power to increase or decrease capital stock or create or increase bonded
Whatever retained earnings they were accruing were being indebtedness (sec. 38)
used to put up other outlets. o Majority of Board
We have this client who owned a heavy mix (?) plant and o Approved by 2/3 of outstanding stock or members [mere written
said that the present plant cannot cope with our volume of assent is not enough]
business. We have to put up a bigger plant so they o SEC approval
purchased a parcel of land in Calabarzon and they will need Sale or other dispositions of [all or substantially all] assets (sec. 40)
100 million to put up the new plant so they are not o Majority of Board
declaring any dividends. But it has to be definite. In fact, o 2/3 of outstanding stock or members
the SEC will ask for copies of the Board Resolution o Written notice of meeting proposing said action is needed
showing the definite expansion plans. The Board Power to invest corporate funds in another corporation or business or
Resolution is sufficient, of course. You cant be showing for any other purposes [other than its primary purpose] (sec. 42)
the same resolution for 5 years in a row. Kung hindi o Majority of Board
gumagalaw yung financial statement or hindi gumagalaw o 2/3 of outstanding stock or members
yung assets, ano ba yan? In this case, the SEC must look in. Stockholders/members approval not needed if the
2. If the corporation is prohibited by a loan agreement from investment in stock of other corporations is reasonably
declaring dividends without the consent of the creditors or when the necessary to accomplish the primary purpose
consent has not been obtained. o Written notice of proposed investment, and time/place of meeting
Usually, if its a big loan, the creditor will require that as a Power to declare dividends (sec. 43)
condition and they will make sure the corp has enough o Cash or property dividends: only Board action is needed
funds to pay. o Stock dividends: Board action plus 2/3 vote of outstanding stock
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Power to enter into a management contract (sec. 44) The Securities and Exchange Commission shall not accept for filing the by-
o Approval of Board of both managing and managed corporations laws or any amendment thereto of any bank, banking institution, building and
loan association, trust company, insurance company, public utility,
o Majority of outstanding shares or members of both managing and
educational institution or other special corporations governed by special laws,
managed corporations unless accompanied by a certificate of the appropriate government agency to
o 2/3 vote of outstanding stock/members of managed corporation is the effect that such by-laws or amendments are in accordance with law.
necessary
where stockholders of both managing and managed Sec. 47. Contents of by-laws. - Subject to the provisions of the Constitution,
corporations (the common stockholders) own or control this Code, other special laws, and the articles of incorporation, a private
corporation may provide in its by-laws for:
more than 1/3 of outstanding stock of the managing
1. The time, place and manner of calling and conducting regular or
corporation, or special meetings of the directors or trustees;
where majority of the directors in both the managing and 2. The time and manner of calling and conducting regular or special
the managed corporations are the same meetings of the stockholders or members;
3. The required quorum in meetings of stockholders or members and the
Date: February 9, 2015 (CG) manner of voting therein;
4. The form for proxies of stockholders and members and the manner of
voting them;
TITLE V
5. The qualifications, duties and compensation of directors or trustees,
BY LAWS officers and employees;
6. The time for holding the annual election of directors of trustees and
Sec. 46. Adoption of by-laws. - Every corporation formed under this Code the mode or manner of giving notice thereof;
must, within one (1) month after receipt of official notice of the issuance of its 7. The manner of election or appointment and the term of office of all
certificate of incorporation by the Securities and Exchange Commission, officers other than directors or trustees;
adopt a code of by-laws for its government not inconsistent with this Code. 8. The penalties for violation of the by-laws;
For the adoption of by-laws by the corporation the affirmative vote of 9. In the case of stock corporations, the manner of issuing stock
the stockholders representing at least a majority of the outstanding certificates; and
capital stock, or of at least a majority of the members in case of non- 10. Such other matters as may be necessary for the proper or convenient
stock corporations, shall be necessary. transaction of its corporate business and affairs.
The by-laws shall be signed by the stockholders or members voting
for them and shall be kept in the principal office of the corporation, Sec. 48. Amendments to by-laws.
subject to the inspection of the stockholders or members during The board of directors or trustees, by a majority vote thereof, and the
office hours. owners of at least a majority of the outstanding capital stock, or at
A copy thereof, duly certified to by a majority of the directors or least a majority of the members of a non-stock corporation, at a
trustees countersigned by the secretary of the corporation, shall be regular or special meeting duly called for the purpose, may amend or
filed with the Securities and Exchange Commission which shall be repeal any by-laws or adopt new by-laws.
attached to the original articles of incorporation. The owners of two-thirds (2/3) of the outstanding capital stock or two-
thirds (2/3) of the members in a non-stock corporation may delegate
Notwithstanding the provisions of the preceding paragraph, by-laws may be to the board of directors or trustees the power to amend or repeal any
adopted and filed prior to incorporation; in such case, such by-laws shall be by-laws or adopt new by-laws:
approved and signed by all the incorporators and submitted to the Securities o Provided, That any power delegated to the board of directors
and Exchange Commission, together with the articles of incorporation. or trustees to amend or repeal any by-laws or adopt new by-
In all cases, by-laws shall be effective only upon the issuance by the laws shall be considered as revoked whenever stockholders
Securities and Exchange Commission of a certification that the by-laws are owning or representing a majority of the outstanding capital
not inconsistent with this Code. stock or a majority of the members in non-stock
corporations, shall so vote at a regular or special meeting.
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Whenever any amendment or new by-laws are adopted, such Grace Christian High School Case There was a homeowners association, which
amendment or new by-laws shall be attached to the original by-laws in was incorporated as non-stock, non-profit. For quite some time, the principal of
the office of the corporation, and a copy thereof, duly certified under the school was being elected in the Board and they decided to terminate that
oath by the corporate secretary and a majority of the directors or
trustees, shall be filed with the Securities and Exchange Commission arrangement. The principal filed a case questioning that termination. The school
the same to be attached to the original articles of incorporation and argued that in fact, there is a move to amend the by-laws to disqualify the principal
original by-laws. to be a member of the Board. RULING: The appointment is void. Even if the
The amended or new by-laws shall only be effective upon the members approve the amendment, it is still void because this is a non-stock
issuance by the Securities and Exchange Commission of a corporation. To be a member of the Board, he must be a member of the association.
certification that the same are not inconsistent with this Code. But only residents of the village are allowed to be members. Thus, the school
cannot ask that it be given representation.
BY-LAWS Majority of the stockholders should approve the by-laws, but the law says that the
A corporation should file within one month from the receipt of certificate of stockholders can delegate that to the Board by at least 2/3 vote of the shares of
incorporation the by-laws. Failure to do so is not a ground to dissolve the stock or members. But to revoke this delegation, only a majority of the members
corporation but the SEC would usually impose a fine. or the stockholders need to approve the revocation.
In case of conflict between the Articles and the By-laws, the Articles will prevail Citibank case (from the old transcript) the by-laws of Citibank provide that the
because that is the contract between the parties. country manager has the power to enter into compromises in lawsuits and he can
The majority stockholders must approve the By-laws, and the amendments to it. delegate that power. There was a delinquent borrower who jumped the gun so
Valley Golf Club case A member pledged his proprietary share of the Chinabank. they filed a case. The case was set for pre-trial and the Country Manager issued a
He failed to pay so it was foreclosed, and Chinabank emerged as the winning special power of attorney (SPA) in favor of a bank lawyer but Citibank was
bidder. It now asked Valley Golf Club to issue the shares in its name, but Valley declared in default. RULING: No, Citibank cannot be declared in default. The by-
Golf Club refused and said that this member is delinquent. He has not paid for the laws expressly provide that the country manager can compromise lawsuits and
monthly dues and he had unpaid bills at the Club House. And under the By-laws, delegate it; therefore, the SPA was valid.
Valley Golf Club has a lien over its proprietary share. RULING: The by-laws do
not bind third parties unless they have actual knowledge. TITLE VI
PMI Colleges case A faculty member filed a case for Illegal Dismissal against the MEETINGS
corporation. Philippine Merchant raised the defense that the appointment was not
valid because under the by-laws, only the Chairman of the Board has the power to Sec. 49. Kinds of meetings. - Meetings of directors, trustees, stockholders, or
appoint faculty members. The Chairman did not appoint the complainant. members may be regular or special.
RULING: The by-laws do not bind third parties unless they have actual
Sec. 50. Regular and special meetings of stockholders or members.
knowledge.
Regular meetings of stockholders or members shall be held annually
Gokongwei case Gokongwei ran for the Board of Directions of San Miguel, but on a date fixed in the by-laws, or if not so fixed, on any date in April of
he lost. The next time, he decided to run again. San Miguel amended its By-laws to every year as determined by the board of directors or trustees:
provide that a stockholder who is a stockholder, member or officer of a competitor o Provided, That written notice of regular meetings shall be
can be disqualified from running for the Board. RULING: The provision in the sent to all stockholders or members of record at least two (2)
by-laws is valid. weeks prior to the meeting, unless a different period is
required by the by-laws.
The By-laws can provide a minimum requirement for shares to qualify in the
board. On the other hand, some provisions would not be valid like a provision Special meetings of stockholders or members shall be held at any
prohibiting stockholders from conveying their shares of stock with the right to time deemed necessary or as provided in the by-laws:
dispose being one of the inherent attributes of ownership.
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o Provided, however, That at least one (1) week written notice Sec. 51. Place and time of meetings of stockholders or members. -
shall be sent to all stockholders or members, unless Stockholders' or members' meetings, whether regular or special, shall be held
otherwise provided in the by-laws. in the city or municipality where the principal office of the corporation is
located, and if practicable in the principal office of the corporation: Provided,
MEETINGS That Metro Manila shall, for purposes of this section, be considered a city or
municipality.
Meetings may be regular or special. Regular stockholders meeting is usually held
on the date fixed in the by-laws. Usually corporations set the regular stockholders Notice of meetings shall be in writing, and the time and place thereof stated
meeting after April 15 of every year because that is the deadline for filing of the therein.
Income Tax Return. At this time, the audited financial statements (FS) are available
for distribution to the stockholders. Now, the listed companies are now usually All proceedings had and any business transacted at any meeting of the
sending the audited FS in the form of discs. Thats cheaper than coming up with stockholders or members, if within the powers or authority of the corporation,
shall be valid even if the meeting be improperly held or called, provided all the
printed FS.
stockholders or members of the corporation are present or duly represented
The by-laws of a certain company in Greenhills provide the annual stockholders at the meeting.
meeting must be held on the last working day of the year. Everybody, however,
will be busy preparing for New Year. Who will appear during the stockholders The meeting should be held in the city or municipality where the principal office is
meeting to question the management? Maybe here Jack is just saying that the located. It need not be in the office itself. Thats why many corporations, which are
meeting of the stockholders must be appropriately and reasonably scheduled for the listed in the Stock Exchange like the San Miguel Corporation would hold their
stockholders to have an opportunity to see the actual performance of the company. stockholders meeting in the PICC.
Sec. 50 (contd) - Sec. 52. Quorum in meetings. - Unless otherwise provided for in this Code or
Notice of any meeting may be waived, expressly or impliedly, by any in the by-laws, a quorum shall consist of the stockholders representing a
stockholder or member. majority of the outstanding capital stock or a majority of the members in the
Whenever, for any cause, there is no person authorized to call a case of non-stock corporations.
meeting, the Secretaries and Exchange Commission, upon petition of
a stockholder or member on a showing of good cause therefor, may
GR: The quorum is the majority of the stockholders.
issue an order to the petitioning stockholder or member directing him
to call a meeting of the corporation by giving proper notice required Exception: If the by laws provide otherwise. For example, a family corporation may
by this Code or by the by-laws. provide that a quorum will be 75% of the members or the stockholders. Also, alumni
o The petitioning stockholder or member shall preside thereat associations, which have been incorporated, may provide that quorum of any meeting is
until at least a majority of the stockholders or members whatever number showed up because its hard to gather them.
present have been chosen one of their number as presiding
officer.
Once a quorum is present, even if some of the stockholders are on leave, the
corporation can continue transacting business.
Notice to the meeting may be waived expressly or impliedly. Expressly when like
Meralco Case GSIS filed a case and got a TRO against the Lopezes to restrain
in a family corporation, they all sign waivers. Impliedly, on the other hand, is when
them from voting through their proxies. GSIS waited until the Secretary certified
a stockholder was not notified of the meeting but he showed up at the meeting and
that there was a quorum, and that the meeting was competent to transact business
participated.
before serving the TRO. They served it right away and the Lopezes walked out.
Now, if there should be a stockholders meeting and nobodys calling it, a
They may not have a quorum anymore. A certain Commissioner Martinez issued
stockholder or member can file a petition asking the SEC to issue an order directing the TRO, but the SC nullified the TRO saying it was issued without authority.
him to call a meeting of the stockholders or members. He will preside until the The SEC is a collegiate body. Commissioner Martinez could not issue a TRO by
members elect a new deciding officer. himself.
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Executors, Administrators, or Receivers can vote without need of getting an order
Sec. 53. Regular and special meetings of directors or trustees. - Regular from the court.
meetings of the board of directors or trustees of every corporation shall be
held monthly, unless the by-laws provide otherwise. Sec. 56. Voting in case of joint ownership of stock. - In case of shares of stock
owned jointly by two or more persons, in order to vote the same, the consent
Special meetings of the board of directors or trustees may be held at any time of all the co-owners shall be necessary, unless there is a written proxy, signed
upon the call of the president or as provided in the by-laws. by all the co-owners, authorizing one or some of them or any other person to
vote such share or shares: Provided, That when the shares are owned in an
Meetings of directors or trustees of corporations may be held anywhere in or "and/or" capacity by the holders thereof, any one of the joint owners can vote
outside of the Philippines, unless the by-laws provide otherwise. Notice of said shares or appoint a proxy therefor.
regular or special meetings stating the date, time and place of the meeting
must be sent to every director or trustee at least one (1) day prior to the if shares of stocks are owned by co-owners, they have to agree how to vote on it.
scheduled meeting, unless otherwise provided by the by-laws. A director or
trustee may waive this requirement, either expressly or impliedly.
Sec. 57. Voting right for treasury shares. - Treasury shares shall have no
voting right as long as such shares remain in the Treasury.
The Board of Directors may also waive notice to their meeting expressly or
impliedly. The SEC now allows board meeting by video conference. Originally,
Treasury shares are not outstanding, thus they cannot be voted.
they said that they must be physically present. In general banking law, however, it
was provided that BOD may hold meetings by video conference or teleconference. Sec. 58. Proxies.
Thus, the SEC now allowed it also in the light of the E-Commerce law. But they Stockholders and members may vote in person or by proxy in all meetings
said that the director must be called and inquire whether they have received the of stockholders or members.
notice. The director must also confirm if they agree to hold the meeting my video Proxies shall in writing, signed by the stockholder or member and filed
conference and the telephone number that they use, etc. It must be recorded in a before the scheduled meeting with the corporate secretary.
disc. Unless otherwise provided in the proxy, it shall be valid only for the
meeting for which it is intended.
Sec. 54. Who shall preside at meetings. - The president shall preside at all No proxy shall be valid and effective for a period longer than five (5) years
meetings of the directors or trustee as well as of the stockholders or at any one time.
members, unless the by-laws provide otherwise.
Sec. 59. Voting trusts.
Sec. 55. Right to vote of pledgors, mortgagors, and administrators. - In case of One or more stockholders of a stock corporation may create a voting
pledged or mortgaged shares in stock corporations, the pledgor or mortgagor trust for the purpose of conferring upon a trustee or trustees the right
shall have the right to attend and vote at meetings of stockholders, unless the to vote and other rights pertaining to the shares for a period not
pledgee or mortgagee is expressly given by the pledgor or mortgagor such exceeding five (5) years at any time:
right in writing which is recorded on the appropriate corporate books. o Provided, That in the case of a voting trust specifically
required as a condition in a loan agreement, said voting trust
Executors, administrators, receivers, and other legal representatives duly may be for a period exceeding five (5) years but shall
appointed by the court may attend and vote in behalf of the stockholders or automatically expire upon full payment of the loan.
members without need of any written proxy. A voting trust agreement must be in writing and notarized, and shall
specify the terms and conditions thereof.
Those who own shares of stock and pledge or mortgage it, they remain owners so A certified copy of such agreement shall be filed with the corporation
they retain the right to vote. They might have conveyed, however, the right to and with the Securities and Exchange Commission; otherwise, said
agreement is ineffective and unenforceable.
vote to the pledgee or mortgagee. This is called agency coupled with an interest.
The certificate or certificates of stock covered by the voting trust
In order to protect the interest of pledgee or mortgage, the pledgor or mortgagor agreement shall be canceled and new ones shall be issued in the
cannot revoke the proxy. name of the trustee or trustees stating that they are issued pursuant
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to said agreement. In the books of the corporation, it shall be noted TITLE VII
that the transfer in the name of the trustee or trustees is made STOCKS AND STOCKHOLDERS
pursuant to said voting trust agreement.
The trustee or trustees shall execute and deliver to the transferors Sec. 60. Subscription contract. - Any contract for the acquisition of unissued
voting trust certificates, which shall be transferable in the same stock in an existing corporation or a corporation still to be formed shall be
manner and with the same effect as certificates of stock. deemed a subscription within the meaning of this Title, notwithstanding the
The voting trust agreement filed with the corporation shall be subject fact that the parties refer to it as a purchase or some other contract.
to examination by any stockholder of the corporation in the same
manner as any other corporate book or record: Sec. 61. Pre-incorporation subscription. - A subscription for shares of stock of
o Provided, That both the transferor and the trustee or trustees a corporation still to be formed shall be irrevocable for a period of at least six
may exercise the right of inspection of all corporate books (6) months from the date of subscription, unless all of the other subscribers
and records in accordance with the provisions of this Code. consent to the revocation, or unless the incorporation of said corporation fails
Any other stockholder may transfer his shares to the same trustee or to materialize within said period or within a longer period as may be stipulated
trustees upon the terms and conditions stated in the voting trust in the contract of subscription: Provided, That no pre-incorporation
agreement, and thereupon shall be bound by all the provisions of said subscription may be revoked after the submission of the articles of
agreement. incorporation to the Securities and Exchange Commission.
No voting trust agreement shall be entered into for the purpose of
circumventing the law against monopolies and illegal combinations in SUBSCRIPTION CONTRACT
restraint of trade or used for purposes of fraud.
Unless expressly renewed, all rights granted in a voting trust
Section 60 defines what is a subscription agreement and Section 61 defines pre-
agreement shall automatically expire at the end of the agreed period, incorporation subscription.
and the voting trust certificates as well as the certificates of stock in o The latter says that a subscription for shares of stock of a corporation still
the name of the trustee or trustees shall thereby be deemed canceled to be formed shall be irrevocable for at least six (6) months unless all the
and new certificates of stock shall be reissued in the name of the subscribers agree or the incorporation fails to materialize.
transferors.
Ong Yu Case The corporation was in financial trouble. They invited a family to
The voting trustee or trustees may vote by proxy unless the
agreement provides otherwise.
infuse fresh capital. They signed a Memorandum of Agreement. This family agreed
that they will infuse fresh capital and in turn, they will own 51%. The old
PROXIES/VOTING TRUSTS stockholders, on the other hand, would also increase their shareholdings. They will
Proxy voting is allowed in a stockholders meeting. pay for the investments with real estate, and one of them would be appointed an
o GR: A proxy given is valid only for the meeting. officer. They agreed also that they would be given offices in the company. After
o Exception: If it is provided otherwise. But, the maximum duration is the corporation recovered, the old family ungratefully wanted to remove the
only five years. This is harmonized with the maximum duration of voting family who infused fresh capital. They filed a case for annulment of the contract
trust. saying that the new investors breached their obligations. They did not recognize
the fresh investment they made. The commitments made were all dishonored.
Voting trust if often required by banks, which grant big loans. So the voting trust
o RULING: When the new family put in fresh money, that was a
can be valid even for more than five years if the loan is payable over a period of 10
subscription agreement. That was a contract with the corporation, not
years. It can subsist for the duration of the loan. But, the voting trust automatically
with the old stockholders. The old stockholders, therefore, cannot ask for
revoked when the loan was paid.
annulment.
If a stockholder was granted a proxy and its a proxy coupled with interest, and he
appointed another proxy, the one whose proxy came last will prevail. If, however, Sec. 62. Consideration for stocks. - Stocks shall not be issued for a
theres personal appearance and an intention to vote, it will revoke the proxy. consideration less than the par or issued price thereof. Consideration for the
issuance of stock may be any or a combination of any two or more of the
following:
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1. Actual cash paid to the corporation; o Note, however, that shares of stock cannot be issued for promissory notes
2. Property, tangible or intangible, actually received by the corporation (must be actual cash!) or for future services (must be services already
and necessary or convenient for its use and lawful purposes at a fair performed).
valuation equal to the par or issued value of the stock issued;
3. Labor performed for or services actually rendered to the corporation; The price of no par value shares is that fixed
4. Previously incurred indebtedness of the corporation; o In the Articles of Incorporation
5. Amounts transferred from unrestricted retained earnings to stated o By the Board of Directors, if authorized by the Articles or the By-Laws
capital; and o By the majority vote of outstanding stock
6. Outstanding shares exchanged for stocks in the event of Majority ah, not 2/3!
reclassification or conversion.
National Exchange v. Dexter: A special stipulation contained in a subscription to
Where the consideration is other than actual cash, or consists of corporate stock which, if valid, would lessen the capital of the company and relieve
intangible property such as patents of copyrights, the valuation the subscriber from liability to be sued upon the subscription is illegal.
thereof shall initially be determined by the incorporators or the board
of directors, subject to approval by the Securities and Exchange Sec. 63. Certificate of stock and transfer of shares. - The capital stock of stock
Commission. corporations shall be divided into shares for which certificates signed by the
Shares of stock shall not be issued in exchange for promissory notes president or vice president, countersigned by the secretary or assistant
or future service. secretary, and sealed with the seal of the corporation shall be issued in
The same considerations provided for in this section, insofar as they accordance with the by-laws.
may be applicable, may be used for the issuance of bonds by the Shares of stock so issued are personal property and may be transferred
corporation. by delivery of the certificate or certificates endorsed by the owner or his
The issued price of no-par value shares may be fixed in the articles of attorney-in-fact or other person legally authorized to make the transfer.
incorporation or by the board of directors pursuant to authority No transfer, however, shall be valid, except as between the parties, until
conferred upon it by the articles of incorporation or the by-laws, or in the transfer is recorded in the books of the corporation showing the
the absence thereof, by the stockholders representing at least a names of the parties to the transaction, the date of the transfer, the
majority of the outstanding capital stock at a meeting duly called for number of the certificate or certificates and the number of shares
the purpose. transferred.
No shares of stock against which the corporation holds any unpaid claim
SHARES shall be transferable in the books of the corporation.
Considerations:
o Cash Transfer of shares of stock:
o Property, but SEC requires that it be appraised (either by the o Stockholders are entitled to have their certificates signed by the President
incorporators or the Board) or the Vice President, and countersigned by the Secretary or Assistant
o Labor already or actually performed Secretary
o Previously incurred indebtedness o Shares of stock are personal property. You find that even in the Civil
o Amounts transferred from unrestricted retained earnings to capital this Code.
happens when you declare stock dividends o Shares of stock are quasi-negotiable. It is quasi-negotiable because it can
o Outstanding shares exchanged for stocks in the event of reclassification or be transferred by indorsement and delivery.
conversion. In Razon v. IAC, the son was claiming that his father owned
For example, San Miguel created preferred shares. They said shares of stock in an arrastre company, which he eventually
that those who owned common shares are given the option to owned because he had possession over it. Held: The court ruled
exchange these for the newly-created preferred shares. that title was not transferred to him because there was no
indorsement.
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It is also called quasi-negotiable because if it was indorsed in Held: No, the unpaid claim contemplated is the unpaid portion of the
blank, it does not become payable to bearer and the holder subscription. It does not apply to other claims like the monthly dues or
thereof does not acquire valid title. If youve picked up a the bills at the clubhouse, which were not paid.
negotiable instrument payable to bearer, you get valid title and you To sum up: Shares of stock are personal property, transferable by endorsement +
can encash it. Thats not true for shares of stock. delivery. The transfer is binding as between parties, but the recording in the
Marcos case When the Marcos family was about to flee from corporate books will make it effective against third persons. No stock certificate
the Philippines during the EDSA Revolution, he was asked will be issued unless the subscription is fully paid.
about the combination of the safe but he could not remember it.
When the new administration barged into Malacanang, they Sec. 64. Issuance of stock certificates. - No certificate of stock shall be issued
found stock certificates of San Miguel Corporation indorsed in to a subscriber until the full amount of his subscription together with interest
blank. Marcoses were claiming that they actually owned those and expenses (in case of delinquent shares), if any is due, has been paid.
shares, not Eduardo Cojuangco Jr. Although in its decision, the
SC said that Cojuangco acquired them. They said that the ISSUANCE OF STOCK CERTIFICATES
prosecution failed to prove that he was a crony of Marcos. No stock certificate shall be issued until full payment.
Justice Carpio dissented and said that it is common knowledge o Full payment of: subscription + interest + expenses
that he was a crony. In fact, he was with them when they A subscription is an indivisible contract.
boarded the helicopter to leave the Philippines. But then, at that o Lingayen case Note: Already overturned but example here is
time, PCGG was arguing that it had the right to vote the shares. instructive. Justice Paredes, who rarely held cases under commercial law,
They said that it was indorsed in blank so just like a negotiable penned this decision. He said that, for example, you subscribed to shares
instrument, they acquired title. Held: No, there must be worth 100,000. You paid 25% of the subscription so you have two
delivery and signature (indorsement). Thats why in the case of options: (1) this spreads out as partial payment of entire subscription; or
Razon, the court said that mere possession does not make the holder the (2) this can be concentrated as full payment of the 25% of subscribed
owner thereof. shares, thus you can get the stock certificate of the shares equivalent to it.
o The Court also said that the Civil Code must be applied with regard to But no, that indivisible. Until fully paid, you cannot get the stock
transfer of shares. The principle of constructive delivery is applicable. The certificate.
execution of a public document is equivalent to delivery. So the sale of o So the Court in later cases said that if somebody subscribed to shares not
shares of stock effected by signing a notarized deed of sale is valid yet fully paid, you cannot say I will sell 50% of the subscription. That is
delivery. indivisible, so it must be all or nothing. (Parang love lang yan. All or
Since it is quasi-negotiable, the sale or transfer will be valid even nothing! Go big or go home!) If you subscribed to 1,000 shares, he should
though you did not attach a deed of sale. sell all 1,000 shares subscribed even though not yet paid. But he has to get
o Remember that a sale or transfer will not bind third parties unless its the approval of the board of directors first. Why? Hes a debtor of the
entered in the books of the corporation. The SC has time and again said corp. Novation requires approval by the creditor.
that the issuance of stock certificate is ministerial. Even though a case is Lao v. Lao: While it may be true that petitioners were named shareholders in the
pending to annul the sale on grounds of fraud, the buyer will be given General Information Sheet submitted to the SEC, that document alone does not
stock certificate without prejudicing the outcome of the case. conclusively prove that they are shareholders of PFSC. The information in the
o China Bank v. Court of Appeals When China Bank foreclosed the document will still have to be correlated with the corporate books of PFSC. As
proprietary share of a member of Valley Golf Club and bought it at the between the GIS and the corporate books, it is the latter that is controlling.
auction, it now asked Valley Golf to transfer the shares in its name. Valley
Golf refused, saying that this member is delinquent. It has not paid for its Sec. 65. Liability of directors for watered stocks. - Any director or officer of a
monthly dues and the by-laws provide that we have a lien on these shares. corporation consenting to the issuance of stocks for a consideration less than
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its par or issued value or for a consideration in any form other than cash, Payment of any unpaid subscription or any percentage thereof, together with
valued in excess of its fair value, or who, having knowledge thereof, does not the interest accrued, if any, shall be made on the date specified in the contract
forthwith express his objection in writing and file the same with the corporate of subscription or on the date stated in the call made by the board. Failure to
secretary, shall be solidarily, liable with the stockholder concerned to the pay on such date shall render the entire balance due and payable and shall
corporation and its creditors for the difference between the fair value received make the stockholder liable for interest at the legal rate on such balance,
at the time of issuance of the stock and the par or issued value of the same. unless a different rate of interest is provided in the by-laws, computed from
such date until full payment. If within thirty (30) days from the said date no
WATERED STOCKS payment is made, all stocks covered by said subscription shall thereupon
become delinquent and shall be subject to sale as hereinafter provided, unless
An officer or director who agrees to the issuance of watered stock or such officer
the board of directors orders otherwise.
who, having knowledge of it, does not file with the corporate secretary his written
objection, will be liable if a stock is watered. Sec. 68. Delinquency sale. - The board of directors may, by resolution, order
o Such officer/director shall be solidarily liable with the stockholder the sale of delinquent stock and shall specifically state the amount due on
concerned each subscription plus all accrued interest, and the date, time and place of the
Watered stock: It does not mean stocks on which Squirtle used Water Gun. A sale which shall not be less than thirty (30) days nor more than sixty (60) days
from the date the stocks become delinquent.
watered stock is a share of stock issued to a stockholder who paid less than the par
value or the stated value, and to whom a stock certificate was issued Notice of said sale, with a copy of the resolution, shall be sent to every
Watered stock includes delinquent stockholder either personally or by registered mail. The same shall
o Stock issued without consideration (bonus share) furthermore be published once a week for two (2) consecutive weeks in a
o Stock issued as fully paid, when the corporation received less than its par newspaper of general circulation in the province or city where the principal
or issued value (discount share) office of the corporation is located.
o Stock issued for a consideration other than actual cash (like property or Unless the delinquent stockholder pays to the corporation, on or before the
services), the fair value of which is less than its par or stated value date specified for the sale of the delinquent stock, the balance due on his
o Stock issued as stock dividends, when the corporation has insufficient subscription, plus accrued interest, costs of advertisement and expenses of
retained earnings or surplus sale, or unless the board of directors otherwise orders, said delinquent stock
shall be sold at public auction to such bidder who shall offer to pay the full
Sec. 66. Interest on unpaid subscriptions. - Subscribers for stock shall pay to amount of the balance on the subscription together with accrued interest,
the corporation interest on all unpaid subscriptions from the date of costs of advertisement and expenses of sale, for the smallest number of
subscription, if so required by, and at the rate of interest fixed in the by-laws. shares or fraction of a share. The stock so purchased shall be transferred to
If no rate of interest is fixed in the by-laws, such rate shall be deemed to be the such purchaser in the books of the corporation and a certificate for such stock
legal rate. shall be issued in his favor. The remaining shares, if any, shall be credited in
favor of the delinquent stockholder who shall likewise be entitled to the
issuance of a certificate of stock covering such shares.
No interest required on unpaid subscriptions if it is not required in the by-laws
or the subscription contract. Should there be no bidder at the public auction who offers to pay the full
If interest is required to be paid, but no interest rate is fixed, then use the legal amount of the balance on the subscription together with accrued interest,
rate (as of July 2013, it is at 6%) costs of advertisement and expenses of sale, for the smallest number of
shares or fraction of a share, the corporation may, subject to the provisions of
Sec. 67. Payment of balance of subscription. - Subject to the provisions of the this Code, bid for the same, and the total amount due shall be credited as paid
contract of subscription, the board of directors of any stock corporation may in full in the books of the corporation. Title to all the shares of stock covered
at any time declare due and payable to the corporation unpaid subscriptions by the subscription shall be vested in the corporation as treasury shares and
to the capital stock and may collect the same or such percentage thereof, in may be disposed of by said corporation in accordance with the provisions of
either case with accrued interest, if any, as it may deem necessary. this Code.
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UNPAID SHARES AND DELINQUENCY o I had a case against this group who went into business. They had a very
good project study but the problem is they put in too little cash as capital
Summary of the procedure for payment of subscription balance: (Secs. 67-68) and then borrowed massively so the interest was killing them. They
1. Look at the subscription contract first. It might have provisions bought some materials from our client abroad. We filed a collection case.
regarding the procedure for delinquency They entered into a compromise agreement where they would pay in
2. If not, the Board, by a formal resolution, may issue at any time a call installments for over a period of two years, but they still failed to pay. So
for all or part of the unpaid subscription, with or without interest I filed a new case against the stockholders on their unpaid subscription
A call is not needed if the subscription contract specifies the and I used the Articles of Incorporation as the actionable document to
dates when the balance is payable show that they have paid only 25%. What was their defense? Payment.
3. If the subscriber fails to pay on the specified date, the entire balance They presented receipts showing that they have paid. But before you can
of unpaid subscription becomes due and payable print your receipt, the printer will ask the BIR for a permit to print. The
4. Failure to pay within thirty days will make the stocks delinquent, number of the order to print will be printed on official receipt and the
and shall be subject to sale date when the permit was given will also be indicated. According to the
5. Delinquency sale will be held not less than 30 nor more than 60 days receipt, the permit to print was issued in June. The receipts for the
from the date the stocks become delinquent payment were dated February. So how were the receipts issued in
6. Notice must be sent to delinquent stockholders, and the notice shall February when the permit was issued in June? Judge Miriam Defensor-
be published once a week for two consectuvie weeks Santiago decided against the stockholder.
7. Sale proper: the winning bidder shall be the one who offers to pay o Molasses trader case The seller alleged that somebody had not paid for
the full amount of the balance, with interest and other expenses, for the molasses ordered. The buyer, on the other hand, alleged that there
the smallest number of shares was already full payment. What did the seller submit as proof? Provisional
8. The stock purchased shall be transferred to the purchaser, and a stock receipts, sales invoices, delivery receipts. But under the BIR regulations,
certificate will issue in his name its not only the official receipt that must be presented but the printing
9. The remaining shares will be credited to the delinquent stockholder, also of the provisional receipts, sales invoices, etc. None of these
who is entitled to a stock certificate covering such shares documents, however, contained the information regarding the permit to
10. If there is no bidder, the corporation can bid, and the total amount print. Thus, the court declared them as spurious.
due shall be credited as paid in full. Such shares will be treasury If the board makes a call, it will fix a date. When 30 days have lapsed from the call,
shares. the board can declare it delinquent.
. o When theres default or delinquency, the entire subscription will become
Balance will fall due if, in the subscription, theres a stipulation saying when it will delinquent, and not only the percentage they have called. For example,
fall due or when a call was made by the Board of Directors. A call must be uniform. the made a call for the payment of 25% of the subscription and there was
o Apocada v. NLRC: Unpaid subscriptions are not due and payable until a default, the entire subscription will be declared delinquent.
call is made by the corporation for payment. In this case, it did not even o After 30 days from that, they can now order that it be sold. Notice will be
appear that a notice of such call has been sent to the stockholders by the sent to the delinquent stockholder and that will be published once a week
respondent corporation. for two weeks in a newspaper of general circulation.
The unpaid subscription is an asset of the corporation, it is a receivable. Creditors o The bidding will be conducted according to the Dutch method.
can sue the stockholders for the unpaid subscription. o Say you subscribed to 1,000 shares and the amount of the unpaid portion
o PNB v. Bitulok: A corporation has no power to release an original is P75,000. The officer will base it on the amount due. The one who will
subscriber to its capital stock from the obligation of paying for his shares accept the least number of shares will win the bidding. So what happened
without a valuable consideration for such release. with the remaining shares? They are now fully paid. The delinquent
stockholder will be given stock certificates for the shares that were left.
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Sec. 69. When sale may be questioned. - No action to recover delinquent stock he pays the amount due on his subscription with accrued interest, and the
sold can be sustained upon the ground of irregularity or defect in the notice of costs and expenses of advertisement, if any.
sale, or in the sale itself of the delinquent stock, unless the party seeking to
maintain such action first pays or tenders to the party holding the stock the Sec. 72. Rights of unpaid shares. - Holders of subscribed shares not fully paid
sum for which the same was sold, with interest from the date of sale at the which are not delinquent shall have all the rights of a stockholder.
legal rate; and no such action shall be maintained unless it is commenced by
the filing of a complaint within six (6) months from the date of sale. During the time of delinquency:
o You cannot vote using the shares, nor be voted for.
If the delinquent stockholder wants to question the sale, he must tender payment o Any right of a stockholder may not be exercised.
for the amount it was sold, and he must file it within six (6) months from the date o Any cash dividends will be applied to the payment of the loan.
of the sale. o The stock certificate will be withheld.
Carab Case He was a member of the Valley Golf Club. He gave as an address a If a stock is delinquent, it loses all its rights except to receive dividends, which will
PO Box Number. He died, but notices were still being sent to his PO box even be withheld and will be applied to payment of the loan.
though they know he was already dead. They declared the subscription delinquent
so they auctioned it. The widow questioned the validity of the sale because they Sec. 73. Lost or destroyed certificates. - The following procedure shall be
had knowledge of his death and still, they sent notices to his PO Box. Valley Golf followed for the issuance by a corporation of new certificates of stock in lieu
Club now invoked section 69, that a case questioning the sale must be filed within of those which have been lost, stolen or destroyed:
6 months from the date of the sale. Held: No, Section 69 refers to delinquency sale 1. The registered owner of a certificate of stock in a corporation or his
to collect the unpaid portion of the subscription of shares of stock. It does not legal representative shall file with the corporation an affidavit in
triplicate setting forth, if possible, the circumstances as to how the
apply to shares auctioned to pay unpaid claims based on monthly dues or payment certificate was lost, stolen or destroyed, the number of shares
for meals eaten at the clubhouse. What they applied instead was the Civil Code. represented by such certificate, the serial number of the certificate
Shares of stock are personal properties. And under the Civil Code, prescription for and the name of the corporation which issued the same. He shall also
the recovery of personal property is eight (8) years, not six (6) months. submit such other information and evidence which he may deem
necessary;
Sec. 70. Court action to recover unpaid subscription. - Nothing in this Code 2. After verifying the affidavit and other information and evidence with
shall prevent the corporation from collecting by action in a court of proper the books of the corporation, said corporation shall publish a notice
jurisdiction the amount due on any unpaid subscription, with accrued interest, in a newspaper of general circulation published in the place where the
costs and expenses. corporation has its principal office, once a week for three (3)
consecutive weeks at the expense of the registered owner of the
certificate of stock which has been lost, stolen or destroyed. The
Another option is to file a collection case because if the corporation is incurring notice shall state the name of said corporation, the name of the
losses, what they need is fresh money. So what they can do is to sue the registered owner and the serial number of said certificate, and the
stockholders in a collection case instead of auctioning these stock certificates. number of shares represented by such certificate, and that after the
expiration of one (1) year from the date of the last publication, if no
Thus, there are three ways to collect unpaid subscriptions: contest has been presented to said corporation regarding said
certificate of stock, the right to make such contest shall be barred and
1. by-laws may provide
said corporation shall cancel in its books the certificate of stock
2. delinquency sale (sec. 68) which has been lost, stolen or destroyed and issue in lieu thereof new
3. court action (sec. 70) certificate of stock, unless the registered owner files a bond or other
security in lieu thereof as may be required, effective for a period of
Sec. 71. Effect of delinquency. - No delinquent stock shall be voted for be one (1) year, for such amount and in such form and with such sureties
entitled to vote or to representation at any stockholder's meeting, nor shall the as may be satisfactory to the board of directors, in which case a new
holder thereof be entitled to any of the rights of a stockholder except the right certificate may be issued even before the expiration of the one (1)
to dividends in accordance with the provisions of this Code, until and unless year period provided herein:
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Provided, That if a contest has been presented to said have been sold. The second buyer cannot acquire good title there will be
corporation or if an action is pending in court regarding the overissuance. The remedy is to sue the forger for damages.
ownership of said certificate of stock which has been lost, Now, those who want to get a telephone line from PLDT must buy shares of
stolen or destroyed, the issuance of the new certificate of
stock in lieu thereof shall be suspended until the final stocks from PLDT. Most of them never got their stock certificates and some
decision by the court regarding the ownership of said employees forged the signatures of those stockholder and sold the shares in the
certificate of stock which has been lost, stolen or destroyed. stock market. Well, the buyer in the stock market will get valid title. But at the
same time you cannot deprive the original stockholders of their shares.
Except in case of fraud, bad faith, or negligence on the part of the corporation o Again, what will happen? PLDT will accommodate both stockholders.
and its officers, no action may be brought against any corporation which shall The remedy is to sue those responsible for selling the shares in an action
have issued certificate of stock in lieu of those lost, stolen or destroyed
pursuant to the procedure above-described.
for damages. But suppose there is overissuance and there are no more
shares which are available, then you cannot accommodate those who
LOST CERTIFICATES bought the shares in the stock market. The remedy for them is to sue
If a stock certificate was lost or destroyed, the remedy is to execute an affidavit of PLDT for negligence in the selection and supervision of its employees.
loss explaining the circumstances under which the shares were lost, then it will be Situation: Ces is a stockholder of Berroya Corp. She sold her shares of stock to
published once a week for three consecutive wks. Then you wait for one year from Sam. Ces delivered the stock certificates to Sam, without indorsement. Marie, the
the date of the third publication to be given a new stock certificate. Sometimes, a corporate secretary of Berroya Corp., cancelled Cess stock certificates, and issued
stockholder is in a hurry to get a new stock certificate because he applied for a loan new ones in Sams name. But then, Marie discovered that Ces did not indorse the
in a bank. He intends to pledge or mortgage it to use as collateral. His remedy is to stock certificates. So Marie told Sam to tell Ces to sign the indorsement at the back.
get a replacement stock certificate and just post a bond. The bond will be based on But, in bad faith, Ces refused to sign and she refused to return the stock certificate.
the market value of the shares. San Miguel, additionally, requires getting a general But Berroya Corp. already issued the stock certificates to Sam, so Berroya Corp.
insurance with the brokers. treated the old stock certificates as cancelled and lost. The Supreme Court held this
to be valid, given that Ces was in bad faith.
Date: February 10, 2015 (MT) Unnamed Case: There was an employee who filed a case against a company in the
NLRC and obtained a favorable judgment. The judgment became final and was
Situations on lost/forged/stolen stock certificates ready for execution. The company now argued that the employee is a stockholder.
Situation: Mon is a stockholder of Feria Corp., and he has a stock certificate. Steffi He subscribed to shares of stock but he has not fully paid the subscription.
forged Mons signature, and she sold it Alyssa. Alyssa does not acquire a valid title. Therefore the monetary award in the decision should be set off against his unpaid
Mon is not deprived of ownership, even if Feria Corp. was misled to believe that it subscription.
was genuine, and even if a new stock certificate was issued in favor or Alyssa. o The court said no. For compensation to take place both debts must be
Situation: David is the corporate secretary of Cocabo Corp. Abby is a stockholder due. While the amount in the judgment is already due, the payment for
of Cocabo Corp. Adrian misled David into issuing him a stock certificate, by the stocks is not yet due because the board has not made a call. So the
claiming that he bought the shares of Abby. Thereafter, Adrian sold it to Kits. Kits money judgment cannot be set off.
will acquire a valid title, because what he bought is a genuine stock certificate Laluza Case: When you incorporate, the SEC will require you to buy a stock and
issued by Cocabo Corp. Kits had all the rights to it. But you cannot deprive the transfer book and have it registered in the SEC. In the old days, we never bothered
Abby, the original owner, of her shares of stocks. So what will happen? Cocabo about that. A Stockholders Meeting was called based on those who were written in
Corp. will have to accommodate both Abby and Kits as stockholders. The remedy the stock and transfer book and the directors were elected. Some people came
now of Cocabo Corp. after Adrian for damages. forward and said, We are stockholders of this corporation and we appear in the
o But you cannot have an overissuance of shares. If there are no more shares articles of incorporation as incorporators. So what happens if there is a conflict
available, you have no more shares left. Malamang, diba? All the shares between the stock and transfer book and the articles of incorporation?
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o Held: The stock and transfer book is only for convenience. There, you Examples: claims that the directors are dissipating the assets of the
will see who are the stockholders and how many shares they have. But the corporation, ultra vires acts, the board improved increased salaries
articles of incorporation is the contract between the stockholders and the Unnamed Case: There was a corporation. There were two sets of families as
corporation. Therefore, in case of conflict between the two the articles of stockholders. One family was in management, and they started syphoning
incorporation should prevail. In the end the stockholders who were in the money of the corporation to their bank account that is appropriate for a
articles of incorporation but excluded in the meeting are correct. derivative suit. They were syphoning the funds of the corporation to depress
the assets of the corporation, therefore pulling down the book value of the
DERIVATIVE SUIT shares of stocks. Then they will buy them at a low price. Now those aggrieved
This is to protect the stockholders against the abuses of the management. stockholders included themselves as co-plaintiffs. The other directors
Its an action based on injury to the corporation to enforce a corporate right complained that it is not appropriate for a derivative suit because these
where the corporation itself is joined as a necessary partyto remedy a wrong stockholders are co-plaintiffs and litigating on their own rights.
done directly to the corporation and indirectly to the stockholder. o The Court said that there is only one involved but prejudice both the
corporation and the stockholders and therefore they could be joined
Requisites: as co-plaintiffs. This will not preclude them from pursuing the
1. The complaint must be filed in the name of the corporation. derivative suit.
2. The complaint must involve a cause of action that is appropriate for a Unnamed Case: Theres this case where the father was a stockholder. He died
derivative suit. and left shares of stocks. In the partition of the shares, the children objected
Sub-requisites of the second requisite: and said the others fraudulently transferred the shares of stocks in their names.
a. the petition must allege that there are no appraisal rights available They filed a derivative suit.
b. it must allege that the case is not a nuisance suit and not being filed o The court said No. This is not proper for a derivative suit. You are
for harassment litigating over your hereditary rights.
Hilda Lim Case: Hilda Lim was a lawyer in a family corporation and she
FIRST REQUISITE: The complaint must be filed in the name of the corporation. rendered legal services. The court, instead of paying her cash, decided to pay
The plaintiff is the corporation not the stockholder who filed it. her in kind. They gave her shares of stock in payment of her bills. Earlier a
o But, according to Pascual v. Orozco, the stockholder must be a petition was filed in the SC saying that since this a family corporation there
stockholder at the time when the alleged objectionable transactions must be a TRO against filing a derivative suit. The brother filed a case
took place. But if he was not yet a stockholder when those acts were claiming that the payment of her bill with shares of stock violated his right.
performed, but they were continued when he became a stockholder Hilda now filed a petition to cite the brother for contempt for the filing of the
and are injurious to him, he may file a derivative suit. TRO.
Soriano Case: This Soriano guy used the funds of San Miguel Corporation to o The court said no, this is not a derivative suit. What the brother cited
buy shares of stock in two corporations in Hong Kong. So the plaintiff is San in his complaints is his own personal rights. He exercised his right of
Miguel and not himself. Since the plaintiff is the corporation, another pre-emption.
stockholder cannot file a separate derivative suit. That will be barred by lis Tower along Paseo de Roxas Case: The tower there along Paseo de Roxas, they
pendens. called a stockholders meeting. Theres a quorum. So the stockholders
o For example, the case was decided adverse to the corporation. convened and elected a new set of directors. Now the other stockholders are
Another stockholder cannot file another derivative suit because that questioning the validity of the election and they filed a derivative suit.
will be barred by res judicata. o The court said no. What are you complaining about is that you were
deprived of your right to vote. What you were trying to enforce in
SECOND REQUISITE: The complaint must involve a cause of action that is appropriate for a
derivative suit.
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this case is your right to vote and that is not appropriate for a Unnamed Case: There was a case of a spoiled brat who is a stockholder of a
derivative suit. corporation. The brat was given monthly allowance and also incurred lots of
B1, B2, B3 Case: But then there is a case of three brothers (B1, B2, and B3) debts to the corporation. He wants his monthly allowance to be increased and
who are stockholders of a family corporation. B1 and B2 borrowed money his debts be wiped out. Because he was not accommodated, he filed a
that they will use it to pay loans they owed to other corporations. B3, derivative suit.
invoking the name of the corporation where all of them are stockholders, filed o The court said that is not allowed.
a derivative suit where the corporation is the plaintiff. Unnamed Case: There was a father in a family corporation who transferred
o The court said what are you complaining about the loan that you 80% of his shares of stock to one of his sons. He asked his son to sign a deed
granted to your two brothers to be used to pay for their obligations acknowledging that that was given to him. So the father wants the son to
to other corporations is not proper for a derivative suit because it is manage the corporation properly. But then the twilight years of his life is now
your own right you are trying to enforce. approaching so now he wanted to split all the shares equally amongst his
Nora Bitong: Nora was handling the finances of the corporations of Senator children. So he cancelled the prior transfer and divided the shares equally
Juan Ponce Enrile. She was a very competent Finance Officer. Nora filed a amongst his children. The son now filed a derivative suit he said that the
derivative suit against Apostol when she was still the one running the Inquirer. signature was a forgery but the NBI exam said that the signature is genuine.
o The court said she could not pursue the case because she was not The father revived the case again.
actually a stockholder of the Inquirer but only a dummy of Enrile. o the court said that is a nuisance suit you cannot pursue it.
Also, the acts complained of occurred long before she became In a derivative suit, the cause of action being prosecuted pertains to the
stockholder. corporation. So that if a favorable judgment was rendered, the proceeds should
o [from orig. transcript: Moreover, the shares issued in her name were go to the corporation, and not to the stockholder. What will be given to the
antedated to make it appear that she became a stockholder before the stockholder is reimbursement for the expenses he incurred in the filing and
action she was questioning occurred. The court said she cannot file a pursuing the case. But the damages awarded will go to the corporation.
derivative suit questioning those transactions.] o Cabaruz Case: In the case of Cabaruz, he filed a derivative suit on
Case: When a stockholder filed a derivative suit, the board argued that he behalf of Surigao Mining and he was claiming the damages awarded
could not pursue the suit because he owned minimal shares in SMC to himself. The court said no.
o Held: The court said the cause of action he is prosecuting involved
the right of the corporation not his own rights that's why it is TITLE VIII
irrelevant even if owned only a few shared because he was exercising CORPORATE BOOKS & RECORDS
the right of the corporation.
The stockholder who filed the case must exhaust of the corporate remedies, Sec. 74. Books to be kept; stock transfer agent. - Every corporation shall keep
unless there is an excuse. and carefully preserve at its principal office a record of all business
transactions and minutes of all meetings of stockholders or members, or of
o Examplethe complaint is for dissipation of funds by the directors. the board of directors or trustees, in which shall be set forth in detail the time
It would be futile to appeal to the directors. and place of holding the meeting, how authorized, the notice given, whether
o Like in the case of San Miguel Corporation, who has stockholders all the meeting was regular or special, if special its object, those present and
over the world. It would be too onerous to require a stockholder to absent, and every act done or ordered done at the meeting. Upon the demand
call a special meeting for them to reverse actions done by the board. of any director, trustee, stockholder or member, the time when any director,
trustee, stockholder or member entered or left the meeting must be noted in
the minutes; and on a similar demand, the yeas and nays must be taken on
SUB-REQUISITES of the SECOND requisite: any motion or proposition, and a record thereof carefully made. The protest of
A. The petition must allege that there are no appraisal rights available any director, trustee, stockholder or member on any action or proposed action
B. It must allege that the case is not a nuisance suit and not being filed for harassment must be recorded in full on his demand.
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The records of all business transactions of the corporation and the minutes of taxable year, showing in reasonable detail its assets and liabilities and the
any meetings shall be open to inspection by any director, trustee, stockholder result of its operations.
or member of the corporation at reasonable hours on business days and he
may demand, writing, for a copy of excerpts from said records or minutes, at At the regular meeting of stockholders or members, the board of directors or
his expense. trustees shall present to such stockholders or members a financial report of
the operations of the corporation for the preceding year, which shall include
Any officer or agent of the corporation who shall refuse to allow any director, financial statements, duly signed and certified by an independent certified
trustees, stockholder or member of the corporation to examine and copy public accountant.
excerpts from its records or minutes, in accordance with the provisions of this
Code, shall be liable to such director, trustee, stockholder or member for However, if the paid-up capital of the corporation is less than P50,000.00, the
damages, and in addition, shall be guilty of an offense which shall be financial statements may be certified under oath by the treasurer or any
punishable under Section 144 of this Code: Provided, That if such refusal is responsible officer of the corporation.
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 INSPECTION OF BOOKS/RECORDS
directors or trustees who voted for such refusal: and Provided, further, That it
This is granted to stockholders to take steps to protect their rights as a
shall be a defense to any action under this section that the person demanding
to examine and copy excerpts from the corporation's records and minutes has stockholder and to protect their investments.
improperly used any information secured through any prior examination of the The corporation is required to keep records of transactions and minutes of
records or minutes of such corporation or of any other corporation, or was not board meetings
acting in good faith or for a legitimate purpose in making his demand. The records should be able to be inspected by the directors or stockholders.
Stock corporations must also keep a book to be known as the "stock and
It has been said that the right of inspection of directors is broader compared to
transfer book", in which must be kept a record of all stocks in the names of stockholders because they need there to make decisions for the company.
the stockholders alphabetically arranged; the installments paid and unpaid on On the issue that the stockholder has the right to inspectthe burden is on the
all stock for which subscription has been made, and the date of payment of person saying that it should be denied from the one asking to inspect such
any installment; a statement of every alienation, sale or transfer of stock records.
made, the date thereof, and by and to whom made; and such other entries as
If the person has been denied, the aggrieved partys remedy is a petition for
the by-laws may prescribe. The stock and transfer book shall be kept in the
principal office of the corporation or in the office of its stock transfer agent Mandamus and pray for damages.
and shall be open for inspection by any director or stockholder of the He can also file a criminal case against the officers who refused inspection and
corporation at reasonable hours on business days. not the corporation.
o It is wrong to make the corporation the defendant. The corporation
No stock transfer agent or one engaged principally in the business of cannot be liable. The directors who denied the request should be
registering transfers of stocks in behalf of a stock corporation shall be
allowed to operate in the Philippines unless he secures a license from the made the defendants. The burden is on the defendants to prove the
Securities and Exchange Commission and pays a fee as may be fixed by the validity of their defenses.
Commission, which shall be renewable annually: Provided, That a stock If the person was earlier given the right and he improperly used the
corporation is not precluded from performing or making transfer of its own information (e.g. insider trading or it was that he was not acting in GF or for a
stocks, in which case all the rules and regulations imposed on stock transfer legitimate purpose)
agents, except the payment of a license fee herein provided, shall be
o Gonzales Case: Ramon Gonzales filed a petition for mandamus as
applicable.
taxpayer. He wanted to see records of loans approved by the PNB.
Sec. 75. Right to financial statements. - Within ten (10) days from receipt of a PNB is a government bank but some of its shares are sold to private
written request of any stockholder or member, the corporation shall furnish to stockholders. When Gonzales lost the petition for mandamus, he
him its most recent financial statement, which shall include a balance sheet as immediately bought shares of PNB and said, I am a stockholder
of the end of the last taxable year and a profit or loss statement for said now!! I have the right to see the records!!!!!!!!!!!
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Held: The court said No!!! The right is granted to February 11, 2015 (RS)
stockholders to enable them to protect their investments
and not to pry into the records. Gonzales bought stocks to TITLE IX
pry into the loan records. MERGER AND CONSOLIDATION
o Gokongwei Case: Gokongwei wanted to inspect the records of San
Miguel International (SMI). However, San Miguel Corporation Sec. 76. Plan or merger of consolidation. - Two or more corporations may
(SMC) said that it was a separate entity from SMI. But inspection was merge into a single corporation which shall be one of the constituent
corporations or may consolidate into a new single corporation which shall be
allowed because SMI is a wholly-owned subsidiary of SMC. SMIs
the consolidated corporation.
capital came from SMC. Therefore, it is more in keeping to allow
Gokongwei to inspect the records of SMI. The board of directors or trustees of each corporation, party to the merger or
consolidation, shall approve a plan of merger or consolidation setting forth
[This was not discussed by Atty. Jimenez, but for reference, I am including this here. Taken from the following:
the old transcript.]
1. The names of the corporations proposing to merge or consolidate,
hereinafter referred to as the constituent corporations;
GRANDFATHER RULE
2. The terms of the merger or consolidation and the mode of carrying
More or less, the test being used here is the nationality/citizenship of the stockholders. the same into effect;
However, the Foreign Investment Act (FIA) has disregarded the grandfather rule. It 3. A statement of the changes, if any, in the articles of incorporation of
adopted the liberalized interpretation of Filipino-ownership. According to the formula the surviving corporation in case of merger; and, with respect to the
consolidated corporation in case of consolidation, all the statements
under the grandfather rule, if you have a corporation owned by another corporation,
required to be set forth in the articles of incorporation for
you trace who are the owners of this owning corp. In other words if you have: corporations organized under this Code; and
4. Such other provisions with respect to the proposed merger or
CDE (50% FIL, 50% FOREIGN) XYZ (60% FIL, 40% FOREIGN) consolidation as are deemed necessary or desirable. (n)
Sec. 77. Stockholder's or member's approval. - Upon approval by majority vote

of each of the board of directors or trustees of the constituent corporations of
ABC CORP.
the plan of merger or consolidation, the same shall be submitted for approval
by the stockholders or members of each of such corporations at separate
Under the grandfather rule, if CDE is 50% foreign and 50% Filipino, and XYZ corporate meetings duly called for the purpose. Notice of such meetings shall
is 60% Filipino, 40% foreign, you will impute all that here and you will say a- be given to all stockholders or members of the respective corporations, at
ha, since CDE is 50% Fil, ABC CORP is not 60% Filipinocoz you are going least two (2) weeks prior to the date of the meeting, either personally or by
to trace. This is only 55% Filipino coz you trace the ownership-both registered mail. Said notice shall state the purpose of the meeting and shall
include a copy or a summary of the plan of merger or consolidation. The
CDE(50% FIL) and XYZ(60%FIL).
affirmative vote of stockholders representing at least two-thirds (2/3) of the
But according to FIA, if a corporation is 60% Filipino, it will be considered outstanding capital stock of each corporation in the case of stock
100% Filipino. FIA discarded the grandfather rule. corporations or at least two-thirds (2/3) of the members in the case of non-
Now, XYZ will be considered 100% Filipino, and so ABC CORP will now be stock corporations shall be necessary for the approval of such plan. Any
considered 75% Filipino-owned(CDE 50% and XYZ 100%). It must be at least dissenting stockholder in stock corporations may exercise his appraisal right
in accordance with the Code: Provided, That if after the approval by the
60% Filipino-owned to be considered a 100% Filipino corporation. But if it is
stockholders of such plan, the board of directors decides to abandon the plan,
less than 60%, then you apply the grandfather rule. That is provided in the the appraisal right shall be extinguished.
FIA. Any amendment to the plan of merger or consolidation may be made, provided
such amendment is approved by majority vote of the respective boards of
directors or trustees of all the constituent corporations and ratified by the
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affirmative vote of stockholders representing at least two-thirds (2/3) of the be the consolidated corporation designated in the plan of
outstanding capital stock or of two-thirds (2/3) of the members of each of the consolidation;
constituent corporations. Such plan, together with any amendment, shall be 2. The separate existence of the constituent corporations shall cease,
considered as the agreement of merger or consolidation. (n) except that of the surviving or the consolidated corporation;
3. The surviving or the consolidated corporation shall possess all the
Sec. 78. Articles of merger or consolidation. - After the approval by the rights, privileges, immunities and powers and shall be subject to all
stockholders or members as required by the preceding section, articles of the duties and liabilities of a corporation organized under this Code;
merger or articles of consolidation shall be executed by each of the 4. The surviving or the consolidated corporation shall thereupon and
constituent corporations, to be signed by the president or vice-president and thereafter possess all the rights, privileges, immunities and
certified by the secretary or assistant secretary of each corporation setting franchises of each of the constituent corporations; and all property,
forth: real or personal, and all receivables due on whatever account,
including subscriptions to shares and other choses in action, and all
1. The plan of the merger or the plan of consolidation; and every other interest of, or belonging to, or due to each constituent
2. As to stock corporations, the number of shares outstanding, or in the corporation, shall be deemed transferred to and vested in such
case of non-stock corporations, the number of members; and surviving or consolidated corporation without further act or deed; and
3. As to each corporation, the number of shares or members voting for 5. The surviving or consolidated corporation shall be responsible and
and against such plan, respectively. (n) liable for all the liabilities and obligations of each of the constituent
corporations in the same manner as if such surviving or consolidated
Sec. 79. Effectivity of merger or consolidation. - The articles of merger or of corporation had itself incurred such liabilities or obligations; and any
consolidation, signed and certified as herein above required, shall be pending claim, action or proceeding brought by or against any of
submitted to the Securities and Exchange Commission in quadruplicate for its such constituent corporations may be prosecuted by or against the
approval: Provided, That in the case of merger or consolidation of banks or surviving or consolidated corporation. The rights of creditors or liens
banking institutions, building and loan associations, trust companies, upon the property of any of such constituent corporations shall not
insurance companies, public utilities, educational institutions and other be impaired by such merger or consolidation. (n)
special corporations governed by special laws, the favorable recommendation
of the appropriate government agency shall first be obtained. If the
How merger/consolidation works:
Commission is satisfied that the merger or consolidation of the corporations
concerned is not inconsistent with the provisions of this Code and existing o Merger: ABC + DEF = ABC
laws, it shall issue a certificate of merger or of consolidation, at which time the One corporation is absorbed by the other
merger or consolidation shall be effective. o Consolidation: ABC + DEF = GHI
A new corporation will be formed
If, upon investigation, the Securities and Exchange Commission has reason to Just read Section 80 for the effects of the merger/consolidation
believe that the proposed merger or consolidation is contrary to or
o Associated Bank v. CA: Ordinarily, in the merger of two or more
inconsistent with the provisions of this Code or existing laws, it shall set a
hearing to give the corporations concerned the opportunity to be heard. existing corporations, one of the combining corporations survives
Written notice of the date, time and place of hearing shall be given to each and continues the combined business, while the rest are dissolved and
constituent corporation at least two (2) weeks before said hearing. The all their rights, properties, and liabilities are acquired by the
Commission shall thereafter proceed as provided in this Code. (n) surviving corporation. Although there is a dissolution of the
absorbed corporations, there is no winding up of their affairs or
Sec. 80. Effects or merger or consolidation. - The merger or consolidation
liquidation of their assets, because the survivng corporation
shall have the following effects:
automatically acquires all their rights, privileges, and powers, as well
1. The constituent corporations shall become a single corporation as their liabilities. #oxfordcomma The merger, howver, does not
which, in case of merger, shall be the surviving corporation become effective upon the mere agreement of the constituent
designated in the plan of merger; and, in case of consolidation, shall corporations. The procedure to be followed is prescribed under
Section 79 of the the Corporation Code.
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Rulings on workers/employees It is the right of the dissenting stockholder to ask the corporation to buy him
o BPI v. BPI Employees: The Corp Code does not mandate the out.
absorption of the employees of the non-surviving corporation by the A dissenting stockholder can ask the corporation to buy him out in case of an
surviving corporation, in the case of a merger. The rule is that, amendment and it affects the rights of the stockholders, or if you extend or
unless expressly assumed, labor contracts (such as employment shorten the corporate life, you increase the authorized capital stock, you go
contracts and CBAs) are not enforceable against a transferee of an into another line of business, or there's merger or consolidation, or where the
enterprise, labor contracts being in personam, thus binding only corp. sells, leases, mortgages or encumbers or disposes of all or substantially all
between parties. It is contrary to public policy to declare the former of its assets.
employees of the absorbed bank as forming part of the assets or o The appraisal right may also be exercised under Section 42, where
liabilities that were transferred and absorbed by the other bank. the corporation wants to invest funds in another corporation, or any
o Filipinas Port v. NLRC: Employees of a predecessor-constituent purpose other than its primary purpose
corporation can avail of their previous tenure when determining And then in the Title on Closed Corporations, the law provides a stockholder
their termination benefits with the surviving corporation in the can, at any time, ask the corp. to buy him out even if the closed corp. has no
merger, and that the employees have a right to their retirement retained earnings.
benefits computed from the time worked with the predecessor-
constituent corporations, since there was considered to be no break Sec. 82. How right is exercised. - The appraisal right may be exercised by any
the employer-employee relationship stockholder who shall have voted against the proposed corporate action, by
o National Union Bank v. Lazaro: The legal effects of Sec. 80 is that making a written demand on the corporation within thirty (30) days after the
date on which the vote was taken for payment of the fair value of his shares:
the surviving corporation in a merger would be considered as the
Provided, That failure to make the demand within such period shall be deemed
successor employer, with respect to the claims of the employees of a waiver of the appraisal right. If the proposed corporate action is
the constituent corporations, even with respect to CBA deadlock implemented or affected, the corporation shall pay to such stockholder, upon
situations which existed right before the merger. surrender of the certificate or certificates of stock representing his shares, the
fair value thereof as of the day prior to the date on which the vote was taken,
TITLE X excluding any appreciation or depreciation in anticipation of such corporate
action.
APPRAISAL RIGHT
If within a period of sixty (60) days from the date the corporate action was
APPRAISAL RIGHT
approved by the stockholders, the withdrawing stockholder and the
Sec. 81. Instances of appraisal right.- Any stockholder of a corporation shall corporation cannot agree on the fair value of the shares, it shall be determined
have the right to dissent and demand payment of the fair value of his shares in and appraised by three (3) disinterested persons, one of whom shall be named
the following instances: by the stockholder, another by the corporation, and the third by the two thus
1. In case any amendment to the articles of incorporation has the effect chosen. The findings of the majority of the appraisers shall be final, and their
of changing or restricting the rights of any stockholder or class of award shall be paid by the corporation within thirty (30) days after such award
shares, or of authorizing preferences in any respect superior to those is made: Provided, That no payment shall be made to any dissenting
of outstanding shares of any class, or of extending or shortening the stockholder unless the corporation has unrestricted retained earnings in its
term of corporate existence; books to cover such payment: and Provided, further, That upon payment by
2. In case of sale, lease, exchange, transfer, mortgage, pledge or other the corporation of the agreed or awarded price, the stockholder shall forthwith
disposition of all or substantially all of the corporate property and transfer his shares to the corporation. (n)
assets as provided in the Code; and
3. In case of merger or consolidation. Sec. 83. Effect of demand and termination of right. - From the time of demand
for payment of the fair value of a stockholder's shares until either the
abandonment of the corporate action involved or the purchase of the said
shares by the corporation, all rights accruing to such shares, including voting
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and dividend rights, shall be suspended in accordance with the provisions of His only right is to receive payment. His right to be paid will cease if he
this Code, except the right of such stockholder to receive payment of the fair withdraws his demand and the corp. agrees.
value thereof: Provided, That if the dissenting stockholder is not paid the
o GR: Dissenting stockholder cannot withdraw from his decision to
value of his shares within 30 days after the award, his voting and dividend
rights shall immediately be restored. (n) exercise his appraisal right
o Exc: The corporation consented (Quimson)
Sec. 84. When right to payment ceases. - No demand for payment under this If the proposed action to which he was objecting was cancelled, or it was
Title may be withdrawn unless the corporation consents thereto. If, disapproved by the SEC, or if the SEC determines that he is not entitled to
however, such demand for payment is withdrawn with the consent of the appraisal rights, then his rights will be restored. Likewise, if the corp. fails to
corporation, or if the proposed corporate action is abandoned or rescinded
pay him within 30 days then his rights will be restored.
by the corporation or disapproved by the Securities and Exchange
Commission where such approval is necessary, or if the Securities and
Exchange Commission determines that such stockholder is not entitled to Sec. 85. Who bears costs of appraisal. - The costs and expenses of appraisal
the appraisal right, then the right of said stockholder to be paid the fair shall be borne by the corporation, unless the fair value ascertained by the
value of his shares shall cease, his status as a stockholder shall thereupon appraisers is approximately the same as the price which the corporation may
be restored, and all dividend distributions which would have accrued on his have offered to pay the stockholder, in which case they shall be borne by the
shares shall be paid to him. (n) latter. In the case of an action to recover such fair value, all costs and
expenses shall be assessed against the corporation, unless the refusal of the
To exercise the right of appraisal, the stockholder must make a written stockholder to receive payment was unjustified. (n)
demand within thirty (30) days from the date the decision to which he does Sec. 86. Notation on certificates; rights of transferee. - Within ten (10) days
not agree was approved. after demanding payment for his shares, a dissenting stockholder shall submit
o If he does not make the demand within that period, that will be the certificates of stock representing his shares to the corporation for notation
barred by waiver. thereon that such shares are dissenting shares. His failure to do so shall, at
He'll be paid the value of his shares on the day before that action was the option of the corporation, terminate his rights under this Title. If shares
approved. represented by the certificates bearing such notation are transferred, and the
certificates consequently canceled, the rights of the transferor as a dissenting
o It must be the day before because the approval will affect the price of stockholder under this Title shall cease and the transferee shall have all the
his shares one way or the other. It might increase or decrease. rights of a regular stockholder; and all dividend distributions which would
If within sixty (60) days from the time the action with which the stockholder have accrued on such shares shall be paid to the transferee. (n)
does not agree was taken, they cannot agree on the value, then that will be
decided by appraisal. Who bears the costs of appraisal?
The corporation will name one appraiser, the stockholder will name another Borne by the corporation
appraiser, and the two will choose the third one (a tiebreaker), and the decision o Where price offered by the corporation < fair value as determined by
will be final. appraisers
The corporation must pay within thirty (30) days after the award was made. o Where the stockholder filed an action to recover the fair value, and
But the corp. must have retained earnings; otherwise, creditors will be the refusal of the stockholder to receive payment is found justified by
prejudiced. court
The cost of the appraisal will be borne by the corp. unless the award is close to Borne by the dissenting stockholder
what the corp. offered, for then it is the stockholder who will pay because it is o Where price offered by the corp is approximately the same as the
his unreasonable demand that made that unnecessary expense. appraisers determination
Once a stockholder demands the exercise of his appraisal right, he will lose all o Where the refusal of the stockholder to receive payment is found
the rights of a stockholder: he can no longer vote, he can no longer receive unjustified by the court
dividends.
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Rights of the transferee 3. Educational: many of the religious sectarian schools are organized as
If the dissenting shares are transferred to others, and the certificates are non-stock corporations (Ateneo de Manila, La Salle) #AnimoQuito
cancelled, the rights of the transferor as dissenting stockholder shall cease. 4. Others: Professional (bar associations, accountants, engineers),
The transferee shall have all the rights of a regular stockholder. Cultural, Fraternal, Literary, Scientific, Social, Civic Service, or
Accrued dividends shall be paid to the transferee. similar purposes (Chambers of Commerce).
TITLE XI Sec. 89. Right to vote. - The right of the members of any class or classes to
vote may be limited, broadened or denied to the extent specified in the articles
NON-STOCK CORPORATIONS
of incorporation or the by-laws. Unless so limited, broadened or denied, each
member, regardless of class, shall be entitled to one vote.
Sec. 87. Definition. - For the purposes of this Code, a non-stock corporation is
one where no part of its income is distributable as dividends to its members, Unless otherwise provided in the articles of incorporation or the by-laws, a
trustees, or officers, subject to the provisions of this Code on dissolution: member may vote by proxy in accordance with the provisions of this Code.
Provided, That any profit which a non-stock corporation may obtain as an
incident to its operations shall, whenever necessary or proper, be used for the Voting by mail or other similar means by members of non-stock corporations
furtherance of the purpose or purposes for which the corporation was may be authorized by the by-laws of non-stock corporations with the approval
organized, subject to the provisions of this Title. of, and under such conditions which may be prescribed by, the Securities and
The provisions governing stock corporation, when pertinent, shall be Exchange Commission.
applicable to non-stock corporations, except as may be covered by specific
provisions of this Title. (n) Sec. 90. Non-transferability of membership. - Membership in a non-stock
corporation and all rights arising therefrom are personal and non-transferable,
Sec. 88. Purposes. - Non-stock corporations may be formed or organized for unless the articles of incorporation or the by-laws otherwise provide. (n)
charitable, religious, educational, professional, cultural, fraternal, literary,
scientific, social, civic service, or similar purposes, like trade, industry, Sec. 91. Termination of membership. - Membership shall be terminated in the
agricultural and like chambers, or any combination thereof, subject to the manner and for the causes provided in the articles of incorporation or the by-
special provisions of this Title governing particular classes of non-stock laws. Termination of membership shall have the effect of extinguishing all
corporations. (n) rights of a member in the corporation or in its property, unless otherwise
provided in the articles of incorporation or the by-laws. (n)
For a corporation to be non-stock, it must not be authorized to declare
dividends. The right to vote may be limited, broadened, or denied in the articles or the
o CIR v. Club Filipino de Cebu, where the corporation has by-laws, but unless the right is limited, broadened or denied, each member
stockholders and capital stock, but it does not distribute cash will be entitled to vote.
dividends. A member may vote by proxy unless that is prohibited in the by-laws.
o Collector v. University of Visayas: It is not the earning of incidental
Example: country clubs. Usually they will have different kinds of members.
profits that make the entity non-stock, but the actual or legal
They will usually provide that whoever is the President of the Philippines and
authority to distribute such profits to the officers and members
the mayor of the place are honorary members.
The law mentions the different purposes for which a non-stock corp. may be o After the honorary members, there are the regular members, and
organized: these are those who own a proprietary share.
1. They may be organized for charitable purposes (Sulpicio de San Jose, o But it's expensive to run and maintain a country club. So to broaden
Tahanang Walang Hagdan) the base of people to whom they can collect monthly dues, they
2. A religious order can incorporate as a non-stock corp. for the sometimes create these associate members.
management of its properties.
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o These are members who do not have a proprietary share but they in their articles of incorporation or by-laws, shall, as soon as organized, so
will be allowed to make use of the playing rights of one who owns a classify themselves that the term of office of one-third (1/3) of their number
proprietary share provided they pay also monthly dues. shall expire every year; and subsequent elections of trustees comprising one-
third (1/3) of the board of trustees shall be held annually and trustees so
o And usually the by-laws will provide that only those who own elected shall have a term of three (3) years. Trustees thereafter elected to fill
proprietary shares can vote. So the honorary members and these vacancies occurring before the expiration of a particular term shall hold office
associate members are given only playing rights and are not allowed only for the unexpired period.
to vote. No person shall be elected as trustee unless he is a member of the
Voting by mail or others means like by fax may be allowed. But membership corporation.
is non-transferrable. Unless otherwise provided in the articles of incorporation or the by-laws,
o If somebody owns a proprietary share in a country club, if he dies officers of a non-stock corporation may be directly elected by the members.
and his share is inherited by his son, the son does not automatically
become a member. He has to apply for membership. If he's
Sec. 93. Place of meetings. - The by-laws may provide that the members of a
disapproved, he cannot make use of the facilities. If he has a
non-stock corporation may hold their regular or special meetings at any place
reputation for not getting along with others, like he is quarrelsome, even outside the place where the principal office of the corporation is located:
they wouldn't want to have such person as member. The only thing Provided, That proper notice is sent to all members indicating the date, time
he can do to that share is that he can sell it, mortgage it, but he and place of the meeting: and Provided, further, That the place of meeting
cannot be a member if he's not accepted. shall be within the Philippines.
Membership shall be terminated in the manner and for causes provided in the A trustee must be a member.
articles or by-laws. Non-stock corporations may have more than fifteen (15) directors. You may even
o Example: A case of loyalty to the organization. For instance, a have 21.
member of the Manila Yacht Club organizes a competing regatta in Example: In alumni associations, if you want to broaden representation in the
Subic to compete with the regatta there, so that's his loyalty. Or board. You can provide that only one third (1/3) of the directors would be
where a member playing golf would make a game terrible for elected every year so the terms every three years would be staggered, to allow
everybody: they use their temper, they throw the club, etc. for continuity in policies.
o The country club could suspend him as what was done in the case of But you can provide that everybody will be elected every year. If you do not
Norberto Quisumbing for picking a fight with a caddy. He sued for provide for such, then 1/3 will be elected every year.
moral damages in the RTC, but the RTC dismissed it because it's an
Officers may be directly elected by members, if so provided.
intra-corporate dispute and should be filed in the SEC, which he did.
o Compare with officers of stock corporations, who are elected by the
o The country club filed a motion to dismiss because they said the
Board of Directors under Section 25
complaint does not state a cause of action because under the by-laws,
Meetings of the members may be anywhere within the Philippines
if a member wants to question his suspension by the board, he must
o But meetings of the Board of Trustees may be in or outside the
appeal to the members. He has not exhausted the intra-corporate
Philippines, like Afghanistan or Somalia.
remedy provided by the by-laws. So it was premature.
o But the SEC dismissed on the ground that it has no jurisdiction, that
Sec. 94. Rules of distribution. - In case dissolution of a non-stock corporation
it should be filed in the RTC. MR in the RTC granted. Petition for in accordance with the provisions of this Code, its assets shall be applied and
prohibition by the club in the CA was granted. Eventually distributed as follows:
Quisumbing just sold his share. 1. All liabilities and obligations of the corporation shall be paid, satisfied
and discharged, or adequate provision shall be made therefore;
Sec. 92. Election and term of trustees. - Unless otherwise provided in the
2. Assets held by the corporation upon a condition requiring return,
articles of incorporation or the by-laws, the board of trustees of non-stock
transfer or conveyance, and which condition occurs by reason of the
corporations, which may be more than fifteen (15) in number as may be fixed
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dissolution, shall be returned, transferred or conveyed in accordance public offering of any of its stock of any class. Notwithstanding the
with such requirements; foregoing, a corporation shall not be deemed a close corporation
3. Assets received and held by the corporation subject to limitations when at least two-thirds (2/3) of its voting stock or voting rights is
permitting their use only for charitable, religious, benevolent, owned or controlled by another corporation which is not a close
educational or similar purposes, but not held upon a condition corporation within the meaning of this Code.
requiring return, transfer or conveyance by reason of the dissolution,
shall be transferred or conveyed to one or more corporations, Any corporation may be incorporated as a close corporation, except mining or
societies or organizations engaged in activities in the Philippines oil companies, stock exchanges, banks, insurance companies, public utilities,
substantially similar to those of the dissolving corporation according educational institutions and corporations declared to be vested with public
to a plan of distribution adopted pursuant to this Chapter; interest in accordance with the provisions of this Code.
4. Assets other than those mentioned in the preceding paragraphs, if
any, shall be distributed in accordance with the provisions of the The provisions of this Title shall primarily govern close corporations:
articles of incorporation or the by-laws, to the extent that the articles Provided, That the provisions of other Titles of this Code shall apply
of incorporation or the by-laws, determine the distributive rights of suppletorily except insofar as this Title otherwise provides.
members, or any class or classes of members, or provide for
distribution; and Sec. 97. Articles of incorporation. - The articles of incorporation of a close
5. In any other case, assets may be distributed to such persons, corporation may provide:
societies, organizations or corporations, whether or not organized for 1. For a classification of shares or rights and the qualifications for
profit, as may be specified in a plan of distribution adopted pursuant owning or holding the same and restrictions on their transfers as may
to this Chapter. (n) be stated therein, subject to the provisions of the following section;
2. For a classification of directors into one or more classes, each of
Sec. 95. Plan of distribution of assets. - A plan providing for the distribution of whom may be voted for and elected solely by a particular class of
assets, not inconsistent with the provisions of this Title, may be adopted by a stock; and
non-stock corporation in the process of dissolution in the following manner: 3. For a greater quorum or voting requirements in meetings of
stockholders or directors than those provided in this Code.
The board of trustees shall, by majority vote, adopt a resolution
recommending a plan of distribution and directing the submission thereof to a The articles of incorporation of a close corporation may provide that the
vote at a regular or special meeting of members having voting rights. Written business of the corporation shall be managed by the stockholders of the
notice setting forth the proposed plan of distribution or a summary thereof corporation rather than by a board of directors. So long as this provision
and the date, time and place of such meeting shall be given to each member continues in effect:
entitled to vote, within the time and in the manner provided in this Code for the 1. No meeting of stockholders need be called to elect directors;
giving of notice of meetings to members. Such plan of distribution shall be 2. Unless the context clearly requires otherwise, the stockholders of the
adopted upon approval of at least two-thirds (2/3) of the members having corporation shall be deemed to be directors for the purpose of
voting rights present or represented by proxy at such meeting. (n) applying the provisions of this Code; and
3. The stockholders of the corporation shall be subject to all liabilities of
TITLE XII directors.
CLOSE CORPORATIONS
The articles of incorporation may likewise provide that all officers or
employees or that specified officers or employees shall be elected or
Sec. 96. Definition and applicability of Title. - A close corporation, within the
appointed by the stockholders, instead of by the board of directors.
meaning of this Code, is one whose articles of incorporation provide that:
(1) All the corporation's issued stock of all classes, exclusive of treasury
Sec. 98. Validity of restrictions on transfer of shares. - Restrictions on the right
shares, shall be held of record by not more than a specified number of
to transfer shares must appear in the articles of incorporation and in the by-
persons, not exceeding twenty (20);
laws as well as in the certificate of stock; otherwise, the same shall not be
(2) all the issued stock of all classes shall be subject to one or more
binding on any purchaser thereof in good faith. Said restrictions shall not be
specified restrictions on transfer permitted by this Title; and
more onerous than granting the existing stockholders or the corporation the
(3) The corporation shall not list in any stock exchange or make any
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option to purchase the shares of the transferring stockholder with such Sec. 100. Agreements by stockholders. -
reasonable terms, conditions or period stated therein. If upon the expiration of 1. Agreements by and among stockholders executed before the
said period, the existing stockholders or the corporation fails to exercise the formation and organization of a close corporation, signed by all
option to purchase, the transferring stockholder may sell his shares to any stockholders, shall survive the incorporation of such corporation and
third person. shall continue to be valid and binding between and among such
stockholders, if such be their intent, to the extent that such
Sec. 99. Effects of issuance or transfer of stock in breach of qualifying agreements are not inconsistent with the articles of incorporation,
conditions. - irrespective of where the provisions of such agreements are
1. If stock of a close corporation is issued or transferred to any person contained, except those required by this Title to be embodied in said
who is not entitled under any provision of the articles of incorporation articles of incorporation.
to be a holder of record of its stock, and if the certificate for such 2. An agreement between two or more stockholders, if in writing and
stock conspicuously shows the qualifications of the persons entitled signed by the parties thereto, may provide that in exercising any
to be holders of record thereof, such person is conclusively voting rights, the shares held by them shall be voted as therein
presumed to have notice of the fact of his ineligibility to be a provided, or as they may agree, or as determined in accordance with a
stockholder. procedure agreed upon by them.
2. If the articles of incorporation of a close corporation states the 3. No provision in any written agreement signed by the stockholders,
number of persons, not exceeding twenty (20), who are entitled to be relating to any phase of the corporate affairs, shall be invalidated as
holders of record of its stock, and if the certificate for such stock between the parties on the ground that its effect is to make them
conspicuously states such number, and if the issuance or transfer of partners among themselves.
stock to any person would cause the stock to be held by more than 4. A written agreement among some or all of the stockholders in a close
such number of persons, the person to whom such stock is issued or corporation shall not be invalidated on the ground that it so relates to
transferred is conclusively presumed to have notice of this fact. the conduct of the business and affairs of the corporation as to
3. If a stock certificate of any close corporation conspicuously shows a restrict or interfere with the discretion or powers of the board of
restriction on transfer of stock of the corporation, the transferee of directors: Provided, That such agreement shall impose on the
the stock is conclusively presumed to have notice of the fact that he stockholders who are parties thereto the liabilities for managerial acts
has acquired stock in violation of the restriction, if such acquisition imposed by this Code on directors.
violates the restriction. 5. To the extent that the stockholders are actively engaged in the
4. Whenever any person to whom stock of a close corporation has been management or operation of the business and affairs of a close
issued or transferred has, or is conclusively presumed under this corporation, the stockholders shall be held to strict fiduciary duties to
section to have, notice either (a) that he is a person not eligible to be a each other and among themselves. Said stockholders shall be
holder of stock of the corporation, or (b) that transfer of stock to him personally liable for corporate torts unless the corporation has
would cause the stock of the corporation to be held by more than the obtained reasonably adequate liability insurance.
number of persons permitted by its articles of incorporation to hold
stock of the corporation, or (c) that the transfer of stock is in violation Sec. 101. When board meeting is unnecessary or improperly held. - Unless the
of a restriction on transfer of stock, the corporation may, at its option, by-laws provide otherwise, any action by the directors of a close corporation
refuse to register the transfer of stock in the name of the transferee. without a meeting shall nevertheless be deemed valid if:
5. The provisions of subsection (4) shall not applicable if the transfer of 1. Before or after such action is taken, written consent thereto is signed
stock, though contrary to subsections (1), (2) of (3), has been by all the directors; or
consented to by all the stockholders of the close corporation, or if the 2. All the stockholders have actual or implied knowledge of the action
close corporation has amended its articles of incorporation in and make no prompt objection thereto in writing; or
accordance with this Title. 3. The directors are accustomed to take informal action with the express
6. The term "transfer", as used in this section, is not limited to a transfer or implied acquiescence of all the stockholders; or
for value. 4. All the directors have express or implied knowledge of the action in
7. The provisions of this section shall not impair any right which the question and none of them makes prompt objection thereto in writing.
transferee may have to rescind the transfer or to recover under any
applicable warranty, express or implied. If a director's meeting is held without proper call or notice, an action taken
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therein within the corporate powers is deemed ratified by a director who failed and does not have the title and powers of a custodian or receiver. A
to attend, unless he promptly files his written objection with the secretary of provisional director shall have all the rights and powers of a duly elected
the corporation after having knowledge thereof. director of the corporation, including the right to notice of and to vote at
meetings of directors, until such time as he shall be removed by order of the
Sec. 102. Pre-emptive right in close corporations. - The pre-emptive right of Commission or by all the stockholders. His compensation shall be determined
stockholders in close corporations shall extend to all stock to be issued, by agreement between him and the corporation subject to approval of the
including reissuance of treasury shares, whether for money, property or Commission, which may fix his compensation in the absence of agreement or
personal services, or in payment of corporate debts, unless the articles of in the event of disagreement between the provisional director and the
incorporation provide otherwise. corporation.
Sec. 103. Amendment of articles of incorporation. - Any amendment to the Sec. 105. Withdrawal of stockholder or dissolution of corporation. - In addition
articles of incorporation which seeks to delete or remove any provision and without prejudice to other rights and remedies available to a stockholder
required by this Title to be contained in the articles of incorporation or to under this Title, any stockholder of a close corporation may, for any reason,
reduce a quorum or voting requirement stated in said articles of incorporation compel the said corporation to purchase his shares at their fair value, which
shall not be valid or effective unless approved by the affirmative vote of at shall not be less than their par or issued value, when the corporation has
least two-thirds (2/3) of the outstanding capital stock, whether with or without sufficient assets in its books to cover its debts and liabilities exclusive of
voting rights, or of such greater proportion of shares as may be specifically capital stock: Provided, That any stockholder of a close corporation may, by
provided in the articles of incorporation for amending, deleting or removing written petition to the Securities and Exchange Commission, compel the
any of the aforesaid provisions, at a meeting duly called for the purpose. dissolution of such corporation whenever any of acts of the directors, officers
or those in control of the corporation is illegal, or fraudulent, or dishonest, or
Sec. 104. Deadlocks. - Notwithstanding any contrary provision in the articles oppressive or unfairly prejudicial to the corporation or any stockholder, or
of incorporation or by-laws or agreement of stockholders of a close whenever corporate assets are being misapplied or wasted.
corporation, if the directors or stockholders are so divided respecting the
management of the corporation's business and affairs that the votes required REMEMBER: Its close corporation, NOT closed corporation.
for any corporate action cannot be obtained, with the consequence that the
o Closed corporations are those that are not open, as in the doors are
business and affairs of the corporation can no longer be conducted to the
advantage of the stockholders generally, the SEC, upon written petition by any closed.
stockholder, shall have the power to arbitrate the dispute. In the exercise of Definition of close corporation:
such power, the Commission shall have authority to make such order as it o A close corporation is one whose articles of incorporation provide
deems appropriate, including an order: that all its stock issued, exclusive of treasury shares, shall be held of
1) canceling or altering any provision contained in the articles of record by not more than 20 persons, and all its issued stock shall be
incorporation, by-laws, or any stockholder's agreement;
2) canceling, altering or enjoining any resolution or act of the
subject to one or more restrictions of transfer, and that any of its
corporation or its board of directors, stockholders, or officers; stock shall neither be listed in any stock exchange nor be offered to
3) directing or prohibiting any act of the corporation or its board of the public.
directors, stockholders, officers, or other persons party to the action; This is a new title, made in recognition of the fact that the overwhelming
4) requiring the purchase at their fair value of shares of any stockholder, majority of the corporations are family corporations.
either by the corporation regardless of the availability of unrestricted o In many family corporations here, the set-up is such that the husband
retained earnings in its books, or by the other stockholders;
5) appointing a provisional director; is the president, the wife is the treasurer, but it is the wife who is
6) dissolving the corporation; or actually running the corp. The husband is just the nominal
7) granting such other relief as the circumstances may warrant. figurehead. Example: Tesoro Handicraft.
A provisional director shall be an impartial person who is neither a A close corp. has a technical meaning in the law. For it to be a close corp., the
stockholder nor a creditor of the corporation or of any subsidiary or affiliate of articles must provide that it cannot have more than 20 stockholders.
the corporation, and whose further qualifications, if any, may be determined
by the Commission. A provisional director is not a receiver of the corporation
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The law says that the mere fact that a corp. is controlled by another corp. does o So you can just put there for example, subject to the restrictions in
not make it a close corp. AOI must contain the features mentioned in the law. Article 10 of the AOI. It is up to the prospective buyer to look into
o BUT if 2/3 of the voting stock of the close corporation are owned or the articles to find out what are those restrictions.
controlled by a non-close corporation, then it is not a close corp. The laws says that the stockholders may enter into pre-incorporation
There should be restrictions on the transfer of the shares agreement before they incorporate, and that pre-incorporation agreement will
o Like, omg, like usually it will be provided that if a stockholder wants remain binding even after they have incorporated because that agreement will
to sell his share, he must first offer it to the other stockholders. Only lay down the modus vivendi after they have incorporated.
if they are not willing to buy can he offer it to an outsider. Or it may o Example: it could be agreed that each family will have 3 directors,
also provide that if no stockholder is willing to buy the shares, then the president can come from one family, the general manager from
he must offer it to the corporation before offering to an outsider. another family, the treasurer from the 3rd family, and then every year
The corporation shall not be listed in any stock exchange. they will rotate the position.
But corporations engaged in mining, oil companies, stock exchanges, banks, o They may also agree on how the shares will be voted. Like 3
insurance companies, public utilities, schools, and corporations vested with directors may be elected only by class A shares, 3 by class B, and 3 by
public interest are not allowed to be close corporations. class C shares.
o Because they're engaged in lines of business vested with public o And unless the by-laws provide otherwise, action of the directors
interest, they should be subject to regulation and close scrutiny. without need of a meeting will be valid if all the directors sign a
The law says the articles may provide for classification of shares and written consent.
qualifications for owning them. o Or if the stockholders have actual or implied knowledge but do not
For example, you have three brothers who form a close corp. So they may object in writing. Or if the directors are used to taking informal
provide: action, or the directors all have express or implied knowledge of the
A. we will classify these shares into class A, B and C. Only the members action taken and none of them objects.
of the family of the first brother can own class A shares. Only The law says that in close corporations, there is right of pre-emption to call
members of 2nd brother can own class B shares, and class C shares can issuances of shares even if the shares have been issued for property or payment
be owned only by members of the 3rd brother; for past services or payment to convert debt to equity.
B. we will have nine (9) directors, and 3 will be elected by holders of When you have these close corporations with everybody having a veto power,
class A shares; like you are required 3/4 majority for the quorum of the board, 3/4 majority
C. can provide for a greater quorum or voting requirements. It can be for quorum in a stockholders meeting, you could be paralyzed by inaction.
provided that you will need three fourths (3/4) majority to approve That is the problem with supermajority.
any action by the board, or any action by the stockholder. Why? o So the law provides for remedies for that.
Because each group would want to be protected for, otherwise, if the The SEC can arbitrate. It can cancel or alter any provision
two groups combine they can get anything approved, like there in the articles or by-law.
would be 2/3. And so the third group would want to be protected; They can cancel, for example, the greater quorum
D. the articles may provide that if it's the stockholders and not the board requirement.
who will manage the affairs and that there is no need for formal Or they may alter, prohibit, or cancel any resolution or
meetings, if the stockholders will be the directors, then they will be action of the corporation, directors, stockholders, or
subject to the same liabilities as directors. officers. They may direct or prohibit the action taken by
For restrictions for the transfer of shares to be binding on third parties, they any one of those mentioned.
have to appear in the articles of incorporation or in the by-laws, and must be Or it may require the purchase of the shares of any
printed at the back of the stock certificate. stockholder by the corporation or by other stockholders
even if there are no retained earnings.
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In fact usually in a corporation like this, it's advisable that you put a buy-out elected thereafter to fill vacancies caused by expiration of term shall hold
provision. You anticipate. Everybody has a right to veto. You''ll be paralyzed office for five (5) years. A majority of the trustees shall constitute a quorum for
the transaction of business. The powers and authority of trustees shall be
inaction, and such is intolerable, then you'll have to put there a buy-out
defined in the by-laws.
provision, that in case you have this continuing deadlock then a stockholder
can demand to buy out the shares of another stockholder. And you can put For institutions organized as stock corporations, the number and term of
there a formula on what would be the valuation, like regarding the book value directors shall be governed by the provisions on stock corporations. (169a)
of something.
o Suppose they cannot agree who will buy whom, they can provide Educational institutions are governed either by special laws (eg UP Charter) or
that the one who's willing to pay the higher price will be the one the Corp Code
who will prevail. Under Article XV of the Consti, school corporations shall be owned by at least
o Or dissolving the corporation, that will be an extreme case; granting 60% Filipino citizens,
other reliefs as the circumstances may warrant, or appointing a o except schools established by religious orders or mission boards, etc.,
provisional director. The law says that the provisional director is which can go beyond 60% (up to 100%, di na pwede maging 101%)
supposed to be an impartial person, an outsider who is not a Educational corporations must obtain a favorable approval of the articles and
stockholder or a creditor. He will have the rights of a duly elected by-laws from Dep-Ed. SEC approval is also required
director. He can vote. He's the tiebreaker. Educational corporations can either be stock or non-stock
o Problem with provisional director is that his stomach becomes bigger o If stock, just follow the provisions for stock corps in the Code
than his head; whoever he supports will win. o If non-stock:
The number of trustees must either be 5, 10, or 15
TITLE XIII (multiples of 5)
SPECIAL CORPORATIONS The term of trustees is 5 years, but the terms must be
staggered (see Sec. 92 for staggering for non-stock corp)
Chapter I - Educational Corporations Board of trustees may be called board of regents
Sec. 106. Incorporation. - Educational corporations shall be governed by
Chapter II Religious Corporations
special laws and by the general provisions of this Code. (n)
Not included in Atty. Jacks exams or the BAR!
Sec. 107. Pre-requisites to incorporation. - Except upon favorable
recommendation of the Ministry of Education and Culture, the Securities and TITLE XIV
Exchange Commission shall not accept or approve the articles of DISSOLUTION
incorporation and by-laws of any educational institution. (168a) My favorite!! JT
Sec. 108. Board of trustees. - Trustees of educational institutions organized as Sec. 117. Methods of dissolution. - A corporation formed or organized under
non-stock corporations shall not be less than five (5) nor more than fifteen the provisions of this Code may be dissolved voluntarily or involuntarily.
(15): Provided, however, That the number of trustees shall be in multiples of
five (5). Sec. 118. Voluntary dissolution where no creditors are affected. - If dissolution
of a corporation does not prejudice the rights of any creditor having a claim
Unless otherwise provided in the articles of incorporation on the by-laws, the against it, the dissolution may be effected by majority vote of the board of
board of trustees of incorporated schools, colleges, or other institutions of directors or trustees, and by a resolution duly adopted by the affirmative vote
learning shall, as soon as organized, so classify themselves that the term of of the stockholders owning at least two-thirds (2/3) of the outstanding capital
office of one-fifth (1/5) of their number shall expire every year. Trustees stock or of at least two-thirds (2/3) of the members of a meeting to be held
thereafter elected to fill vacancies, occurring before the expiration of a upon call of the directors or trustees after publication of the notice of time,
particular term, shall hold office only for the unexpired period. Trustees
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place and object of the meeting for three (3) consecutive weeks in a amended articles of incorporation shall be submitted to the Securities and
newspaper published in the place where the principal office of said Exchange Commission in accordance with this Code. Upon approval of the
corporation is located; and if no newspaper is published in such place, then in amended articles of incorporation of the expiration of the shortened term, as
a newspaper of general circulation in the Philippines, after sending such the case may be, the corporation shall be deemed dissolved without any
notice to each stockholder or member either by registered mail or by personal further proceedings, subject to the provisions of this Code on liquidation.
delivery at least thirty (30) days prior to said meeting. A copy of the resolution
authorizing the dissolution shall be certified by a majority of the board of Sec. 121. Involuntary dissolution. - A corporation may be dissolved by the
directors or trustees and countersigned by the secretary of the corporation. Securities and Exchange Commission upon filing of a verified complaint and
The Securities and Exchange Commission shall thereupon issue the after proper notice and hearing on the grounds provided by existing laws,
certificate of dissolution. rules and regulations.
Sec. 119. Voluntary dissolution where creditors are affected. - Where the Sec. 122. Corporate liquidation. - Every corporation whose charter expires by
dissolution of a corporation may prejudice the rights of any creditor, the its own limitation or is annulled by forfeiture or otherwise, or whose corporate
petition for dissolution shall be filed with the Securities and Exchange existence for other purposes is terminated in any other manner, shall
Commission. The petition shall be signed by a majority of its board of nevertheless be continued as a body corporate for three (3) years after the
directors or trustees or other officers having the management of its affairs, time when it would have been so dissolved, for the purpose of prosecuting
verified by its president or secretary or one of its directors or trustees, and and defending suits by or against it and enabling it to settle and close its
shall set forth all claims and demands against it, and that its dissolution was affairs, to dispose of and convey its property and to distribute its assets, but
resolved upon by the affirmative vote of the stockholders representing at least not for the purpose of continuing the business for which it was established.
two-thirds (2/3) of the outstanding capital stock or by at least two-thirds (2/3)
of the members at a meeting of its stockholders or members called for that At any time during said three (3) years, the corporation is authorized and
purpose. empowered to convey all of its property to trustees for the benefit of
stockholders, members, creditors, and other persons in interest. From and
If the petition is sufficient in form and substance, the Commission shall, by an after any such conveyance by the corporation of its property in trust for the
order reciting the purpose of the petition, fix a date on or before which benefit of its stockholders, members, creditors and others in interest, all
objections thereto may be filed by any person, which date shall not be less interest which the corporation had in the property terminates, the legal
than thirty (30) days nor more than sixty (60) days after the entry of the order. interest vests in the trustees, and the beneficial interest in the stockholders,
Before such date, a copy of the order shall be published at least once a week members, creditors or other persons in interest.
for three (3) consecutive weeks in a newspaper of general circulation
published in the municipality or city where the principal office of the Upon the winding up of the corporate affairs, any asset distributable to any
corporation is situated, or if there be no such newspaper, then in a newspaper creditor or stockholder or member who is unknown or cannot be found shall
of general circulation in the Philippines, and a similar copy shall be posted for be escheated to the city or municipality where such assets are located.
three (3) consecutive weeks in three (3) public places in such municipality or
city. Except by decrease of capital stock and as otherwise allowed by this Code, no
corporation shall distribute any of its assets or property except upon lawful
Upon five (5) day's notice, given after the date on which the right to file dissolution and after payment of all its debts and liabilities.
objections as fixed in the order has expired, the Commission shall proceed to
hear the petition and try any issue made by the objections filed; and if no such February 15, 2015 (QN)
objection is sufficient, and the material allegations of the petition are true, it
shall render judgment dissolving the corporation and directing such
disposition of its assets as justice requires, and may appoint a receiver to
DISSOLUTION
collect such assets and pay the debts of the corporation. A corporation may be dissolved voluntarily or involuntarily. There are three
ways.
Sec. 120. Dissolution by shortening corporate term. - A voluntary dissolution In the case of voluntary dissolution, SEC approval is required. It will only be
may be effected by amending the articles of incorporation to shorten the effective upon approval of the SEC. The three-year period for winding up will
corporate term pursuant to the provisions of this Code. A copy of the
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be counted from the approval of the SEC. The resolution should be approved
Continuous inoperation for 5 years (Sec. 22)
by majority of the board and ratified by at least 2/3 of the stockholders.
Deadlock in close corporations (Sec. 104)
In voluntary dissolution, a tax liability must be paid. SEC and BIR signed a
Illegal, dishonest, fraudulent, oppressive acts of directors,
memorandum of agreement that the SEC will not approve voluntary officers, or those in control of close corporation prejudicial
dissolution unless the BIR has issued a tax clearance. BIR invoked that when to the corporation, or when assets are misapplied or wasted
the Monetary Board ordered the dissolution of a rural bank. But the SC said (Sec. 105)
that this memorandum is not applicable because this is involuntary dissolution. Violation of the Corp Code provisions (Sec. 144)
o Under PD 902-A (Organization and Powers of SEC)
For voluntary dissolution, you have Sections 118, 119, 120. Fraud or fraudulent schemes
Section 118when no creditors are affected Serious misrepresentation
o Majority of the Board approves a resolution for dissolution Refusal to follow SEC order (eg. cease and desist)
o 2/3 vote of outstanding capital stock is required Continuous inoperation for 5 years
o SEC will issue a certificate of dissolution Failure to file by-laws
Section 119when creditors will be affected Failure to file reports required by SEC
o Majority vote of the Board, and 2/3 vote of the stockholders or o Under other laws, like Sec Reg Code/Anti-Dummy Law
members is required Quo warranto proceeding under Rule 66, Rules of Court
o Petition for dissolution must be filed with SEC, signed by majority o Verified petition in the name of the Republic of the Philippines is
of the Board and verified brought by the SolGen against an association which acts as a
o SEC will issue an order reciting the purpose of the petition, which shall be corporation, without being lawfully incorporated, or without lawful
published once a week for 3 consecutive weeks. The order will fix authority to act
the date on or before which objections may be filed o Republic v. Security Credit and Acceptance Corp: A corporation,
o SEC will hear the petition, try any issues, and receive evidence which misused its corporate funds and franchise by engaging in
regarding creditors claims illegal banking, may be dissolved. Here, the corporations acts were
o SEC renders judgment dissolving the corporation, and directing the willful and were repeated 59,463 times, and the continuance of its
disposition of assets. A receiver may be appointed. illegal operations causes public injury. A writ of quo warranto for its
Section 120Dissolution by shortening corporate term dissolution is proper.
o Just amend the Articles of Incorporation.
o Majority of Board, 2/3 outstanding stock or members Now, the Court said that dissolution is a serious penalty. Its imposing the death
o SEC approval is required. Upon approval, the corporation shall be penalty on the corporation.
deemed dissolved, without any further proceedings (but subject to In the case of Government v. El Hogar Filipino, there were 10 different
liquidation proceedings) grounds invoked to justify dissolution. The Court said they were not
sufficiently serious. Building and loans associations, like banks, are required to
Involuntary dissolution dispose of, within 5 years, any properties they foreclosed. They disposed of
A corporation may be dissolved by SEC, after filing of a verified complaint, the properties after 6 years but they exerted their best effortsthey hired real
and proper notice and hearing, on the following grounds: estate brokers, they advertised in newspapersbut they just could not find
o Under the Corp Code buyers. They acquired this land and building. The SC held that it is not illegal,
Expiry of corporate term (Sec. 11) that they leased the space that they did not need for their office, that is not
Failure to organize and commence transaction of business illegal they are maximizing their property, that they provide a provision in the
w/in 2 years from incorporation (Sec. 22) by-laws that stockholders can be compelled to surrender their shares, to be
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bought out. Well the court said that that is void but that is not sufficient Who can take care of a dissolution? (1) Directors; (2) Legal trustee; (3) Receiver
ground to dissolve the corporation. There are three entities who can take care of a dissolution.
o In other words the court is saying that you do not dissolve a 1. the directors themselves.
corporation for every infraction, the infraction must be serious, 2. they may appoint a legal trustee. Legal title will be transferred to
because dissolution is imposing the death penalty upon the the trustee and he will be mandated to pay the creditors and then
corporation. distribute the rest of the properties to the stockholders.
When a minority stockholder files a case and asks to dissolve the corporation, 3. a receiver may be appointed.
the court said that that is a harsh remedy. Unless the situation is really beyond The rule before was that if any case is not finished within the three-year
redemption, you should not impose that remedy. period, the case will be abated whether the corporation is plaintiff or whether
it is defendant but recent jurisprudence has rendered that obsolete. That rule is
Winding up applicable if it is the directors winding up the corporation. If the corporation is
The corporation has three years after it should have been dissolved for the under receivership, it is the receiver who may wind up the affair of the
purpose of winding up its affairs. The SEC has said the three year period corporation. But if it is the trustee, that will not apply, the trust will subsist
should be counted from the time the dissolution was approved by the SEC, until the affairs of the corporation are wound up and until any creditor can sue
even if the directors and stockholders pass a resolution dissolving the the trustee provided that the applicable prescriptive period has not yet lapsed.
corporation. Such resolution is not effective without SEC approval. So if his cause of action is based on a written contract he has ten (10) years to
For three years, the corporation will continue to exist it will no longer be a sue the trustee.
going concern but only for the purpose of winding up that is why the SC has The Court has said that the remedy there if the three years will end and there
said that the corporation cannot for example renew its contract of lease are still pending cases is for the board to appoint a trustee but more recent
because it is no longer a going concern. jurisprudence has fashioned a practicable solution to that the lawyer handling
Effects of the winding up of affairs: the cases may be considered as trustee of the corporation and therefore the
o It continues as a body corporate, for the purpose of cases will not be abated but should continue. Therefore, the rule that cases
Prosecuting and defending suits against it which are still pending after the three-year winding up period are abated is no
Setting and closing its affairs longer operative.
Disposing and conveying its property In one case, the SC held that the directors may be considered as trustees after
Distributing its assets three years so that they can continue to wind up the affairs of the corporation
o Cannot continue the business for which it was established and in effect the three year period has become ineffectual.
o Can convey all its property to trustees, for the benefit of the Pepsi v. CA: If the three-year extended life has expired without a trustee or
stockholders, members, creditors, and other interested persons receiver having been expressly designated by the corporation, within that
Legal interest vests in the trustees period, the Board itself may be permitted to so continue as trustees by legal
Beneficial interest remains with the stockholders, etc. implication, to complete the corporate liquidation.
Properties to unknown stockholders, members, or creditors
are escheated Now, look at Sec. 145: Amendment or repeal. - No right or remedy in favor of or
o Distribution of corporate assets can be done only upon lawful against any corporation, its stockholders, members, directors, trustees, or
dissolution, and payment of all debts and liabilities officers, nor any liability incurred by any such corporation, stockholders,
But distribution can be done w/o dissolution in the ff cases: members, directors, trustees, or officers, shall be removed or impaired either
by the subsequent dissolution of said corporation or by any subsequent
Decrease of capital stock amendment or repeal of this Code or of any part thereof.
As otherwise provided by the Code (eg property
dividends)
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Even if the corporation has been dissolved, the dissolution will not impair its 3. The name and address of its resident agent authorized to accept
real rights. summons and process in all legal proceedings and, pending the
establishment of a local office, all notices affecting the corporation;
o For example, a corporation owns a parcel of land, and the
4. The place in the Philippines where the corporation intends to operate;
corporation is dissolved. It does not lose ownership over that parcel 5. The specific purpose or purposes which the corporation intends to
of land. The stockholders can still get it. pursue in the transaction of its business in the Philippines: Provided,
o In a case, a person sued a corporation and got favorable judgment. That said purpose or purposes are those specifically stated in the
But the litigation dragged on and when the decision became final, he certificate of authority issued by the appropriate government agency;
asked for its execution. The defendant opposed and said that the 6. The names and addresses of the present directors and officers of the
corporation;
corporation has already been dissolved so it can no longer enforce the
7. A statement of its authorized capital stock and the aggregate number
judgment. of shares which the corporation has authority to issue, itemized by
The Court said no. Under Section 145, the plaintiff classes, par value of shares, shares without par value, and series, if
retained the right to that judgment. any;
8. A statement of its outstanding capital stock and the aggregate
February 16, 2015 (AJG) number of shares which the corporation has issued, itemized by
classes, par value of shares, shares without par value, and series, if
any;
TITLE XV 9. A statement of the amount actually paid in; and
FOREIGN CORPORATIONS 10. Such additional information as may be necessary or appropriate in
[get ready for massive codal!] order to enable the Securities and Exchange Commission to
determine whether such corporation is entitled to a license to transact
Sec. 123. Definition and rights of foreign corporations. - For the purposes of business in the Philippines, and to determine and assess the fees
this Code, a foreign corporation is one formed, organized or existing under payable.
any laws other than those of the Philippines and whose laws allow Filipino
citizens and corporations to do business in its own country or state. It shall Attached to the application for license shall be a duly executed certificate
have the right to transact business in the Philippines after it shall have under oath by the authorized official or officials of the jurisdiction of its
obtained a license to transact business in this country in accordance with this incorporation, attesting to the fact that the laws of the country or state of the
Code and a certificate of authority from the appropriate government agency. applicant allow Filipino citizens and corporations to do business therein, and
that the applicant is an existing corporation in good standing. If such
Sec. 124. Application to existing foreign corporations. - Every foreign certificate is in a foreign language, a translation thereof in English under oath
corporation which on the date of the effectivity of this Code is authorized to do of the translator shall be attached thereto.
business in the Philippines under a license therefore issued to it, shall
continue to have such authority under the terms and condition of its license, The application for a license to transact business in the Philippines shall
subject to the provisions of this Code and other special laws. likewise be accompanied by a statement under oath of the president or any
other person authorized by the corporation, showing to the satisfaction of the
Sec. 125. Application for a license. - A foreign corporation applying for a Securities and Exchange Commission and other governmental agency in the
license to transact business in the Philippines shall submit to the Securities proper cases that the applicant is solvent and in sound financial condition,
and Exchange Commission a copy of its articles of incorporation and by-laws, and setting forth the assets and liabilities of the corporation as of the date not
certified in accordance with law, and their translation to an official language of exceeding one (1) year immediately prior to the filing of the application.
the Philippines, if necessary. The application shall be under oath and, unless
already stated in its articles of incorporation, shall specifically set forth the Foreign banking, financial and insurance corporations shall, in addition to the
following: above requirements, comply with the provisions of existing laws applicable to
1. The date and term of incorporation; them. In the case of all other foreign corporations, no application for license to
2. The address, including the street number, of the principal office of the transact business in the Philippines shall be accepted by the Securities and
corporation in the country or state of incorporation;
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Exchange Commission without previous authority from the appropriate Commission that the licensee has no liability to Philippine residents, including
government agency, whenever required by law. the Government of the Republic of the Philippines.
Sec. 126. Issuance of a license. - If the Securities and Exchange Commission Sec. 127. Who may be a resident agent. - A resident agent may be either an
is satisfied that the applicant has complied with all the requirements of this individual residing in the Philippines or a domestic corporation lawfully
Code and other special laws, rules and regulations, the Commission shall transacting business in the Philippines: Provided, That in the case of an
issue a license to the applicant to transact business in the Philippines for the individual, he must be of good moral character and of sound financial
purpose or purposes specified in such license. Upon issuance of the license, standing.
such foreign corporation may commence to transact business in the
Philippines and continue to do so for as long as it retains its authority to act Sec. 128. Resident agent; service of process. - The Securities and Exchange
as a corporation under the laws of the country or state of its incorporation, Commission shall require as a condition precedent to the issuance of the
unless such license is sooner surrendered, revoked, suspended or annulled in license to transact business in the Philippines by any foreign corporation that
accordance with this Code or other special laws. such corporation file with the Securities and Exchange Commission a written
power of attorney designating some person who must be a resident of the
Within sixty (60) days after the issuance of the license to transact business in Philippines, on whom any summons and other legal processes may be served
the Philippines, the license, except foreign banking or insurance corporation, in all actions or other legal proceedings against such corporation, and
shall deposit with the Securities and Exchange Commission for the benefit of consenting that service upon such resident agent shall be admitted and held
present and future creditors of the licensee in the Philippines, securities as valid as if served upon the duly authorized officers of the foreign
satisfactory to the Securities and Exchange Commission, consisting of bonds corporation at its home office. Any such foreign corporation shall likewise
or other evidence of indebtedness of the Government of the Philippines, its execute and file with the Securities and Exchange Commission an agreement
political subdivisions and instrumentalities, or of government-owned or or stipulation, executed by the proper authorities of said corporation, in form
controlled corporations and entities, shares of stock in "registered and substance as follows:
enterprises" as this term is defined in Republic Act No. 5186, shares of stock
in domestic corporations registered in the stock exchange, or shares of stock "The (name of foreign corporation) does hereby stipulate and agree, in consideration of its being
granted by the Securities and Exchange Commission a license to transact business in the
in domestic insurance companies and banks, or any combination of these Philippines, that if at any time said corporation shall cease to transact business in the Philippines, or
kinds of securities, with an actual market value of at least one hundred shall be without any resident agent in the Philippines on whom any summons or other legal
thousand (P100,000.) pesos; Provided, however, That within six (6) months processes may be served, then in any action or proceeding arising out of any business or
after each fiscal year of the licensee, the Securities and Exchange transaction which occurred in the Philippines, service of any summons or other legal process may
be made upon the Securities and Exchange Commission and that such service shall have the same
Commission shall require the licensee to deposit additional securities force and effect as if made upon the duly-authorized officers of the corporation at its home office."
equivalent in actual market value to two (2%) percent of the amount by which
the licensee's gross income for that fiscal year exceeds five million Whenever such service of summons or other process shall be made upon the
(P5,000,000.00) pesos. The Securities and Exchange Commission shall also Securities and Exchange Commission, the Commission shall, within ten (10)
require deposit of additional securities if the actual market value of the days thereafter, transmit by mail a copy of such summons or other legal
securities on deposit has decreased by at least ten (10%) percent of their process to the corporation at its home or principal office. The sending of such
actual market value at the time they were deposited. The Securities and copy by the Commission shall be necessary part of and shall complete such
Exchange Commission may at its discretion release part of the additional service. All expenses incurred by the Commission for such service shall be
securities deposited with it if the gross income of the licensee has decreased, paid in advance by the party at whose instance the service is made.
or if the actual market value of the total securities on deposit has increased, In case of a change of address of the resident agent, it shall be his or its duty
by more than ten (10%) percent of the actual market value of the securities at to immediately notify in writing the Securities and Exchange Commission of
the time they were deposited. The Securities and Exchange Commission may, the new address.
from time to time, allow the licensee to substitute other securities for those
already on deposit as long as the licensee is solvent. Such licensee shall be Sec. 129. Law applicable. - Any foreign corporation lawfully doing business in
entitled to collect the interest or dividends on the securities deposited. In the the Philippines shall be bound by all laws, rules and regulations applicable to
event the licensee ceases to do business in the Philippines, the securities domestic corporations of the same class, except such only as provide for the
deposited as aforesaid shall be returned, upon the licensee's application creation, formation, organization or dissolution of corporations or those which
therefor and upon proof to the satisfaction of the Securities and Exchange
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fix the relations, liabilities, responsibilities, or duties of stockholders, corporation may be sued or proceeded against before Philippine courts or
members, or officers of corporations to each other or to the corporation. administrative tribunals on any valid cause of action recognized under
Philippine laws.
Sec. 130. Amendments to articles of incorporation or by-laws of foreign
corporations. - Whenever the articles of incorporation or by-laws of a foreign Sec. 134. Revocation of license. - Without prejudice to other grounds provided
corporation authorized to transact business in the Philippines are amended, by special laws, the license of a foreign corporation to transact business in
such foreign corporation shall, within sixty (60) days after the amendment the Philippines may be revoked or suspended by the Securities and Exchange
becomes effective, file with the Securities and Exchange Commission, and in Commission upon any of the following grounds:
the proper cases with the appropriate government agency, a duly
authenticated copy of the articles of incorporation or by-laws, as amended, 1. Failure to file its annual report or pay any fees as required by this
indicating clearly in capital letters or by underscoring the change or changes Code;
made, duly certified by the authorized official or officials of the country or 2. Failure to appoint and maintain a resident agent in the Philippines as
state of incorporation. The filing thereof shall not of itself enlarge or alter the required by this Title;
purpose or purposes for which such corporation is authorized to transact 3. Failure, after change of its resident agent or of his address, to submit
business in the Philippines. to the Securities and Exchange Commission a statement of such
change as required by this Title;
Sec. 131. Amended license. - A foreign corporation authorized to transact 4. Failure to submit to the Securities and Exchange Commission an
business in the Philippines shall obtain an amended license in the event it authenticated copy of any amendment to its articles of incorporation
changes its corporate name, or desires to pursue in the Philippines other or or by-laws or of any articles of merger or consolidation within the time
additional purposes, by submitting an application therefor to the Securities prescribed by this Title;
and Exchange Commission, favorably endorsed by the appropriate 5. A misrepresentation of any material matter in any application, report,
government agency in the proper cases. affidavit or other document submitted by such corporation pursuant
to this Title;
Sec. 132. Merger or consolidation involving a foreign corporation licensed in 6. Failure to pay any and all taxes, imposts, assessments or penalties, if
the Philippines. - One or more foreign corporations authorized to transact any, lawfully due to the Philippine Government or any of its agencies
business in the Philippines may merge or consolidate with any domestic or political subdivisions;
corporation or corporations if such is permitted under Philippine laws and by 7. Transacting business in the Philippines outside of the purpose or
the law of its incorporation: Provided, That the requirements on merger or purposes for which such corporation is authorized under its license;
consolidation as provided in this Code are followed. 8. Transacting business in the Philippines as agent of or acting for and
in behalf of any foreign corporation or entity not duly licensed to do
Whenever a foreign corporation authorized to transact business in the business in the Philippines; or
Philippines shall be a party to a merger or consolidation in its home country or 9. Any other ground as would render it unfit to transact business in the
state as permitted by the law of its incorporation, such foreign corporation Philippines.
shall, within sixty (60) days after such merger or consolidation becomes
effective, file with the Securities and Exchange Commission, and in proper Sec. 135. Issuance of certificate of revocation. - Upon the revocation of any
cases with the appropriate government agency, a copy of the articles of such license to transact business in the Philippines, the Securities and
merger or consolidation duly authenticated by the proper official or officials of Exchange Commission shall issue a corresponding certificate of revocation,
the country or state under the laws of which merger or consolidation was furnishing a copy thereof to the appropriate government agency in the proper
effected: Provided, however, That if the absorbed corporation is the foreign cases.
corporation doing business in the Philippines, the latter shall at the same time
file a petition for withdrawal of it license in accordance with this Title. The Securities and Exchange Commission shall also mail to the corporation at
its registered office in the Philippines a notice of such revocation
Sec. 133. Doing business without a license. - No foreign corporation accompanied by a copy of the certificate of revocation.
transacting business in the Philippines without a license, or its successors or
assigns, shall be permitted to maintain or intervene in any action, suit or Sec. 136. Withdrawal of foreign corporations. - Subject to existing laws and
proceeding in any court or administrative agency of the Philippines; but such regulations, a foreign corporation licensed to transact business in the
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Philippines may be allowed to withdraw from the Philippines by filing a Because a corporation is an artificial person, it only has personality because of
petition for withdrawal of license. No certificate of withdrawal shall be issued the laws of the country where it was incorporated. So, if it wants to participate
by the Securities and Exchange Commission unless all the following
in the economic processes of another country, he has to get authorization of
requirements are met;
1. All claims which have accrued in the Philippines have been paid, that country also, by getting a license to do business.
compromised or settled; o Agilent Technologies v. Integrated Silicon: A foreign corporation
2. All taxes, imposts, assessments, and penalties, if any, lawfully due to without a license is not ipso facto incapacitated from bring an action in
the Philippine Government or any of its agencies or political Philippine courts. A license is necessary only if a foreign corporation is
subdivisions have been paid; and transacting or doing business in the Philippines.
3. The petition for withdrawal of license has been published once a week
o Mahrra-Drew Case: Mahrra Corp. is a foreign corporation
for three (3) consecutive weeks in a newspaper of general circulation
in the Philippines. organized under the laws of China. It was doing business in the
Philippines without a license. It signed a contract with Drew, a
Law defines a foreign corporation as organized existing under any laws other Filipino. Unfortunately, Drew breached the contract. After the
than those of the Philippines and whose laws allow Filipino corporations to breach, Mahrra Corp. applied for a license, which was granted.
operate in its own country. When the license was issued, Mahrra Corp. sued Drew. Drew
That element of reciprocity is the new ingredient not found in the old law. If realized that he can no longer argue that Mahrra Corp. has no
you will incorporate, you have to get a certification from the custodian in that license. Drew changed his argument, and argued that the contract
country certifying that under their laws, Filipinos and Filipino corporations between him and Mahrra Corp. was void, because when he signed,
are allowed to do business there. Mahrra Corp. had no license to do business.
o If you are an American corporation, get it from Secretary of State Held: Court said no. When the legislature drafted this law,
Government. Like, omg, like, heller, for a New York company, get they determined that denying access to the courts and
it from the Secretary of State of New York. criminal prosecution of responsible officers are enough
sanctions for violation of doing business without a license.
To avoid any confusion that might entail in the following points, here is a But, the sanctions did not include annulment of contract.
summary of the effects of w/n a foreign corporation is doing business in the Hence, the absence of the license requirement does not
Philippines, with or without a license: affect the validity of the contract. It was not defective.
o Communication Materials v. CA: A foreign corporation doing
business in the Philippines may sue in Philippine courts, although not
Doing business in the May sue and can be sued in the
authorized to do business here, against a Philippine citizen or entity
Philippines, with a license Philippines
who has contracted with and benefited by said corporation. Such
Doing business in the GR: Cannot sue, but may be sued in the
party is estopped to challenge the personality of a corporation after
Philippines, without a license Philippines
having acknowledged the same by entering into a contract with it.
o Merrill Lynch v. CA: Merrill Lynch was engaging in the
Exc: If defendants are estopped
commodities business in the Philippines without obtaining the
Communication Materials v. CA
proper license. It brought a suit in a Philippine court to enforce a
Merrill Lynch v. CA claim against local investors. The investors filed a MTD, claiming
Not doing business in the May sue and may be sued in the that Merrill Lynch has no standing to file a suit in the Philippines,
Philippines, on isolated Philippines since it has done business without the proper license.
transactions Held: Although the foreign corporation has engaged in
business in the Philippines without a license, the dismissal of
the suit would not be proper, on the ground that if the local
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investors knew that the foreign corporation had no license to do function is to protect the interests of our client, and not to think that we are
business in the Philippines, then they are estopped from using the right and the judge is wrong. Supreme Court sustained the lower court.
lack of license to avoid their obligations. Merrill Lynch PH/NY: There was a case where there was international
Now, if a corporation is not doing business, it can sue. It need not have a arbitration (still about doing business). Sycip Salazar organized a Philippine
license. corporation Merrill Lynch PH. Its primary purpose: to transmit orders
o In the Pharmaceutical case, there is an obiter dictum: If a corporation abroad. Merrill Lynch New York is a New York Corporation. If a client
which is not doing business can sue, by a parity of reasoning it should wants to engage with the stock market in New York/invest in commodities,
also be allowed to be sued. Wrong!! The courts cannot acquire he/she just places an order with Merrill Lynch PH and Merrill Lynch PH
jurisdiction over corporations not doing business in the Philippines, transmits orders to New York. There was a client who was speculating on
if a suit is filed against them. Thus, and this is the correct view: silver and ordered that the silver be unloaded. It was not promptly executed
GR: If such foreign corporation filed the case, then it by the time they implemented it, price of silver dropped. The client filed a
submitted jurisdiction to the court. But if its being sued, complaint, sued both Merrill Lynch PH and NY. Merrill Lynch PH argued:
the courts cannot acquire jurisdiction over it. we have no contract with you. Your contract is with NY. Merrill Lynch NY
Exception: Convert it to an action quasi in rem if it has said, you cannot sue us. As you can see, there is an arrangement wherein they
properties here. Attach the property and make the action make money from customers, yet escape liability. Sir argued veil of corporate
quasi in rem. fiction between these two entities should be pierced.
Another case: Where do you get meat? They tried to get samples from o Case was settled (arbitration eh, not court action), but the SEC found
Monterey, tested, and asked if the pork could be acceptable. Then, they out about this, and ordered Merrill Lynch PH to be dissolved.
received a letter that they have decided to terminate negotiations. Our client Another case: There was a case of an international arbitration between an
wrote, Please refund to us our Ten Thousand Dollars in accordance with the American company and a Philippine company. The American company won.
contract. Refused. It was the lawyer who made that decision not to refund They filed a petition to enforce the arbitral award. Defendant argued that the
(probably thinking that the Filipino company cannot sue them). We filed a plaintiff is doing business without a license and cannot therefore sue.
case, and attached a trademark (belonging to the opponent) that is registered o Held: Court said no, because we have adopted the UNCITRAL
here. Summons was published in a newspaper of general circulation, and a Model for International Arbitration. It says there that the award of
copy of the complaint was also mailed to them. When they receive the mail, an international arbitral tribunal can only be questioned on the
they did not want to lose their trademark so they had to defend themselves. grounds provided for in the Article 5 of the NY Convention on the
Court ordered them to refund 10k dollars plus interest and attorneys fees that Enforcement of International Arbitral Awards. And the fact that the
they have billed. By that time, they lost also on appeal, and when the time plaintiff is doing business without a license is not one of them,
decision became final, the amount to be paid reached 25,000 dollars. therefore, that defense cannot be invoked. Some of the grounds
If the corporation is doing business, it can be sued because our courts can mentioned under article 5 are denial of due process, the arbitral
acquire jurisdiction over it because it has presence here. But it cannot sue IF tribunal has no jurisdiction, or the award is against public policy of
there is no license. the Philippines.
Atlantic Insurance case Plaintiff alleged that it is a corporation organized in
New Jersey, and it was suing the defendant. Court issued an order asking DOING BUSINESS IN THE PHILIPPINES
counsel for plaintiff to amend the complaint and specify whether the plaintiff Requisites:
was not doing business, or was doing business without a license. It must show 1. There must be habituality
that they have legal capacity to sue. They refused to comply (probably 2. The activity must be in pursuit of the primary purpose for which the
thinking that they are right and the judge is wrong). Court invoked Rule 17 corporation was established
failure to comply with court order dismissed the case. Note that our primary 3. The act must not be consummated abroad.
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First requisite: Habituality o Old transcript: In the case of Columbia Pictures vs. CA, Columbia
o Isolated transaction is not doing business. Pictures filed a case because its films were being pirated here and it
For example, a vessel was chartered considered single was argued that it was doing business without a license. The SC said
isolated transaction. no, because the contracts are consummated abroad.
There was a case of trump vessel, no regular o In the Avon Plc case, the Court said that a foreign insurance
schedule. It dropped by here once in 1963 and in company which accepted reinsurance is not doing business here
1964. It is also considered isolated transaction. because the contract is executed abroad.
There was a Hong Kong bank, loaned money to
somebody here, and the borrower did not pay.
Hence, it sued considered isolated transaction. TITLE XVI
o However, even if the transaction may be considered to be isolated, if MISCELLANEOUS PROVISIONS
it is indicative of an intention to do business here, then it will be
regarded as doing business here.
Sec. 137. Outstanding capital stock defined. - The term "outstanding capital
Nankai Kogyo Case: A Japanese corporation negotiated stock", as used in this Code, means the total shares of stock issued under
with a Philippine corporation, and then it leased office binding subscription agreements to subscribers or stockholders, whether or
spaces in Luneta Hotel. The court said, while that contract not fully or partially paid, except treasury shares.
of lease is an isolated transaction, it is a long term lease, so it is
indicative of an intention to establish presence here. Hence, Sec. 138. Designation of governing boards. - The provisions of specific
provisions of this Code to the contrary notwithstanding, non-stock or special
it was considered doing business and the Japanese
corporations may, through their articles of incorporation or their by-laws,
corporation can be sued. designate their governing boards by any name other than as board of trustees.
Secondly, the activity must be in pursuit of primary purpose for which the
corporation was established. Sec. 139. Incorporation and other fees. - The Securities and Exchange
o Cook in a vessel case: MV Quito is a foreign vessel, owned by Nitura Commission is hereby authorized to collect and receive fees as authorized by
Corp., a foreign corporation from Ecuador. MV Quito dropped by in law or by rules and regulations promulgated by the Commission.
Manila, and it hired Sheena to be a cook. In those days, if an
Sec. 140. Stock ownership in certain corporations. - Pursuant to the duties
employee got sick, or was injured in the course of work, the specified by Article XIV of the Constitution, the National Economic and
employer is liable for workmens compensation. And, the question is: Development Authority shall, from time to time, make a determination of
was Nitura Corp. considered doing business? whether the corporate vehicle has been used by any corporation or by
Held: No, it is a common carrier. So, what is its primary business or industry to frustrate the provisions thereof or of applicable laws,
purpose? To transport passengers and cargoes. The contract and shall submit to the Batasang Pambansa, whenever deemed necessary, a
report of its findings, including recommendations for their prevention or
with Sheena did not involve transportation of passengers,
correction.
but hiring a cook. Hence, the corporation is considered not
doing business. Maximum limits may be set by the Batasang Pambansa for stockholdings in
Lastly, the act must not be consummated abroad. corporations declared by it to be vested with a public interest pursuant to the
o Example: A field producer can sue here because it is not performing provisions of this section, belonging to individuals or groups of individuals
the acts here. Likewise, a foreign reinsurance company is not related to each other by consanguinity or affinity or by close business
interests, or whenever it is necessary to achieve national objectives, prevent
performing the acts here
illegal monopolies or combinations in restraint or trade, or to implement
Both considered not doing business in the Philippines. national economic policies declared in laws, rules and regulations designed to
promote the general welfare and foster economic development.
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In recommending to the Batasang Pambansa corporations, business or That nothing in this section shall be construed to repeal the other causes for
industries to be declared vested with a public interest and in formulating dissolution of a corporation provided in this Code.
proposals for limitations on stock ownership, the National Economic and
Development Authority shall consider the type and nature of the industry, the Sec. 145. Amendment or repeal. - No right or remedy in favor of or against any
size of the enterprise, the economies of scale, the geographic location, the corporation, its stockholders, members, directors, trustees, or officers, nor
extent of Filipino ownership, the labor intensity of the activity, the export any liability incurred by any such corporation, stockholders, members,
potential, as well as other factors which are germane to the realization and directors, trustees, or officers, shall be removed or impaired either by the
promotion of business and industry. subsequent dissolution of said corporation or by any subsequent amendment
or repeal of this Code or of any part thereof.
Sec. 141. Annual report or corporations. - Every corporation, domestic or
foreign, lawfully doing business in the Philippines shall submit to the Sec. 146. Repealing clause. - Except as expressly provided by this Code, all
Securities and Exchange Commission an annual report of its operations, laws or parts thereof inconsistent with any provision of this Code shall be
together with a financial statement of its assets and liabilities, certified by any deemed repealed.
independent certified public accountant in appropriate cases, covering the
preceding fiscal year and such other requirements as the Securities and Sec. 147. Separability of provisions. - Should any provision of this Code or any
Exchange Commission may require. Such report shall be submitted within part thereof be declared invalid or unconstitutional, the other provisions, so
such period as may be prescribed by the Securities and Exchange far as they are separable, shall remain in force.
Commission.
Sec. 148. Applicability to existing corporations. - All corporations lawfully
Sec. 142. Confidential nature of examination results. - All interrogatories existing and doing business in the Philippines on the date of the effectivity of
propounded by the Securities and Exchange Commission and the answers this Code and heretofore authorized, licensed or registered by the Securities
thereto, as well as the results of any examination made by the Commission or and Exchange Commission, shall be deemed to have been authorized,
by any other official authorized by law to make an examination of the licensed or registered under the provisions of this Code, subject to the terms
operations, books and records of any corporation, shall be kept strictly and conditions of its license, and shall be governed by the provisions hereof:
confidential, except insofar as the law may require the same to be made public Provided, That if any such corporation is affected by the new requirements of
or where such interrogatories, answers or results are necessary to be this Code, said corporation shall, unless otherwise herein provided, be given a
presented as evidence before any court. period of not more than two (2) years from the effectivity of this Code within
which to comply with the same.
Sec. 143. Rule-making power of the Securities and Exchange Commission. -
The Securities and Exchange Commission shall have the power and authority Sec. 149. Effectivity. - This Code shall take effect immediately upon its
to implement the provisions of this Code, and to promulgate rules and approval.
regulations reasonably necessary to enable it to perform its duties hereunder,
particularly in the prevention of fraud and abuses on the part of the controlling
stockholders, members, directors, trustees or officers.
YEY! DONE WITH CORP! J end
Sec. 144. Violations of the Code. - Violations of any of the provisions of this
Code or its amendments not otherwise specifically penalized therein shall be
punished by a fine of not less than one thousand (P1,000.00) pesos but not
more than ten thousand (P10,000.00) pesos or by imprisonment for not less
than thirty (30) days but not more than five (5) years, or both, in the discretion
of the court. If the violation is committed by a corporation, the same may, after
notice and hearing, be dissolved in appropriate proceedings before the
Securities and Exchange Commission: Provided, That such dissolution shall
not preclude the institution of appropriate action against the director, trustee
or officer of the corporation responsible for said violation: Provided, further,
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FOREIGN INVESTMENTS ACT
trustee is a Philippine national and at least sixty (60%) of the fund will accrue
to the benefit of the 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 (60%) of the
Atty. Jack did not include this for his exams. But its part of the bar L capital stocks outstanding and entitled to vote of both corporations must be
owned and held by citizens of the Philippines and at least sixty percent (60%)
REPUBLIC ACT NO. 7042 of the members of the Board of Directors of both corporations must be citizens
FOREIGN INVESTMENTS ACT. of the Philippines, in order that the corporations shall be considered a
Philippine national;
AN ACT TO PROMOTE FOREIGN INVESTMENTS, PRESCRIBE THE PROCEDURES FOR
REGISTERING ENTERPRISES DOING BUSINESS IN THE PHILIPPINES, AND FOR OTHER b) The term "investment" shall mean equity participation in any enterprise
PURPOSES organized or existing under the laws of the Philippines;
Be it enacted by the Senate and House of Representatives of the Philippines in c) The term "foreign investment" shall mean as equity investment made by a
Congress assembled:: 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
Section 1. Title. - This Act shall be known as the, "Foreign Investments Act of 1991".
foreign exchange;
Section 2. Declaration of Policy. - It is the policy of the State to attract, promote and
d) The praise "doing business" shall include soliciting orders, service
welcome productive investments from foreign individuals, partnerships, corporations,
contracts, opening offices, whether called "liaison" offices or branches;
and governments, including their political subdivisions, in activities which significantly
appointing representatives or distributors domiciled in the Philippines or who
contribute to national industrialization and socioeconomic development to the extent
in any calendar year stay in the country for a period or periods totalling one
that foreign investment is allowed in such activity by the Constitution and relevant laws.
hundred eighty (180) days or more; participating in the management,
Foreign investments shall be encouraged in enterprises that significantly expand
supervision or control of any domestic business, firm, entity or corporation in
livelihood and employment opportunities for Filipinos; enhance economic value of farm
the Philippines; and any other act or acts that imply a continuity of commercial
products; promote the welfare of Filipino consumers; expand the scope, quality and
dealings or arrangements, and contemplate to that extent the performance of
volume of exports and their access to foreign markets; and/or transfer relevant
acts or works, or the exercise of some of the functions normally incident to,
technologies in agriculture, industry and support services. Foreign investments shall be
and in progressive prosecution of, commercial gain or of the purpose and
welcome as a supplement to Filipino capital and technology in those enterprises serving
object of the business organization: Provided, however, That the phrase
mainly the domestic market.
"doing business: shall not be deemed to include mere investment as a
shareholder by a foreign entity in domestic corporations duly registered to do
As a general rule, there are no restrictions on extent of foreign ownership of export business, and/or the exercise of rights as such investor; nor having a nominee
enterprises. In domestic market enterprises, foreigners can invest as much as one director or officer to represent its interests in such corporation; nor appointing
hundred percent (100%) equity except in areas included in the negative list. Foreign a representative or distributor domiciled in the Philippines which transacts
owned firms catering mainly to the domestic market shall be encouraged to undertake business in its own name and for its own account;
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
e) The term "export enterprise" shall mean an enterprise which produces goods for
technology to Filipinos, generating more employment for the economy and enhancing
sale, or renders services to the domestic market entirely or if exporting a portion of its
skills of Filipino workers.
output fails to consistently export at least sixty percent (60%) thereof; and [THIS
PART OF THE CODAL IS WRONG!! SEE CORRECT DEFINITION BELOW]
Section 3. Definitions. - As used in this Act:
g) The term "Foreign Investments Negative List" or "Negative List" shall mean
a) The term "Philippine national" shall mean a citizen of the Philippines or a a list of areas of economic activity whose foreign ownership is limited to a
domestic partnership or association wholly owned by citizens of the maximum of forty ownership is limited to a maximum of forty percent (40%) of
Philippines; or a corporation organized under the laws of the Philippines of the equity capital of the enterprise engaged therein.
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 trustee of funds
for pension or other employee retirement or separation benefits, where the
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Section 4. Scope. - This Act shall not apply to banking and other financial institutions A domestic market enterprise may change its status to export enterprise if over a three
which are governed and regulated by the General Banking Act and other laws under the (3) year period it consistently exports in each year thereof sixty per cent (60%) or more
supervision of the Central Bank. of its output.
Section 5. Registration of Investments of Non-Philippine Nationals. - Without need of Section 8. List of Investment Areas Reserved to Philippine Nationals (Foreign
prior approval, a non-Philippine national, as that term is defined in Section 3 a), and not Investment Negative List). - The Foreign Investment Negative List shall have three (3)
otherwise disqualified by law may upon registration with the Securities and Exchange component lists: A, B, and C:
Commission (SEC), or with the Bureau of Trade Regulation and Consumer Protection
(BTRCP) of the Department of Trade and Industry in the case of single proprietorships,
a) List A shall enumerate the areas of activities reserved to Philippine nationals
do business as defined in Section 3 (d) of this Act or invest in a domestic enterprise up
by mandate of the Constitution and specific laws.
to one hundred percent (100%) of its capital, unless participation of non-Philippine
nationals in the enterprise is prohibited or limited to a smaller percentage by existing
law and/or limited to a smaller percentage by existing law and/or under the provisions of b) List B shall contain the areas of activities and enterprises pursuant to law:
this Act. The SEC or BTRCP, as the case may be, shall not impose any limitations on the
extent of foreign ownership in an enterprise additional to those provided in this Act:
Provided, however, That any enterprise seeking to avail of incentives under the 1) Which are defense-related activities, requiring prior clearance and
authorization from Department of National Defense (DND) to engage
Omnibus Investment Code of 1987 must apply for registration with the Board of
in such activity, such as the manufacture, repair, storage and/or
Investments (BOI), which shall process such application for registration in accordance
with the criteria for evaluation prescribed in said Code: Provided, finally, That a non- distribution of firearms, ammunition, lethal weapons, military
ordnance, explosives, pyrotechnics and similar materials; unless
Philippine national intending to engage in the same line of business as an existing joint
such manufacturing or repair activity is specifically authorized, with a
venture in his application for registration with SEC. During the transitory period as
provided in Section 15 hereof, SEC shall disallow registration of the applying non- substantial export component, to a non-Philippine national by the
Secretary of National Defense; or
Philippine national if the existing joint venture enterprise, particularly the Filipino
partners therein, can reasonably prove they are capable to make the investment needed
for they are competing applicant. Upon effectivity of this Act, SEC shall effect 2) Which have implications on public health and morals, such as the
registration of any enterprise applying under this Act within fifteen (15) days upon manufacture and distribution of dangerous drugs; all forms of
submission of completed requirements. gambling; nightclubs, bars, beerhouses, dance halls; sauna and
steambath houses and massage clinics.
Section 6. Foreign Investments in Export Enterprises. - Foreign investment in export
enterprises whose products and services do not fall within Lists A and B of the Foreign Small and medium-sized domestic market enterprises with paid-in
Investment Negative List provided under Section 8 hereof is allowed up to one hundred equity capital less than the equivalent of five hundred thousand US
percent (100%) ownership. dollars (US$500,000) are reserved to Philippine nationals, unless they
involve advanced technology as determined by the Department of
Export enterprises which are non-Philippine nationals shall register with BOI and submit Science and Technology. Export enterprises which utilize raw
materials from depleting natural resources, with paid-in equity capital
the reports that may be required to ensure continuing compliance of the export
of less than the equivalent of five hundred thousand US dollars
enterprise with its export requirement. BOI shall advise SEC or BTRCP, as the case may
be, of any export enterprise that fails to meet the export ratio requirement. The SEC or (US$500,000) are likewise reserved to Philippine nationals.
BTRCP shall thereupon order the non-complying export enterprise to reduce its sales to
the domestic market to not more than forty percent (40%) of its total production; failure Amendments to List B may be made upon recommendation of the Secretary of
to comply with such SEC or BTRCP order, without justifiable reason, shall subject the National Defense, or the Secretary of Health, or the Secretary of Education,
enterprise to cancellation of SEC or BTRCP registration, and/or the penalties provided in Culture and Sports, indorsed by the NEDA, or upon recommendation motu
Section 14 hereof. propio of NEDA, approved by the President, and promulgated by Presidential
Proclamation.
Section 7. Foreign Investments in Domestic Market Enterprises. - Non-Philippine
nationals may own up to one hundred percent (100%) of domestic market enterprises c) List C shall contain the areas of investment in which existing enterprises
unless foreign ownership therein is prohibited or limited by existing law or the Foreign already serve adequately the needs of the economy and the consumer and do
Investment Negative List under Section 8 hereof. not require further foreign investments, as determined by NEDA applying the
criteria provided in Section 9 of this Act, approved by the President and
promulgated in a Presidential Proclamation.
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The Transitory Foreign Investment Negative List established in Sec. 15 hereof development of the economy. The list shall specify, as a matter of policy and not as a
shall be replaced at the end of the transitory period by the first Regular legal requirement, the desired equity participation by Government and/or private Filipino
Negative List to the formulated and recommended by the NEDA, following the investors in each strategic industry. Said list of strategic industries, as well as the
process and criteria provided in Section 8 and 9 of this Act. The first Regular corresponding desired equity participation of government and/or private Filipino
Negative List shall be published not later than sixty (60) days before the end of investors, may be amended by NEDA to reflect changes in economic needs and policy
the transitory period provided in said section, and shall become immediately directions of Government. The amended list of strategic industries shall be published
effective at the end of the transitory period. Subsequent Foreign Investment concurrently with publication of the Foreign Investment Negative List.
Negative Lists shall become effective fifteen (15) days after publication in two
(2) newspapers of general circulation in the Philippines: Provided, however,
The term "strategic industries" shall mean industries that are characterized by all of the
That each Foreign Investment Negative List shall be prospective in operation
following:
and shall in no way affect foreign investments existing on the date of its
publication.
a) Crucial to the accelerated industrialization of the country,
b) Require massive capital investments to achieve economies of scale for
Amendments to List B and C after promulgation and publication of the first
efficient operations;
Regular Foreign Investment Negative List at the end of the transitory period
c) Require highly specialized or advanced technology which necessitates
shall not be made more often than once every two (2) years.
technology transfer and proven production techniques in operations;
d) Characterized by strong backward and forward linkages with most industries
Section 9. Determination of Areas of Investment for Inclusion in List C of the Foreign existing in the country, and
Investment Negative List. - Upon petition by a Philippine national engage therein, an e) Generate substantial foreign exchange savings through import substitution
area of investment may be recommended by NEDA for inclusion in List C of the Foreign and collateral foreign exchange earnings through export of part of the output
Investment Negative List upon determining that it complies with all the following criteria: that will result with the establishment, expansion or development of the
industry.
a) The industry is controlled by firms owned at least sixty percent (60%) by
Filipinos; Section 11. Compliance with Environmental Standards. - All industrial enterprises
b) Industry capacity is ample to meet domestic demand; regardless of nationality of ownership shall comply with existing rules and regulations
c) Sufficient competition exists within the industry; to protect and conserve the environment and meet applicable environmental standards.
d) Industry products comply with Philippine standards of health and safety or, in
the absence of such, with international standards, and are reasonably
Section 12. Consistent Government Action. - No agency, instrumentality or political
competitive in quality with similar products in the same price range imported
subdivision of the Government shall take any action on conflict with or which will nullify
into the country;
the provisions of this Act, or any certificate or authority granted hereunder.
e) Quantitative restrictions are not applied on imports of directly competing
products;
f) The leading firms of the industry substantially comply with environmental Section 13. Implementing Rules and Regulations. - NEDA, in consultation with BOI, SEC
standards; and and other government agencies concerned, shall issue the rules and regulations to
g) The prices of industry products are reasonable. implement this Act within one hundred and twenty (120) days after its effectivity. A copy
of such rules and regulations shall be furnished the Congress of the Republic of the
Philippines.
The petition shall be subjected to a public hearing at which affected parties will have the
opportunity to show whether the petitioner industry adequately serves the economy and
the consumer, in general, and meets the above stated criteria in particular. NEDA may Section 14. Administrative Sanctions. - A person who violates any provision of this Act
delegate evaluation of the petition and conduct of the public hearing to any government or of the terms and conditions of registration or of the rules and regulations issued
agency having cognizance of the petitioner industry. The delegated agency shall make pursuant thereto, or aids or abets in any manner any violation shall be subject to a fine
its evaluation report and recommendations to NEDA which retains the right and sole not exceeding One hundred thousand pesos (P100,000).
responsibility to determine whether to recommend to the President to promulgate the
area of investment in List C of the Negative List. An industry or area of investment
If the offense is committed by a juridical entity, it shall be subject to a fine in an amount
included in List C of the Negative List by Presidential Proclamation shall remain in the
said List C for two (2) years, without prejudice to re-inclusion upon new petition, and not exceeding of 1% of total paid-in capital but not more than Five million pesos
(P5,000,000). The president and/or officials responsible therefor shall also be subject to
due process.
a fine not exceeding Two hundred thousand pesos (P200,000).
Section 10. Strategic Industries. - Within eighteen (18) months after the effectivity of this
Act, the NEDA Board shall formulate and publish a list of industries strategic to the
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In addition to the foregoing, any person, firm or juridical entity involved shall be subject Negative List will require determination by NEDA after due public hearings that such
to forfeiture of all benefits granted under this Act. inclusion is warranted under the criteria set forth in Section 8 and 9 hereof.
SEC shall have the power to impose administrative sanctions as provided herein for any Section 16. Repealing Clause. - Articles forty-four (44) to fifty-six (56) of Book II of
violation of this Act or its implementing rules and regulations. Executive Order No. 226 are hereby repealed.
Section 15. Transitory Provisions. - Prior to effectivity of the implementing rules and All other laws or parts of laws inconsistent with the provisions of this Act are hereby
regulations of this Act, the provisions of Book II of Executive Order 226 and its repealed or modified accordingly.
implementing rules and regulations shall remain in force.
Section 17. Separability. - If any part or section of this Act is declared unconstitutional
During the initial transitory period of thirty-six (36) months after issuance of the Rules for any reason whatsoever, such declaration shall not in any way affect the other parts
and Regulations to implement this Act, the Transitory Foreign Investment Negative List or sections of this Act.
shall consist of the following:
Section 18. Effectivity. - This Act shall take effect fifteen (15) days after approval and
A. List A: publication in two (2) newspaper of general circulation in the Philippines.
1. All areas of investment in which foreign ownership is limited by mandate of Constitution and specific
laws.
B. List B: BAR SYLLABUS OUTLINE
1. Manufacture, repair, storage and/or distribution of firearms, ammunitions, lethal weapons, military
ordinance, explosives, pyrotechnics and similar materials required by law to be licensed by and under the
continuing regulation of the Department of National Defense; unless such manufacturing or repair activity is Policy of the Law
specifically authorized with a substantial export component, to a non-Philippine national by the Secretary of
National Defense; to attract, promote and welcome productive investments from foreign
2. Manufacture and distribution of dangerous drugs; all forms of gambling; nightclubs, bars, beerhouses, individuals, partnerships, corporations, and governments, including their
dance halls; sauna and steam bathhouses, massage clinic and other like activities regulated by law
because of risks they may pose to public health and morals; political subdivisions, in activities which significantly contribute to national
3. Small and medium-size domestic market enterprises with paid-in equity capital or less than the industrialization and socioeconomic development to the extent that foreign
equivalent of US$500,000, unless they involve advanced technology as determined by the Department of
Science and Technology, and investment is allowed in such activity by the Constitution and relevant laws
4. Export enterprises which utilize raw materials from depleting natural resources, and with paid-in equity In short, just jj this shit.
capital of less than the equivalent US$500,000.
C. List C:
1. Import and wholesale activities not integrated with production or manufacture of goods; Definition of terms
2. Services requiring a license or specific authorization, and subject to continuing regulations by national
government agencies other than BOI and SEC which at the time of effectivity of this Act are restricted to Foreign investment: equity investment made by a non-Philippine national in
Philippine nationals by existing administrative regulations and practice of the regulatory agencies
concerned: Provided, That after effectivity of this Act, no other services shall be additionally subjected to
the form of foreign exchange and/or other assets actually transferred to the
such restrictions on nationality of ownership by the corresponding regulatory agencies, and such Philippines and duly registered with the Central Bank which shall assess and
restrictions once removed shall not be reimposed; and appraise the value of such assets other than foreign exchange;
3. Enterprises owned in the majority by a foreign licensor and/or its affiliates for the assembly, processing
or manufacture of goods for the domestic market which are being produced by a Philippine national as of Doing business in the Philippines: includes the following acts:
the date of effectivity of this Act under a technology, know-how and/or brand name license from such
licensor during the term of the license agreement: Provided, That, the license is duly registered with the
o Soliciting orders, service contracts, opening offices (whether liaison
Central Bank and/or the Technology Transfer Board and is operatively in force as of the date of effectivity of offices or branches)
this Act.
o Appointing representatives or distributors operating under full
control of foreign corporation, who
NEDA shall make the enumeration as appropriate of the areas of the investment covered
in this Transitory Foreign Investment Negative List and publish the Negative List in full
Are domiciled in the Philippines, or
at the same time as, or prior to, the publication of the rules and regulations to implement In any calendar year, stays in the country for a period or
this Act. periods totalling 180 days or more
o Participating in management, supervision or control of any domestic
The areas of investment contained in List C above shall be reserved to Philippine business, firm, entity, or corporation in the Philippines
nationals only during the transitory period. The inclusion of any of them in the regular
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o Any other acts that imply a continuity of commercial dealings or Export Enterprise:
arrangements, and contemplate to that extent the performance of o As a general rule, there are no restrictions on the extent of foreign
acts or works, or the exercise of some functions normally incident to ownership (up to 100%) in export enterprises, unless the products fall
and in progressive prosecution of commercial gain or of the object or within the Negative Lists, or utilize raw materials from depleting
purpose of the business organization natural resources.
Export Enterprise: A manufacturing, processing, or service (including
tourism) enterprise, which exports 60% or more of its output, or a trader Foreign Investment Negative List
which purchases products manufactured domestically, or exports 60% or more List A provides areas of activities reserved for Philippine nationals, by
of such purchases constitutional mandate or specific laws
Domestic Market Enterprise: an enterprise which produces goods for sale, List B lists down activities where foreign ownership is listed for reasons of
or renders services to the domestic market entirely or if exporting a portion of security, defense, health, morals, and protection of small and medium scale
its output fails to consistently export at least sixty percent (60%) thereof enterprises
List C shall contain the areas of investment in which existing enterprises
Registration of investments on non-Philippine nationals already serve adequately the needs of the economy and the consumer and do
Basta SEC and BTRCP registration. A SEC license for doing business in the not require further foreign investments
Philippines (under the Corporation Code) is likewise required.
Posting of bond with the SEC, in actual value of 100k pesos. Additional or ATTY. JACKS LECTURES
yearly securities may be imposed. Now, you have this Foreign Investments Act. Its primary purpose is to
No registration, no FIA benefits attract foreign investment because PH capital is inadequate.
First, it defines who are the PH nationals (see law) at least 60% of the capital
Investments of Domestic Market v. Export Enterprise stock entitled to vote owned by Filipinos, or Corp organized abroad and 100%
Domestic Market Enterprise: Filipino owned. Or trustee, at least 60% of funds must go to Filipinos.
o Foreigners can invest as much as 100% equity, except in areas o Some companies just ask a trust company to take care of their
included in the Negative Lists investments, and the trust company will not disclose who their
o If the activity is in the Negative Lists, foreign ownership in the customer is.
enterprise is limited generally to a maximum 40% (unless the Now, the law says we have 2 lists: negative list A refers to the economic
Constitution or other laws provide a lower limit) activities reserved to Fil by Consti or specific laws, like logging. Mass media,
Ownership limitation for activities in the Negative Lists can advertising, public utilities, or by specific laws, like retail trade. Outside of
be waiveed, should foreign investor decide to invest in an Negative list a and b, it is open to foreigners. Court said, you bring substantital
enterprise that exports at least 60% or more of its output. In investment, you must bring in 200k dollars as investment. In other words, if
this case, foreign ownership may reach 100% (unless Consti investment is petty leave that to Filipinos. While all other economic areas are
or other laws provide otherwise) open to foreigners, bring 200k dollars.
o A domestic market enterprise may change its status to export o Exception: if the business involves high technology or will employ at
enterprise if over a three-year period, it consistently exports in each least 50 Filipinos, then a paid-up capital of 100k dollars is sufficient.
year thereof 60% or more of its output. Then if it is an export-oriented, no minimum capitalization is
o Entry into small and medium domestic market enterprises, e.g. those required. To be export oriented, at least 60% of the income must
with paid-in equity capital of less than $100k, are restricted by come from exports. Even if not all come from exports, lets say part
Negative List B, unless a certification that the enterprise involves of the income come from providing supplies for an export-orientd
advanced technology is obtained from DOST. company here is a company selling spare parts to a company
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producing electronic components, or technology parts in US. So, if In Cargill Case, ordered molasses, seller repeatedly failed to deliver despite
adding the value fothese spare parts it supplied to these export- extensions, Cargill sued. Defendant argued NTB WITHOUT LICENSE.
oriented with its won direct saels, it would classify under that Court said you dont make from buying, you make from selling. Cargill is the
Law defines doing business soliciting orders (negotiating terms and largest family corporation that deals in commodities like grain. Everytime
conditions) opening offices, or appointing representatives or distributors who there is a wheat shortage in Russia.
stay here for at least 180 days during the year, or performs any other acts that
imply continuity of commercial dealings. Appointing representatives
operating under the full control of foreign corporation who stay here for at
least 180 days..
Case of BMW - before you want to buy BMW, you go to Hahn the
distributor. He will forward the order to BMW and evaluate if they wil
approve it. If approved, then buyer will pay in Bavaria directly, and will ship
the car directly. Hahn sued BMW, argued not doing business. Court said
Hahn not an independent distributor
Participating in the management and control of domestic business, and any
other act which implies continuity of commercial dealings, or the progressive
prosecution of commercial gains Isagani Cruz, saying that if you own shares
of stock in PH , that is doing business. This is wrong. Some companies own
NY stocks. If you apply this, nobody will buy shares of stocks in PH in NY
stock exchange. Appointing a representative in his own name (independent)
a typical distributorship agreement provides that the relationship is not
principal and agent, but buyer and seller. Hence, if you buy cars, it is up to
you to sell them at whatever price you want and you have to pay even if you
are able to resell or not, like the distributor of Jaguar here, Maserati,
Lamborghini there was an old decision in US SC, that a manufacturer would
dicate to the distributor the price, this is I nviolation of Sherman Antitrust la.
But series of Presidents appointed justices, latest ruling now says that it is not a
violation of antitrust law for a manufacturer to fix price at which distributors
can sell.
American company - sent engineers ot install the machines conducts seminar
to teach employees how to operate not doing business.
Obiter dictum: Granting a franchise, is this doing business? NO. McDonalds
hamburger, Wendys, they are not doing business just because they granted
franchsies here.
Buying from the PH does not constitute doing business. Before, Justice
Mendoza said that Mills can sue American baseball team because the team
would ask a local company to make baseball caps and jerseys. The court said
that it could be sued because it is doing business here.
SECURITIES REGULATION / NEW CENTRAL BANK ACT / GENERAL BANKING LAW / BANK SECRECY / AMLA
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SECURITIES REGULATION CODE The definition includes:
1. Debt instruments

Atty. Jack did not include this as part of his exam coverage. But its included in the bar.
2. Equity instruments
3. Investments instruments
State Policy and Purpose of the SRC Power Homes v. SEC: An investment contract is a contract,
Abacus v. Ampil: Securities transactions are impressed with public interest, and transaction, or scheme whereby a person invests his money
in a common enterprise, and is led to expect profits not
are thus subject to public regulation. In particular, the laws and regulations
solely but primarily from the efforts of others. An
requiring payment of traded shares within specified periods are meant to
investment contract that is a security under SRC must be
protect the economy from excessive stock market manipulations.
registered with SEC before its sale, or offer, to the public.
PSE v. CA: The law is designed not onluy to provide investors with adequate
4. Derivatives
information upon which to base their decisions to buy and sell securities, but
A derivative is a financial instrument whose value depends
also to protect legitimate businesses, seeking to obtain capital through honest
on the interest in or performance of an underlying security,
presentation, against competition from crooked promoters and prevent fraud
but which does not require any investment of principal in
in sales of securities.
the underlying security. It includes options and warrants.
The declared state policy is to
5. Trsut instruments
o [insert jj]
6. Other instruments as may be determined by the SEC
o Protect investors and ensure full and fair disclosure about securities
Exempt securitiessecurities which may be sold without need of
o Minimize, if not totally eliminate, insider trading and other
registration:
fraudulent or manipulative devices and practices which distort the
1. Issued or guaranteed by the Philippine Government or any political
free market
subdivision, agency, or instrumentality
Requiring, through the process of registration, issuers of
2. Issued or guaranteed by the government of any country with which
securities, to furnish the public with full and accurate
the Philippines has diplomatic relations on the basis of reciprocity
disclosure of all material facts concerning the issuer and its
3. Issued by the receiver or by the trustee in a bankruptcy duly
securities, so that the public may make a reasonable business
approved by the proper adjudicatory body
judgment whether or not to invest
4. Those involving the sale or transfer of which, by law, is under the
Limiting margin and borrowing requirements to prevent
supervision and regulation of the OIC, HLURB, or BIR
undue speculations
5. Issued by a bank, except its own shares
Punishing those who manipulate the market and from
Union Bank v. SEC: Although shares of banks are exempt
misrepresentations, manipulations, and fraudulent practices
from the registration requirements, they are not exempt
covering securities.
from complying with the reportorial requirements.
Exempt transactionssecurities sold or offered for sale in the following
Securities Required to Be Registered
transactions are exempt from the registration requirements:
General rule: The Code requires the sale or offer for sale of any security in the
[JPID-CEC-BS-XF-Q-bripio-O]
Philippines to be registered and permitted by SEC. Prior to such sale, information
1. Any judicial sale (including sales by executor, administrator,
on the securities shall be made available to each prospective purchaser.
guardian, receiver, or trustee in insolvency or bankruptcy)
o Except: exempt securities and exempt transactions
2. Those sold by a pledgee or mortgaee to liquidate a bona fide debt
Definition of securities: shares, participation, or interest in a corporation, or
(shares were pledged in good faith as security for such debt)
in a commercial enterprise, or profit-making venture, and evidenced by a
3. Those sold or offered in an isolated transaction by the owner or for
certificate, contract, instrument, whether written or electronic in character.
his account, provided:
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Such transaction is not made in the course of repeated and to be delivered
successive transactions o Prospectus is the document made by or on behalf of an issuer,
Such owner is not an underwriter underwriter, or dealer to sell or offer securities for sale to the public
4. Distribution by the corporation of stock dividends or other through a registration statement filed with SEC
distributions out of surplus 3. Information on the effect of the securities issue on ownership, on the mix of
5. Sale of capital stock of a corporation to its own stockholders ownership (esp. foreign/local ownership) must be included
exclusively, where no commission or other remuneration is paid 4. Registration Statement must be signed by the issuers executive officer,
6. The issuance of bonds secured by mortgage, where the entire principal operating officer, principal financial officer, comptroller, principal
mortgage, together with all the bonds secured thereby, are sold to a accounting officer, corporate secretary, accompanied by a duly verified Board
single purchaser in a single sale resolution
7. The issuance and delivery of any security in exchange for any other 5. The written consent of the expert named as having certified the registration
security of the same issuer, pursuant to a right of conversion statement shall be filed
8. Brokers transactions executed upon the customers orders, but not 6. Certification of stockholders who are selling shares is also required
those made upon the brokers soliciation thereof 7. Fees pay to SEC
9. Subscription of shares of the capital stock of a corporation 8. Notice and publication two newspapers, once a week for two consecutive
i. Prior to the incorporation of the corporation, or weeks; notice to interested parties shall also be furnished
ii. Pursuant to an increase in its authorized capital stock 9. Production of books SEC may compel the production of books and to
Nestle v. CA: This must be interpreted to cover examine the officers of the issuer
only issuance of shares from already authorized 10. Ruling within 45 days after the filing of the registration statement, the SEC
but still unissued capital stock shall declare the registration statement as either effective or rejected. SEC may
10. Exchange of securities where no commission or other remuneration allow the applicant to amend the registration statement
is paid o Upon the effectivity of the registration statement, the issuer shall
11. Sale of securities by an issuer to fewer than 20 persons in the state in every prospectus that the registration requirements have been
Philippines, during any 12-month period met, and all information presented by the issuer are true and correct
12. Sale of securities to qualified buyers o Untrue statements of fact or omissions to state a material fact shall
i. Bank constitute fraud
ii. Registered investment house o Grounds for rejection or revocation of registration statement:
iii. Insurance company a. Issuer has
iv. Pension fund or retirement plan, maintained by the 1. Been judicially declared insolvent
government of the Philippines 2. Violated the SRC, IRRs, or any SEC order
v. Investment company 3. Engaged, or is about to engage, in fraudulent
vi. Such other persons that SEC may determine to be a transactions
qualified buyer 4. Made false or misleading representations of
13. Other transactions that SEC may exempt material facts
5. Failed to comply with SEC requirements
Procedure for Registration of Securities b. Registration statement is, on its face, incomplete, or
1. Application File with SEC a sworn registration statement includes untrue statements of material facts, or omits to
o Registration statement already filed may be withdrawn by the issuer, state a material fact
only with the consent of SEC c. Issuer or any of its officers has been convicted of an offense
2. Prospectus Such registration statement must include any prospectus required involving moral turpitude and/or fraud, or is enjoined by
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SEC or other judicial or administrative body, for violations of any security will rise or fall because of market operations
of related laws o Making false or misleading statements regarding registered securities
d. Issuer refused to comply with the SEC order for production o Effecting a series of transactions for the purpose of pegging, fixing,
of books, administation of oaths, or examination of officers or stabilizing the price of security traded in an Exchange, unless
o SEC may suspend the offer and sale of securities pending any allowed by SEC/SRC
investigation. Any sale made during suspension is void. 2. Short Sales
o Finding of non-fraudulence: If SEC finds that the sale of the security o Basically, selling of stock that the seller does not own
is fraudulent, it shall issue an order revoking the order of suspension, o Option Trading it shall be unlawful for an Exchange member to
and such security shall be restored to its status as a registered security endorse or guarantee the performance of any put, call, or straddle, in
as of the date of the order of suspension. relation to any security registered on an Exchange
Put option or promise to sell
Prohibitions on Fraud, Manipulation, and Insider Trading Call option or promise to buy
1. Manipulation of Security Prices Straddle option to buy and sell
o Creating a false or misleading appearance of active trading in any 3. Fraudulent Transactions
listed security in an Exchange o Employing any device, scheme, or artifice to defraud
Wash shale To effect any transaction involving no change o Obtaining money or property by means of any untrue statement
in beneficial ownership o Engaging in any act, transaction or practice which operates as a fraud
Matched orders To enter orders with the knowledge that or deceit upon any person
a simultaneous order of the same size, time, and price has or SEC v. CA: Fraud, not mere negligence, must be
will be entered by different parties established
Market rigging / jiggling To perform similar acts where 4. Insider Trading
there is no change in beneficial ownership o It shall be unlawful for any insider to sell or buy a security of the
o Effecting a series of transactions to induce the sale or purchase of any issuer, if he knows a fact of special significance with respect to the
security, that raises or depresses the price, or through any of the issuer or security that is not generally available to the public, unless
following manipulative devices (CLV enumerated a lot; Quimson The information was not gained from such relationship
gave only five.) The insider proves that the fact is generally available
Marking the close buying/selling securities at the close of o If the other party to the transaction has
the market to alter the closing prices information disclosed to him by an insider
Painting the tape transactions that are reported publicly o Has reason to believe that he also has possession of
to give an impression of activity or price movement such information
Squeezing the float taking advantage of a shortage of o Presumption: A purchase or sale of security made by an insider, his
securities by controlling the demand side and exploiting spouse, or relative within the second degree, shall be presumed to
market congestions to create artificial prices have been effected while in possession of material non-public
Hype and dump engaging in buying activity at information, if transacted after such information came into existence,
increasingly higher prices and then selling the securities at but prior to public dissemination, and lapse of reasonable time for the
the higher prices market to absorb such information
Boiler room operations activities out of low-rent offices, o SEC v. Interport: Insiders include those persons whose relationship
and which use high pressure tactics involving or former relationship to the issuer gave him access to facts of special
misrepresentations of the securities being sold significance that is not generally available, or one who learns such a
o Circulating or disseminating information to the effect that the price fact from an isnder knowing that the other person is an insider
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o SEC v. Interport: Insiders have the duty to disclose material facts ownership of shares by the purchases
which are known to them by virtue of their position, but which are Purchases from increases in authorized capital stock
not known to the persons with whom they deal and which, if Purchases in connection with foreclosure proceedings
known, would affect their investment judgment. In some cases, Purchases in connection with privatization undertaken by
however, there may be valid corporate reasons for the nondisclosure the government
of the maerial information. Where such reasons exist, an issuers Purchases in connection with corporate rehabilitation under
decision not to make any public disclosures is not ordinarily court supervision
considered a violation of insider trading. Purchases through an open market at the prevailing price
o SEC v. Interport: What is required to be disclosed is a fact of special Merger or consolidation
significance, which may be o Obligations of the person making a tender offer
A material fact which would be likely, on being made Announcement of his intention in a newspaper, prior to the
generally available, to affect the market price of a security commencement of the offer
to a significant extent, or And, at least 2 days before the date of commencement of
One which a reasonable person would consider especially the tender offer
important in determining his course of action with regard o File with SEC Form 19-1
to the shares of stock o Hand deliver a copy of such form plus all exhibits
to the target company
Protection of Investors Report to SEC the results of tender offer
Tender offer publicly announced intention by a person, acting alone or in
concert with others, to acquire equity securities of a public company Proxy Solicitations
o Osmea v. SSS: Tender offer affords minority shareholders the o Proxies must be in writing, signed by the stockholder, and filed
opportunity to withdraw or exit from the company under reasonable before the scheduled meeting with the corporate secretary. The
terms, a chance to sell their shares at the same price as those of proxy shall be valid only for the meeting intended, unless otherwise
majority shareholders provided. But the proxy shall be valid and effective for no longer
o When is a tender offer mandatory? than five years at one time.
When any person intends to acquire 35% or more of equity o No broker or dealer shall give any proxy, in respect of any
shares in a public company customers security to a person other than the customer, without the
When any person intends to acquire 35% or more of equity customers express written authorization.
shares in a public company, within a period of 12 months, o A broker or dealer who holds or acquires the proxy for at least 10%
shall be required to make a tender offer to all holders of of the issuers outstanding share shall submit a report identifying the
such class for the number of shares so acquired beneficial owner, within 10 days after such acquisition, to the issuer,
If any acquisition of even less than 35% would result in exchange where traded, and SEC. end
ownership of over 51% of the total outstanding equity
securities of a public company, the acquirer shall be
required to make a tender offer for all the outstanding
equity securities to all remaining stockholders of the said
company
o Exempt from the mandatory tender offer requirement
Purchases of shares from the unissued capital stock,
provided the acquisition will not result to 50% or more
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NEW CENTRAL BANK ACT
Natural-born Filipino citizens

At least 35, but the Governor must be at least 40
The part on conservatorship/receivership/liquidation are from the PPT slides of Atty. Carmona.
Of good moral character, of unquestionable integrity, of
known probity and patriotism
The Bangko Sentral and the Monetary Board With recognized competence in social or economic
The Bangko Sentral ng Pilipinas (BSP) is the States central monetary discipline
authority, which shall function and operate as an independent and accountable o MB members are disqualified from being director, officer, employee,
body corporate in the discharge of its mandated responsibilities concerning consultant, lawyer, agent, or stockholder of any bank or quasi-bank
money, banking, and credit. Powers of the BSP
Busuego v. CA: The BSP, through its Monetary Board (MB), is granted the o BSP shall have supervision over, and conduct periodic and special
power of supervision and examination over banks and non-bank financial examinations of, banking institutions and quasi-banks, including their
institutions performing quasi-banking functions, including savings and loan subsudiaries and affiliates engaged in allied activities
associations. Subsidiary a corporation more than 50% of the voting
o Koruga v. Arcenas: The authority to determine whether a bank is stock of which is owned by a bank or quasi-bank
conducting business in an unsafe/unsound manner is also in the MB Affiliate a corporation, the voting stock of which, to the
Primary objectives of BSP: extent of 50% or less, is owned by a bank or a quasi-bank
o To maintain price stability o Refusal to be subjected to the supervision or examination by BSP, or
o To promote and maintain the monetary stability and convertibility to make reports, is criminally punishable.
of the peso o BSP cannot be enjoined by the courts from examining any institution
o To provide policy directions in money, banking, and credit, with under its supervision, unless the BSP is abritrary or in bad faith, and
supervision over banks and quasi-banks the plaintiff files a bond
MB v. Antonio-Valenzuela: Judicial review enters the
BSP has the authority to request from the government data it requires for the
picture only after the MB has taken action.
proper discharge of its functions, with the power to issue subpoena.
o MB v. Antonio-Valenzuela: BSP is allowed by law to adopt the
Roles of the BSP
close now, hear later scheme, where the sanction of closure would
o Banker of the government cash balances of the government and its
be imposed upon a bank by BSP even without notice and hearing.
subdivisions should be deposited to the BSP
This is to prevent unwarranted dissipation of the banks assets and to
o Representation with the IMF, World Bank, and other financial
protect the depositors, creditors, stockholders, and the general public
institutions represents the government in all deals with the IMF,
World Bank, etc.
Conservatorship, Receivership, and Liquidation
o Fiscal operations BSP maintains a general cash account for the
Treasurer, in which the liquid funds of the Government. Transfer of Section 29. Appointment of Conservator. - Whenever, on the basis of a report
funds are made only upon the order of the Treasurer submitted by the appropriate supervising or examining department, the
Monetary Boardthe BSP powers and functions are exercised by the MB, Monetary Board finds that a bank or a quasi-bank is in a state of continuing
composed of 7 members appointed by El Presidente, for a term of 6 years inability or unwillingness to maintain a condition of liquidity deemed adequate
o Composed of to protect the interest of depositors and creditors, the Monetary Board may
BSP Governor, as Chairman appoint a conservator with such powers as the Monetary Board shall deem
necessary to take charge of the assets, liabilities, and the management
A Cabinet member, as designated by the President thereof, reorganize the management, collect all monies and debts due said
Five members from the private sector institution, and exercise all powers necessary to restore its viability. The
o Qualifications of members of the MB conservator shall report and be responsible to the Monetary Board and shall
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have the power to overrule or revoke the actions of the previous management designate the Philippine Deposit Insurance Corporation as receiver of the
and board of directors of the bank or quasi-bank. banking institution.
The conservator should be competent and knowledgeable in bank operations For a quasi-bank, any person of recognized competence in banking or finance
and management. The conservatorship shall not exceed one (1) year. may be designed as receiver.
The conservator shall receive remuneration to be fixed by the Monetary Board The receiver shall immediately gather and take charge of all the assets and
in an amount not to exceed two-thirds (2/3) of the salary of the president of the liabilities of the institution, administer the same for the benefit of its creditors,
institution in one (1) year, payable in twelve (12) equal monthly payments: and exercise the general powers of a receiver under the Revised Rules of
Provided, That, if at any time within one-year period, the conservatorship is Court but shall not, with the exception of administrative expenditures, pay or
terminated on the ground that the institution can operate on its own, the commit any act that will involve the transfer or disposition of any asset of the
conservator shall receive the balance of the remuneration which he would institution: Provided, That the receiver may deposit or place the funds of the
have received up to the end of the year; but if the conservatorship is institution in non-speculative investments. The receiver shall determine as
terminated on other grounds, the conservator shall not be entitled to such soon as possible, but not later than ninety (90) days from take over, whether
remaining balance. The Monetary Board may appoint a conservator connected the institution may be rehabilitated or otherwise placed in such a condition so
with the Bangko Sentral, in which case he shall not be entitled to receive any that it may be permitted to resume business with safety to its depositors and
remuneration or emolument from the Bangko Sentral during the creditors and the general public: Provided, That any determination for the
conservatorship. The expenses attendant to the conservatorship shall be resumption of business of the institution shall be subject to prior approval of
borne by the bank or quasi-bank concerned. the Monetary Board.
The Monetary Board shall terminate the conservatorship when it is satisfied If the receiver determines that the institution cannot be rehabilitated or
that the institution can continue to operate on its own and the conservatorship permitted to resume business in accordance with the next preceding
is no longer necessary. The conservatorship shall likewise be terminated paragraph, the Monetary Board shall notify in writing the board of directors of
should the Monetary Board, on the basis of the report of the conservator or of its findings and direct the receiver to proceed with the liquidation of the
its own findings, determine that the continuance in business of the institution institution. The receiver shall:
would involve probable loss to its depositors or creditors, in which case the
provisions of Section 30 shall apply. (1) file ex parte with the proper regional trial court, and without
requirement of prior notice or any other action, a petition for
Section 30. Proceedings in Receivership and Liquidation. - Whenever, upon assistance in the liquidation of the institution pursuant to a liquidation
report of the head of the supervising or examining department, the Monetary plan adopted by the Philippine Deposit Insurance Corporation for
Board finds that a bank or quasi-bank: general application to all closed banks. In case of quasi-banks, the
liquidation plan shall be adopted by the Monetary Board. Upon
(a) is unable to pay its liabilities as they become due in the ordinary acquiring jurisdiction, the court shall, upon motion by the receiver
course of business: Provided, That this shall not include inability to after due notice, adjudicate disputed claims against the institution,
pay caused by extraordinary demands induced by financial panic in assist the enforcement of individual liabilities of the stockholders,
the banking community; directors and officers, and decide on other issues as may be material
(b) has insufficient realizable assets, as determined by the Bangko to implement the liquidation plan adopted. The receiver shall pay the
Sentral, to meet its liabilities; or cost of the proceedings from the assets of the institution.
(c) cannot continue in business without involving probable losses to its (2) convert the assets of the institutions to money, dispose of the same
depositors or creditors; or to creditors and other parties, for the purpose of paying the debts of
(d) has willfully violated a cease and desist order under Section 37 that such institution in accordance with the rules on concurrence and
has become final, involving acts or transactions which amount to preference of credit under the Civil Code of the Philippines and he
fraud or a dissipation of the assets of the institution; may, in the name of the institution, and with the assistance of counsel
as he may retain, institute such actions as may be necessary to
in which cases, the Monetary Board may summarily and without need for prior collect and recover accounts and assets of, or defend any action
hearing forbid the institution from doing business in the Philippines and against, the institution. The assets of an institution under receivership
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or liquidation shall be deemed in custodia legis in the hands of the Banks in distress
receiver and shall, from the moment the institution was placed under o When do we know that a bank is in distress?
such receivership or liquidation, be exempt from any order of
After examination of BSP of PDIC
garnishment, levy, attachment, or execution.
Bank declares a bank holiday or suspends the payment of
The actions of the Monetary Board taken under this section or under Section deposits continuously for thirty days
29 of this Act shall be final and executory, and may not be restrained or set o Options of BSP when a bank is in distress:
aside by the court except on petition for certiorari on the ground that the Conservatorship
action taken was in excess of jurisdiction or with such grave abuse of Receivership
discretion as to amount to lack or excess of jurisdiction. The petition for
The designation of a conservator is not a
certiorari may only be filed by the stockholders of record representing the
majority of the capital stock within ten (10) days from receipt by the board of precondition to the designation of a receiver.
directors of the institution of the order directing receivership, liquidation or
conservatorship. Conservatorship
o Ground: whenever a bank or quasi-bank is in a state of continuing
The designation of a conservator under Section 29 of this Act or the inability or unwillingness to maintain a condition of liquidity
appointment of a receiver under this section shall be vested exclusively with
the Monetary Board. Furthermore, the designation of a conservator is not a deemed adequate to protect the interest of depositors and creditors
precondition to the designation of a receiver. o Basic effect: Bank/quasi-bank operates as such, but the conservator
takes over the Board and the management
SECTION 31. Distribution of Assets. In case of liquidation of a bank or o Mandate of the conservator:
quasi-bank, after payment of the cost of proceedings, including reasonable Preserve the assets of the bank/quasi-bank
expenses and fees of the receiver to be allowed by the court, the receiver shall
Includes the authority to take charge of the assets,
pay the debts of such institution, under order of the court, in accordance with
the rules on concurrence and preference of credit as provided in the Civil collect debts, and foreclose mortgages
Code. Reorganize management
Conservator can overrule or revoke previous
SECTION 32. Disposition of Revenues and Earnings. All revenues and actions of the Board, except perfect transactions
earnings realized by the receiver in winding up the affairs and administering o Only an action filed by the majority stockholders may assail the action
the assets of any bank or quasi-bank within the purview of this Act shall be
of the MB, on the ground that the MB acted arbitrarily or in bad
used to pay the costs, fees and expenses mentioned in the preceding section,
salaries of such personnel whose employment is rendered necessary in the faith
discharge of the liquidation together with other additional expenses caused File a petition for certiorari wtihtin 10 days from receipt by
thereby. The balance of revenues and earnings, after the payment of all said the Board of the order directing conservatorship
expenses, shall form part of the assets available for payment to creditors. Applies also to orders directing receivership or liquidation
Distressed bank o Grounds to termination conservatorship:
The MB is satisfied that the bank/QB can continue to
operate on its own, and the conservatorship is no longer
necessary
Conservatorship Resumption of The MB determines that the continuance of the bank/QB
Receivership business would involve probable cause to its depositors/creditors
In which case, the bank/QB will be placed under
receivership
Rehabilitation
Liquidation
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Receivership Larrobis v. PNB: Receivership does not interrupt
o Grounds: the running of the prescriptive period for the
Illiquidity Bank/QB is unable to pay its liabilities as they collection of debts
fall due in the ordinary course of business Provident Savings Bank v. CA: However, the time
Except if due to bank runs induced by financial when the bank was prevented from enforcing its right to
panic in the banking community. collect by an order of the MB is deemed a
Insolvency Bank/QB has insufficient realizable assets to fortuitous event that interrupts prescription
meet its liabilities Overseas Bank v. CA: When a banks operations
Probable Loss to Depositors Bank/QB cannot continue in are suspended by the BSP, the bank is not liable
business without involving probable losses to depositors or for interest accrued during the period of
creditors suspension
Dissipation of Assets Bank/QB willfully violated a final o Receivership lasts for 90 days from takeover
cease-and-desist order for a violation involving fraud or o Effects of the order of receivership
dissipation of assets. Order of receivership is final and executory, and can only
Prolonged Bank Holiday Declaration of bank holiday or be assailed via certiorari.
suspension of payment of deposits for 30 days. Only the majority of the stockholders may file,
o Rural Bank of San Miguel v. MB: The receivership need not be due within 10 days from Boards receipt of the order
to the examination of the MB. The MB can merely rely on the of receivership [same rule as in conservatorship]
report furnished by the supervising or examining department (SED) Provident Savings Bank v. CA: Monetary Board will
o Rural Bank of Buhi v. MB: Prior hearing is not required. It may summarily forbid bank from doing business in the
defeat the purpose and efficacy of the receivership. It could result Philippines.
into bank runs. This means that the bank can neither accept
CB v. CA: The procedural rights of banks should not deposits nor grant loans.
override the substantive rights of its creditors. Villanueva v. CA: Bank officers cannot
o Only the MB can place the bank under receivership intermeddle with the property of the bank in any
o Who is appointed as receiver? way.
For banks: PDIC The articles of incorporation and the by-laws are
For quasi-banks: any competent person in banking/finance suspended.
o Powers of PDIC as the bank;s receiver The powers, functions and duties, as well as all allowances,
Bring suits to enforce liabilities or recoveries remunerations and perquisites of the directors, officers and
Hire experts as deputies and assistants stockholders are suspended.
Suspend or terminate officers and employees The assets of the bank are in custodia legis, and are exempt
Pay accrued, utilities, rental and salaries for 3 months from execution.
Collect or restructure loans and claims Lipana v. Development Bank of Rizal: Executions
Reduce unusually high interest rates for unpaid interest against the banks assets are stayed. One of the
Retain private counsel reasons of placing a bank under receivership is to
Borrow money and encumber asset to prevent dissipation, prevent creditors from having advantage over the
redeem foreclosed assets, or minimize losses to depositors assets of the bank.
and creditors
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o Within 90 days from take-over of the bank/QB, the receiver must and effect partial payments of the bank's obligations in
determine and recommend to the MB if accordance with legal priority, for the benefit of the bank
the bank/QB may resume business with safety to and its creditors
depositors, creditors, and the general public. o Steps in liquidation
may be rehabilitated. A. Petition for assistance in liquidation
cannot be rehabilitated or permitted to resume business The petition must be filed with the RTC, in
notify the board of the bank/QB in writing of consonance with a liquidation plan adopted by
findings PDIC
direct the receiver to proceed with liquidation. If the RTC gives due course to the petition, it
becomes the liquidation court (LC)
Rehabilitation B. Adjudication of disputed claims
o Rehabilitation contemplates a continuance of corporate life and The LC will have exclusive jurisdiction over
activities in an effort to restore and reinstate the corporation to its disputed claims against the bank.
former position of successful operation and solvency. o Manalo v. PAIC: But for claims of the
o Not all enterprises which fail in a competitive market place should bank against others, LC does not have
necessarily be liquidated. A corporation with a reasonable prospect of jurisdiction
survival should be given the opportunity to rehabilitate. Upon acquiring jurisdiction, RTC will, on
o The rehabilitation receiver shall not take over management and motion:
control of the debtor but shall only closely oversee and monitor the o adjudicate disputed claims against the
operators of the debtor during the pendency of the proceedings bank
o assist the enforcement of individual
Liquidation liabilities of the stockholders, directors
o Ground: When a bank can no longer pay its debts as they come due and officers, and
and when rehabilitation is not a feasible option o decide on other issues as may be material
o Nature of liquidation proceedings to implement the liquidation plan
Its an in rem special proceeding, akin to the settlement of adopted.
the estate of a deceased person. Disputed claims refer to all claims, whether
It is a single proceeding, but multiple appeals are allowed against the assets of the insolvent bank, for specific
o Goals of Liquidation performance, breach of contract, damages, or
Convert the assets of the institution to money and for this whatever.
purpose, with assistance of counsel, institute actions to C. Approval of project of distribution of assets
collect and recover accounts and defend any action against The project of distribution
the institution o specifies in detail all the assets available
Dispose of the proceeds to creditors, depositors, other for distribution
parties to pay for the debts and disputed claims owing them o identifies the creditors whose claims
according to the rules on concurrence and preference of were earlier allowed by the LC
credits o specifies the order of preference and
o Role of liquidator concurrence of credits under the Civil
Larrobis v. PNB: A liquidator assumes the role of the Code
receiver. His task is to dispose of all the assets of the bank
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What are the assets available for distribution?
Foreign Exchange Operations
o Includes all assets belonging to the bank In order that BSP may, at all times, have foreign exchange resources sufficient
or QB in its own right to enable it to maintain the international stability and convertibility of the
o But excludes assets held in trust, on peso, or in order to promote the domestic investment of bank resources, the
which the bank only holds legal (but not MB may require banks to sell to BSP or to other banks all or part of their surplus
beneficial) title holdings of foreign exchange.
D. Payment of claims and distribution of assets The MB may require banks to maintain a balanced position between their
All revenues and earnings realized in winding up assets and liabilities in Philippine peso, or in any other currency
the affairs and administering the assets of the Foreign currency deposits are exempt from attachment or garnishment
bank/QB shall be used o Exc: Salvacion v. Central Bank, where the exemption was
Order of payment: inapplicable due to a heinous crime committed against a Filipino
1. Administrative expenses minor
Cost, fees, and expenses of Legal tender power: All notes and coins issued by BSP are fully guaranteed
liquidation proceedings by the Republic, and shall be the legal tender in the Philippines of all the
Reasonable expenses and fees public or private debts
of the receiver o However, unless otherwise fixed by the MB, coins shall be legal
Salaries of such personnel tender
whose employment is rendered In amounts not exceeding P100, for denominations of 25
necessary in discharge of the centavos or less
liquidation, In amounts not exceeding P1000, for 1, 5, or 10-peso coins
Other additional expenses end
2. Special preferred credits (two-tiered!)

a. Taxes, duties, fees on specific
movables or immovables
b. All other special preferred
credits, pari passu and pro rata
3. Ordinary preferred credits
4. Common credits
CB v. Morfe: Depositors are
not considered preferred
creditors. A general depositor is
merely a general creditor who
does not enjoy any preference
over other general creditors.
E. Termination of liquidation proceedings
Creditors have 3 years from date of last notice to
claim payment.
After the lapse of the 3-year period, unclaimed
payments are escheated to the Republic
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GENERAL BANKING LAW No person shall engage in banking or quasi-banking functions without
authority from BSP.
o However, an entity authorized by BSP to perform universal or
Definition and Classification of Banks commercial banking functions shall likewise have the authority to
engage in quasi-banking functions.
Banks refer to entities engaged in the lending of funds obtained in the form of
deposits, and classified as follows: BSP shall have supervision over operations of and exercise regulatory powers
o Universal banks banks that have authority to exercise, in addition over banks, quasi-banks, trust entities, and other financial institutions which,
to the powers and functions of commercial banks, powers of an under special laws, are subject to BSP supervision.
investment house and the power to invest in non-allied enterprises
o Commercial banks banks that are given all such power necessary Organization of Banks
to engage in commercial banking, in addition to general corporate MB may authorize the organization of a bank or QB, subject to the following
powers conditions:
Commercial banking includes the power to accept drafts, o The entity is a stock corporation
issue letters of credit, discounting and negotiation of Only par value stocks may be issued
negotiable instruments and evidence of debt, accept and o Funds are obtained from the public (20 or more persons)
create demand deposits, and the like o Minimum capital requirements prescribed by MB for each category
o Thrift banks of banks are satisfied
Savings and mortgage banks SEC shall not register to AOI and/or by-laws of any bank, unless accompanied
Stock savings and loan associations by a certificate of authority issued by the MB
Private development banks Banks are not allowed to purchase or acquire shares of its own capital stock, or
o Rural banks created to make needed credit available and readily accept its own shares as security for a loan, except when authorized by MB
accessible in rural areas, for the purpose of promoting comprehensive o Every stock so purchased or acquired shall be, within six months,
rural development. The term includes: sold or disposed of at a public or private sale.
o Cooperative banks banks that primarily provide financial, Foreigners may own up to 40% of the voting stock of a domestic bank.
banking, and credit services to cooperative organizations and their o Non-Filipinos may become a director, to the extent of foreign equity
members participation
o Islamic banks 5 to 15 directors, 2 of whom shall be independent directs
Quasi-banks are entities engaged in borrowing of funds through issuance, o An independent director is a person other than an officer or
endorsement, or assignment with recourse or acceptance of deposit substitutes, employee of the bank, its subsidiaries, affiliates, or related interests
for purposes of re-lending or purchasing of receivables and other obligations
o Deposit substitutes are alternative forms of obtaining funds from the Bank Powers and Liabilities
public, other than deposits, through the issuance, endorsement, or Basic functions
acceptance of debt instruments for the borrowers own account, for o Deposit function
the purpose of relending or purchasing of receivables and other o Loan function
obligations. Other/incidental functions
Trust entities are those authorized by the MB to engage in trust business, o Receive in custody funds, documents, and valuable objects
administer any trust, or hold property in trust or on deposit for the use, o Act as financial agenet, and buy and sell, by order of and for the
benefit, or behalf of others. account of their customers, shares, evidences of indebtedness, and all
types of securities
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o Make collections and payments for the account of others, and GSIS v. Santiago: The due diligence required of banks extend even to persons
perform such other services for their customers, as are not or institutions regularly engaged in the business of lending money secured by
incompatible with the banking business real estate mortgage, such as the GSIS.
o Act as managing agent, adviser, consultant, or administrator of Reyes v. CA: But the same higher degree of diligence is not expected to be
investment management accounts (upon prior MB approval) exerted by banks in commercial transactions that do not involve their fiduciary
o Rent out safety deposit boxes relationship with their depositors.
CA Agro v. CA: For contracts involving safety deposit box PCI Bank v. CA: As a general rule, however, a banking corporation is liable
accounts, the contract is a special kind of deposit, and for the negligent, or even wrongful or tortuous acts and declarations of its
cannot be characterized as an ordinary contract of lease, officers or agents within the course and scope of their employment.
because the full and absolute possession and control of the Philippine Banking Corp. v. CA: A banking corporation is liable to innocent
deposit box was not given to the renters. The prevailing third persons where the representation is made in the course of its business, by
rule is that the relation between the bank renting out and a bank agent acting within the general scope of his authority, even though the
the renter is that of bailor-bailee, the bailment being for agent is secretly abusing his authorityeven though the agent is secretly abusing his
mutual hire and benefit. authority and attempting to perpetrate a fraud for his own ultimate benefit.
CA Agro v. CA: Any stipulation exempting the depositary Philippine Banking Corp. v. CA: The bank is liable for the wrongful acts of its
from any liability arising from loss of the thing deposited manager done in the interest of the bank, or in its dealings as bank
on account of fraud, negligence, or delay would be void for representative, but not for acts done outside the scope of his authority.
being contrary to law and public policy.
BPI v. Buenaventura: Unless a forgery or alteration is attributable to the fault
Prohibited functions
or negligence of the drawer himself, the remedy of the drawee bank that
o Insurance business negligently clears a forged check for payment is against the party responsible
o Outsourcing of functions for the loss; otherwise, the bank bears the loss.
PNB v. Corpuz: Banks are expected to be more cautious than ordinary
Diligence required of banks / Banks liability
individuals in dealing with lands, even registered ones, since the business of
Citibank v. Dinopol: The business of banking is impressed with public interest,
banks is imbued with public interest. If the mortgagee-bank failed to exercise
and great reliance is made on the banks sworn profession of diligence and that degree of diligence required, then it does not qualify to be a mortgagee in
meticulousness in giving irreproachable service. Banks must always act in good faith, and does not entitle it to the lien on the title to the property in
good faith and must win the confidence of clients and people in general. dispute.
BDO v. JAPRL: Since banks deal with the publics money, their viability Philippine Trust v. CA: Consequently, the rule that persons dealing with
depends largely on their ability to return those deposits on demand. registered lands can rely solely on the certificate of title does not apply to
PNB v. Pike: With banks, the degree of diligence required is more than that of banks.
a good father of a family, considering that the business of banking is imbued
with public interest. The law imposes on banks a high degree of obligation to Deposit Function
treat the accounts of its depositors with meticulous care, always having in Meaning of deposit The unpaid balance of money or its equivalent received
mind the fiduciary nature of banking. Thus, the State recognizes the fiduciary by a bank in the usual course of business, and for which it has given or is
nature of banking that requires high standards of integrity and performance. obliged to give credit to an account
PNB v. Pike: Although its employees may be the ones negligent, a banks Relationship between bank and depositor
liability as an obligor is not merely vicarious, but primary, as banks are expected o People v. Ong: All kinds of deposits, whether fixed, savings, or
to exercise the highest degree of diligence in the selection and supervision of current, are to be treated as loans, and are to be covered by the law on
their employees. loans.
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o Serrano v. Central Bank: The relationship between the bank and the Such grant must be consistent with safe and sound banking
depositor is not that of deposit, but one that is called irregular deposit, practices
which is actually a debtor-creditor relationship. o Before granting a loan, a bank must ascertain that the debtor is
o Equitable PCI v. Ng Sheung: A bank has the right to set-offs the capable of fulfilling his commitments to the bank
deposits in its hands for the payment of a depositors indebtedness. o Amortization schedule of bank loans shall be adapted to the nature of
o BPI v. Franco: The bank must record every single transaction the operations to be financed.
accurately, down to the last centavo, as promptly as possible. This For loans and other credit accommodations with maturities
has to be done if the account is to reflect at any given time the of more than five years, provisions must be made for periodic
amount of money the depositor can dispose of as he sees fit, amortization payments. But, such payments must be made
confident that the bank will deliver it as and to whomever directed. at least annually.
Types of deposits Ratio of Net Worth to Total Risk Assets
o Time deposit o The MB shall prescribe the minimum ratio which the net worth of a
The interest rate stipulated depends on a number of days bank must bear to its total risk assets, which may include contingent
During this period, the money deposited may not be accounts.
withdrawn. The bank uses this money to lend others MB may require or suspend compliance with the ratio
o Savings deposit whever necessary, for a maximum period of one year
o Demand deposits or current accounts The ratio shall be applied uniformly to all banks of the same
No interest is paid by the bank, because the depositor can category
take out his funds any time. o Effect of non-compliance with the ratio
A bank, other than a universal or commercial bank, cannot The bank may be limited or prohibited in distributing net
accept or create demand deposits, except upon prior approval profits. MB may require the bank that part of the net
of, and subject to such conditions and rules as may be profits will be used to increase the capital accounts in order
prescribed by the MB. to meet the mimimum requirement
Certificate of deposit A written acknowledgement by a bank of the receipt The bank may be restricted or prohibited in acquiring
of a sum of money on deposit, which the bank promises to pay to the major assets or in making new investments
depositor, whereby the debtor-creditor relationship is created between the In case of merger or consolidation, or when a bank is under
bank and the depositor rehabilitation, the MB may temporarily relieve the bank
Bank accounts may be garnished by the creditor of the depositor. It is the from full compliance with the ratio
account, and not the amount in the account, that can be disclosed. Single Borrowers Limit
All deposits in banks are insured with the PDIC o The total amount of loans, credit accommodations, and guarantees
Deposits that have become dormant for a period of 10 years may be escheated that may be extended by a bank to any person or entity shall at no time
in favor of the government exceed 25% of the net worth of such bank.
The basis for determining compliance with the single-
Loan function borrower limit is the total credit commitment of the bank to the
Basic rules and restrictions, according to Sundiang: borrower.
o A bank shall grant loans and other credit accommodations only in The limit may be increased an additional 10%, provided the
amounts and for the periods of time essential for the effective completion of the additional liabilities of any borrower are secured by trust
operations to be financed. receipts, shipping documents, or other documents
transferring or securing title covering readily-marketable and
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non-perishable goods, which must be fully covered by
insurance.
o Not covered by the single borrowers limit:
Secured by obligations of BSP or of the government
Fully guaranteed by the government
Covered by assignment of deposits, maintained in a lending
bank and held in the Philippines
Under letters of credit to the extent covered by margin
deposits
Those which the MB may specify as non-risk items
Restriction on Bank Exposure to DOSRI
o No director or officer of any bank shall, directly or indirectly, for
himself or as the representative or agent of another
Borrow from such bank
Become a guarantor, indorser, or surety for loans from such
bank to others
In any manner be an obligor or incur any contractual
liability to the bank
Except with written approval of the majority of all directors of
the bank, excluding the director concerned
o The account should be upon terms not less favorable to the bank than
those offered to others
Stipulations on interests
Floating interest rates where there is no reference set either by a letter of
credit or by the Bangko Sentral, leaving the determination thereof to the sole
will and control of the lender bank. Such rates are invalid.
Escalation clause The rate of an escalation clause must be the result of an
agreement between the bank and the borrower. A unilateral escalation clause,
which is left solely to the will of one of the parties, is void. end
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CONFIDENTIALITY OF the house but instead, to put them them in banks. And that applies equally
to money placements and trusts.
BANKING TRANSACTIONS
It is unlawful for any official or employee of a bank to disclose any
(BANK SECRECY)
information concerning deposits and investments in government bonds.
Date: December 4, 2014 (CG) (Section 3)
Introduction Example: Cler is a depositor of Cupin Bank. She was filling up a deposit
Republic Act No. 1405 was sponsored by a certain Congressman Ramos of Ilocos slip when Leon, another depositor, saw in Clers passbook that she has
because he said that there was a common perception that people had a lot of money 150,000 pesos in her account. Leon, being the chismoso that he is, told
stashed in the mattresses or in their beds. And we should encourage people to put them that to other people. Leon will not be held liable under RA 1405, but he
in the banks so it could be circulated. To do that, they made deposits absolutely will be liable under the Civil Code for violation of the right to privacy.
confidential. Even the mere existence of a bank account cannot be disclosed. Prohibition
includes not only bank deposits, but also investments in government banks. So if 2. Other Records
somebody bought treasury bills, the Confidentiality of Banking Transactions would
cover such transaction. The confidentiality granted by the law does not extend to other documents
and records like letters of credit, trust receipts, bank drafts and promissory
I. Law on Secrecy of Bank Deposits (Republic Act No. 1405, as amended) notes; (Opinion of the Secretary of Justice No. 5, Series of 1982; Opinion of
the Secretary of Justice No. 126, Series of 1989.)
A. Scope
B. Exceptions
1. Deposits and investments in Government Bonds
1. The depositor has given his written consent.
The following are absolutely confidential and may not be examined, inquired
or looked into by anyone: a. For loans secured by holdouts or assignments of certificates of time
a. Deposits deposits, the loan documents should include a waiver by the borrower of
b. Investments in bonds issued by the government, its political his rights under existing laws to the confidentiality of his deposits.
subdivisions and instrumentalities (Section 2) (Section 315, Manual of Regulations for Banks)
c. Trust accounts are included in the scope of the law, because they are also
funds which the law seeks to protect to discourage private hoarding so b. Any director, officer or stockholder who, together with his related
that they can be invested by banks and the law includes deposits of interest, contracts a loan or any form of financial accommodation from (1)
whatever nature (Ejercito v. Sandiganbayan, 509 SCRA 590) his bank or (2) from a bank (a) which is a subsidiary of a bank holding
company by which both his bank and the lending bank are subsidiaries or
Ejercito v. Sandiganbayan (b) in which a controlling proportion of the shares is owned by the same
He had trust funds in Citibank. Is this law applicable? Held: Justice interest that owns a controlling proportion of the shares of his bank, in
Carpio-Morales said YES because it applies to deposits of of whatever excess of 5% of the capital and surplus of the bank, or in the maximum
nature. The phrase of whatever nature implies that the law is not amount permitted by law, whichever is lower, shall be required by the
limited to traditional deposits savings deposit, time deposit, or current lending bank to waive the secrecy of bank deposits in the banks in the
account. She also said that we should interpret this in the light of the Philippines (Section 26, Republic Act No. 7653).
purpose of the law to encourage the people not to keep the money in
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2. The examination is made in connection with an impeachment case. iii. Doctrine: In a special proceeding to settle the estate of deceased
depositor, his bank deposits may be inquired into, since his bank deposits
3. There is an order from a competent court in cases of bribery or are the subject matter of the case, be all his assets are supposed to be
dereliction of duty of public officials. collated. (Sy v. Judge, RTC of Iloilo City; Reyes v. Mercado)
4. Bank accounts may be inquired into a criminal prosecution for plunder, Improper cases:
because all the underlying criminal acts are similar to bribery. (Ejercito v.
Sandiganbayan, 509 SCRA 190). i. Sunlife bought Treasury Bills (T-bills) and it paid the seller with a check.
The seller did not deliver the T-bills, so it filed an action for specific
5. The money deposited or invested is the subject matter of the litigation. performance. The lawyer filed a motion asking that the bank account, in
which the check was drawn, be subpoenaed. Court said no because the
Proper Cases bank account is not the subject matter of the case. You are suing for
specific performance for the treasury bills, that is the subject matter, and
i. Spouses Melchor used to receive financial assistance every now and then not the bank account.
from the sister of the wife. The sister-in-law, every now and then, would
send 1,000 to 2,000 USD. But by mistake, 1M dollars was transmitted. Doctrine: The examination of the bank account to which the money
The Melchor spouses called a lawyer, Poblador Jr. The lawyer advised paid by an insurance company for T-bills it purchased was deposited is
them to keep the money. Atty. Poblador Jr. owned a parcel of land in improper, even if the insurance company sued the seller of the T-bills for
Mohammed Desert. He said to the spouses, well make a deed of sale that failure to deliver the T-bills, because the money it paid is not the subject matter
youre buying a lot there. So the spouses withdrew all the money in the of litigation. (Onate v. Abrogar)
bank. Some were placed in money market placements. It was difficult to
trace the money. Then when we asked that the accounts be subpoenaed, ii. There was a case where a depositor of Union Bank deposited a check. It
they invoked secrecy of bank deposits. Court said that the money is the was drawn against Metropolitan Bank. They brought the check to the
subject matter of litigation therefore it can be looked into. clearinghouse, but they made a mistake in the cover letter, that the
amount declared was less than the amount on the face of the check. So the
Doctrine: In an action filed by a bank to recover money it transmitted by computer credited Union Bank with the lesser amount. Union Bank now
mistake, the records of the bank accounts in which the proceeds of the sued to collect the difference. And it now asked that the account of the
money were deposited may be required to be produced. This is so since drawer of the check be subpoenaed. The court said that is not the subject
the money deposited is the subject matter of the litigation, even if the matter of the case. You cannot have that subpoenaed.
money was deposited in the names of persons other than the recipient of
the payment by mistake. (Mellon Bank, N.A. v. Magsino) Doctrine: A collecting bank which sued the drawee bank to recover the
deficiency for the payment of a check for failure of the drawee bank to
ii. In the case of Jinggoy Estrada, the court also said that the money in notify the collecting bank that the collecting bank had erroneously
Citibank falls also under this exception (subject matter of litigation). undercoded the amount of the check it presented for clearing is not
entitled to examine the account of the drawer of the check, because the
Doctrine: Since a criminal case for plunder against a former public official money in the account of the drawer is not the subject matter of the case.
necessarily involves an inquiry into the whereabouts of the funds he (Union Bank of the Philippines, 321 SCRA 563).
allegedly acquired illegally, the bank accounts of his son to which the
funds were allegedly transferred can be inquired into, because they are iii. PNB v. Gilcayco and PCIB v. Purisima The anti-graft law provides that
included in the subject matter of litigation. (Estrada v. Sandiganbayan) in determining if a public officer acquired ill-gotten wealth, his bank
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account and the bank account of his family can be taken into c. A specific taxpayer upon request for tax information from a foreign tax
consideration. SC said that clearly, this indicates that it was the intention authority pursuant to an international convention or agreement on tax
of the Congress to make another exception to the Secrecy of Bank matters to which the Philippines is a party (Section 6(F), NIRC)
Deposits. But, that was in effect, overturned. The Ombudsman Law now
provides that the Ombudsman can examine bank accounts in connection 8. All banks shall forward to the Treasurer of the Philippines a statement under
with an investigation he is conducting. And the Ombudsman Desierto oath of all deposits in favor of persons who are known to be dead or who have
said he was investigating the Mayor and the head of the PEA. They were not made further deposits or withdrawals during the preceding ten years,
invoking that provision. They asked that the bank deposit be subpoenaed showing the name and last known place of resident or address in whose favor
of the Mayor. The Court, in effect, reversed the ruling in PNB case and such unclaimed balances stand and the amount of the outstanding unclaimed
PCIB case. The court said no. In order to be able to inspect the bank balances. (Section 2, Unclaimed Balances Act, as amended by P.D. No. 679)
account, there must be case already pending in court. Then the account
must be identified and the inspection must cover only the account. It 9. Because of its power to conduct investigation to accomplish its purposes, the
must be limited only to the subject matter of the case, and the owner of PCGG may require the production of bank records as may be material to its
the account must be notified. investigation. (Opinion of the Secretary of Justice dated Feb. 27, 1987)
Doctrine: Requisites in order that the Ombudsman may inspect a bank 10. The Anti-Money Laundering Council may inquire into any deposit with any
deposit: bank in case of violation of the AMLA if there is probable cause that it is
a. there must be a case pending in court related to any unlawful activity. (Section 11, Republic Act No. 9160, as
b. the account must be clearly identified amended)
c. the inspection must be limited to the subject matter of the
pending case 11. Upon ex-parte application by a law enforcer authorized by the Anti-
d. the inspection may cover only the account identified Terrorism Council, the Justices of the CA designated as a special court to
e. the bank personnel and the account holder must be notified to handle anti-terrorism cases may authorize the examination of deposits in
be present during the inspection. (Marquez v. Desierto, 359 financial institutions upon finding probable cause of the commission of
SCRA 772; Office of the Ombudsman v. Ibay, 364 SCRA 281) terrorism or conspiracy to commit terrorism. (Sections 27 and 28, RA 9372)
6. The prohibition against the examination of a bank deposit does not preclude its 12. BSP and PDIC may examine deposit accounts and all information related to
garnishment to satisfy a judgment against the depositor. (China Banking v. them in case of a finding of unsafe or unsound banking practices. (Section 8,
Ortega; Philippine Commercial & Industrial Bank v. CA; Onate v. Abrogar) Republic Act No. 3591, as amended)
When this bill was being discussed in Congress, a certain Congressman who 13. The Anti-Money Laundering Council can investigate
sponsored the bill was interpellated, what is the effect of this law? Will this
include garnishment of bank accounts? Congressman said no. But, the Court (a) any property or funds related to financing of terrorism,
said bank account can be garnished. Otherwise, the judgment debtor can just (b) property or funds of any person if there is probable cause to believe he is
put his money in the bank but the creditor cannot garnish it. committing or attempting or conspiring to commit terrorism or financing
terrorism. (Section 10, Republic Act No. 10168)
7. The CIR is authorized to inquire into bank deposits of the following:
a. A decedent to determine his estate; and
b. Any taxpayer who has filed an application for compromise of his tax
liability by reason of financial incapacity to pay his tax liability;
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II. Foreign Currency Deposit Act (RA No. 6426, as amended) process cannot be issued against any FCD. But the Court said that provision
was placed there to protect the depositor. But the money, in this case, does not
A. Secrecy of Foreign Currency Deposits belong to Lee. Since Lee does not own the money, you cannot invoke that
provision to protect herself.
1. All foreign currency deposits (FCD) are absolutely confidential. (Section 8)
2. FCD shall be exempt from attachment, garnishment or any other order or Doctrine: Where the funds deposited in a joint foreign currency savings
process of any court, legislative body, government agency or administrative account belonged exclusively to one of the depositors and were held in trust
body. (Section 8) for him by the other depositor and the other depositor unilaterally closed the
joint account and transferred the funds to her personal account, the depositor
B. Exception based on Law who owned the funds can have her enjoined from making withdrawals from
her personal account. She cannot invoke the exemption of her personal
1. The depositor has given his written permission (Section 8) account from court processes, because the funds did not belong to her. (230
SCRA 42)
a. For loans secured by holdouts or assignments of certificates of time
deposits, the loan documents should include a waiver by the borrower of b. China Banking v. CA: Armand was a father who had a dollar account with
his rights under existing laws to the confidentiality of his deposits. VillanueBank. His daughter, Roxie, managed to forge his signature and
(Section 315, Manual of Regulations for Banks) withdraw the money. The money was then deposited in an account with
b. Any director, officer or stockholder who, together with his related Banco Joco (BJ). Armand sued to recover the money, and asked that Roxies
interest, contracts a loan or any form of financial accommodation from (1) account with BJ be subpoenaed. BJ invoked secrecy of bank deposits. The
his bank or (2) from a bank (a) which is a subsidiary of a bank holding court said that the money belongs not to Roxie, but to Armand, her father.
company by which both his bank and the lending bank are subsidiaries or Therefore, Armand had the right to have it subpoenaed.
(b) in which a controlling proportion of the shares is owned by the same
bank, in excess of 5% of the capital and surplus of the bank, or in the Doctrine: A father who sued his daughter for illegally withdrawing funds
maximum amount permitted by law, whichever is lower, shall be from his FCD and transferring to another bank in the name of his sister, can
required by the lending bank to waive the secrecy of bank deposits in the inquire into the deposit of the sister, because the money deposited belongs to
banks in the Philippines. (Section 26, Republic Act No. 7653) him. (511 SCRA 110)
c. This is the only exception to the secrecy of foreign currency bank
deposits (Intengan v. CA, 377 SCRA 63; GSIS v. CA, 651 SCRA 661) c. The director of a foreign corporation who fraudulently deposited funds
d. The heirs of someone who opened a foreign currency bank deposit can belonging to the corporation and who is a fugitive from justice may be
look into the deposit, because they inherited it and a request for subpoena restrained from making withdrawals, because he might flee with the funds.
made by them constitutes a written permission. (Reyes v. Maceda) (Breckenridge Corporation, Ltd. v. CA, 232 SCRA xvii)
2. Exceptions based on Jurisprudence d. Salvacion case There was a foreigner who enticed a girl using a doll to come
with her and he raped her. That fellow escaped so he was never tried in court.
a. Van Twest v. CA: Mindy opened an account in with LukBank in Deutsch The parents filed an action for damages and got a favorable judgment. Bank
Marks. It was an and/or account, where Mindy and Lee, another employee, accounts of the foreigner were discovered so the parents asked that these be
were the signatories. Lee then closed the bank account and opened another garnished. Chinabank now opposed and argued that this is a FCD, therefore it
account exclusively in her name. Lee transfered all the money there. Mindy is exempt from garnishment. Court said no, this is a case where a foreigner
now filed a case and asked the court to enjoin any withdrawal. Lee argued that who committed a crime managed to escape, and the only form of redress that
the court cannot issue an injunction because the law provides that court was obtained was the money judgment. To prohibit garnishment would result
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in a grave miscarriage of justice. This situation could not have been within the itself solidarily for the payment of the loan. The consortium banks have sued
contemplation of the law. Philconsa and GSIS. GSIS filed a cross claim against Philconsa, then they filed
a motion asking the court to subpoena the account to which the money was
Doctrine: Where a foreign tourist who opened a FC savings account, raped a transferred in the interest of justice. But SC said no, theres only one
child and escaped, but was sued and held liable for damages to the victim, exception: written consent of the depositor.
garnishment of his account should be allowed to prevent injustice. (Salvacion
v. Central Bank of the Philippines, 278 SCRA 27) g. Case: There was a group of American swindlers who bought a small bank.
They opened a bank office in Portland, Oregon. They offered a higher interest
e. Citibank Case: Some officers of Citibank formed a corporation engaged in on bank deposits than what was offered than other banks so a lot of people
investment management. They enticed some depositors of Citibank to close transferred their money there. They then went to the Philippines and had the
the dollar accounts and transfer the money in their corporation and they money transmitted here by wire transfer and opened a dollar account in
would manage the funds. Because of this, Citibank filed a criminal case against HSBC. To pump up they money circulation and to combat inflation, Central
them for violation of the provisions of the Corporation Code on conflict of Bank issued bills payable to bearer in denominations of P1M, non-interest
Interest. And for that purpose, a bank officer had to execute an affidavit and bearing, but you buy them at a discount. You buy them for P600K, and after
attached records showing that the bank accounts of these customers were five years, you get P1M. These Americans used the money to buy those bills.
closed. Now I think these people talked to one of the depositors and When the State of Oregon found out what was happening, it closed that bank
convinced him to file a criminal case against that officer for violation of and placed it under receivership. The Central Bank Bills were in the possession
secrecy of bank deposits. We argued before the City Prosecutor of Makati that of the receiver. Somebody wrote a letter to Central Bank, I am Mr. Stanley, I
this is the subject matter of litigation. Thus, it can be looked into. The bought these Central Bank bills. He then presented a deed of sale and he was
complaint was dismissed. The complainant filed a Petition for Review with asking the bank to pay. The Central Bank refused because the State of Oregon
the Department of Justice. The Secretary of Justice affirmed the ruling of the is claiming the proceeds. So he filed a case for payment. The Central Bank
City Prosecutor of Makati. The complainant filed a Petition for Certiorari filed a counterclaim for interpleader. The mastermind pleaded guilty and he
with the Court of Appeals. The Court of Appeals denied the petition. A offered to cooperate so he gets reduced penalty. Jack, as the counsel for the
Petition for Review was then filed with the Supreme Court. The case was State of Oregon, brought along a written waiver of confidentiality of bank
assigned to Justice Sabino de Leon Jr. and in his decision, he said that lawyers deposits. He signed so the HSBC gave Jack all the records. Case was scheduled
involved in this case expounded lengthily on Republic Act No. 1405 on for hearing and Stanley booked a flight to testify. While he was boarding the
whether this is the subject matter of the case or not. This is a FCD, it is not plane, he had a heart attack and he never got to testify. It took 20 years of
governed by Republic Act No. 1405. What is applicable is Republic Act litigation before a final judgment was rendered in favor or the State of
No. 6426 and there is only one exception: the written consent of the Oregon.
depositor. [Of course Jack knew that the adverse party was litigating under
the wrong law. He only let them continue litigating under the wrong law C. Exceptions applicable to the Confidentiality of Peso Deposits, under the NIRC,
until the crime prescribes, which is what happened in this case.] And that was AMLA, Human Security Act, PDIC and BSP, and Anti-Terrorism Law, also apply
what the Supreme Court said, unfortunately, the crime has already to FCD.
prescribed.
f. Philconsa case: Philconsa obtained a loan from the consortium of funds in

dollars. In their application, they said that these funds would be used to rent
the services and facilities of a satellite. The money was deposited in a bank
account in Philconsa and transferred it to a different account but was never
used to pay for the rent of the satellite. GSIS executed a surety bond binding
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III. General Banking Act (Republic Act No. 8791)
A. Secrecy of Bank Transactions
No director, officer, employee, or agent of any bank shall, without order of a court,
disclose to any unauthorized person any information relative to the funds or
properties in the custody of the bank belonging to private individuals,
corporations, or any other entity. (Section 55, 1(b))
This sweeping provision is broader in scope than the two laws on confidentiality of
bank deposits. It includes any money or property in the possession of the bank,
like property placed in the safety deposit box. It would have been much simpler if
Justice Carpio-Morales invoked this in the case of Jinggoy Estrada. This would
clearly apply because the confidentiality is given to private persons. It does not
extend to officials unless there is a court order, which is subpoenaed through the
Sandiganbayan.
The laws, which exempted create exemptions from confidentiality in Republic Act
No. 1405 and Republic Act No. 6426, also applied this except in the Anti-
Terrorism Council. The Council may ask the Court of Appeals to allow the
inspection of deposits in case of terrorism. But when Congress passed that law, they
only thought of these two laws on bank deposits. They overlooked the sweeping
and catch all provision in the General Banking Law so this was not included in the
exception. Thats the trouble when you amend laws, there might be conflicting
provisions.
B. Scope
1. The disclosure to an authorized person is permitted.

2. The prohibition does not apply to the funds or properties of public officials.
(Section 55.1 (b))
C. Exceptions
1. AMLA (Same as Confidentiality of Banking Transactions of Peso Deposits)

2. NIRC (Same as Confidentiality of Banking Transactions of Peso Deposits)
3. Anti-Terrorism (Same as Confidentiality of Banking Transactions of Peso
Deposits) end

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ANTI-MONEY LAUNDERING ACT (AMLA) thereon, valuable objects, cash subsitutes and other similar monetary
instruments or property supervised or regulated by the SEC;

d. Jewelry dealers in precious metals, who, as a business, trade in precious metals,
This has been revised several times because the international monetary board for transactions in excess of P1M
keep telling us that we have to be compliant; otherwise, your account would e. Jewelry dealers in precious stones, who, as a business, trade in precious metals,
be frozen. for transactions in excess of P1M
f. Company service providers which, as a business, provide any of the following
I. Money Laundering services to third parties: (i) acting as a formation agent of juridical persons; (ii)
acting as (or arranging for another person to act as) a director or corporate
A. Definition secretary of a company, a partner of a partnership, or a similar position in
relation to other juridical persons (iii) providing a registered office, business
Money laundering is committed by any person who, knowing that any monetary address or accommodation, correspondence or administrative address for a
instrument or property represents, involves, or relates to the proceeds of any unlawful company, a partnership or any other legal person or arrangement; and (iv)
activity: acting as (or arranging for another person to act as) a nominee shareholder for
a. Transacts said monetary instrument or property; another person; and
b. Converts, transfers, disposes of, moves, acquires, possesses or uses said monetary g. Persons who provide any of the following services:
instrument or property; i. Managing of client money, securities or other assets;
c. Conceals or disguises the true nature, source, location, disposition, movement or ii. Management of bank, savings or securities accounts;
ownership of or rights with respect to said monetary instrument or property; iii. Organization of contributions for the creation, operation or
d. Attempts or conspires to commit money laundering offenses referred to in paragraphs management of companies; and
(a), (b), or (c); iv. Creation, operation or management of juridical persons or
e. Aids, abets, assists in or counsels the commission of the money laundering offenses arrangements, and buying and selling business entities. (Section
referred to in paragraphs (a), (b) or (c) above; and 3(a))
f. Performs or fails to perform any act as a result of which facilitates the offense of money Note that real estate companies are not included.
laundering referred to in paragraphs (a), (b) or (c) above.
C. Exclusions
B. Institutions covered:
The term covered persons excludes lawyers and accountants acting as
a. Banks, non-banks, quasi-banks, trust entities, foreign exchange dealers, independent legal professionals in relation to information concering their clients or
pawnshops, money changers, remittance and transfer companies and other where disclosure of information would compromise client confidences or the
similar entities and all other persons and their subsidiaries and affiliates attorney-client relationship.
supervised or regulated by the BSP;
b. Insurance companies, pre-need companies and all other persons supervised or D. Covered Transactions
regulated by the Insurance Commission;
c. (i) securities dealers, brokers, salesmen, investment houses and other similar Any transactions in cash or other equivalent monetary instrument involving a
persons managing securities or rendering services as investment agent, advisor, total of more than P500,000 in one banking day is covered, whether it is withdrawal or
or consultant, (ii) mutual funds, close-end investment companies, common deposit of money, purchase of bank drafts.
trust funds, and other similar persons, and (iii) other entities administering or
otherwise dealing in currency, commodities or financial derivatives based
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E. Suspicious Transactions C. Important functions
Suspicious transactions are transactions with covered institutions, regardless of 1. To require and receive covered or suspicious transaction reports from
amount, where any of the following circumstances exist: covered institutions.
1. There is no underlying legal or trade obligations, purpose or economic 2. To issue orders to the Supervising Authority or covered institution to
justification. (Sometimes bank would ask the purpose for remittance determine the true identity of the owner of any monetary investment or
when it involves huge amount.) property subject of a covered transaction or suspicious transaction report
2. The client is not properly identified. (That is why when opening a bank or requested for assistance from a foreign state, or believed on the basis of
account, presentment of at least 2 government issued IDs is required.) substantial evidence be the proceeds of an unlawful activity.
3. The amount involved is not commensurate with the business or financial 3. To institute civil forfeiture proceedings and all other remedial
capacity of the client. (Corrupt officials usually buy winning tickets of proceedings through the OSG. (Important doctrine: Actions for
horse racing sweepstakes at a premium.) forfeiture of properties under this law can be filed without need of
4. It may be perceived that the transaction is structured to avoid being the conviction in a criminal case.)
subject of reporting requirements. (For example, person knows that the 4. To cause the filing of complaints with the DOJ or the Ombudsman for
amount of the transaction that has to be reported is $10K, he breaks it up the prosecution of money laundering offense.
everyday to $1K. He spreads it out for ten days.) 5. To investigate suspicious transactions and covered transactions deemed
5. Any circumstance which deviates from the profile of the client or the suspicious after an investigation, money laundering activities, and other
clients past transactions with the covered institution. violations of this Act.
6. The transaction is related to an unlawful activity. 6. To apply before the CA ex parte for the freezing of any monetary
7. The transaction is similar or analogous to any of the foregoing. (Section instrument or property alleged to be laundered, proceeds from, or
(2b-1)) [catch-all; parang Pokemon: gotta catch em all!] instrumentalities used on or intended to be used in any unlawful
activities. (Originally, the law did not impose a limit on the duration of
Law enumerates the covered unlawful activities (See handout for the complete the freezing of the account. But the SC, invoking its power to
list). In other countries, this list is much longer. But in our law, tax evasion is not promulgate rules for the protection of Constitutional rights, issued a
included. It includes kidnapping, drugs, plunder, robbery, jueteng, illegal Circular limiting the duration of the freezing to six (6) months, and that
booking for jai alai, piracy, qualified theft, swindling, smuggling, hijacking, has now been incorporated in the law.)
malversation, violations of Securities Code. 7. To implement measures to counteract money laundering.
8. To take action or any request from foreign states for assistance in their
II. Anti-Money Laundering Council anti-money laundering operations.
9. To develop educational programs on money laundering.
A. Composition 10. To enlist assistance of any instrumentality of the government.
11. To impose administrative sanctions for violation of laws, rules, order and
1. Governor of the BSP resolutions.
2. Insurance Commissioner 12. To require the Land Registration Authority and the Registries of Deeds
3. Chairman of the SEC to submit to it reports on all real estate transactions involving more than
P500K within 15 days from the date of registration and copies of
B. Requirement for Discharge of Function Unanimity documents of all real estate transactions. (Section 7)
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III. Prevention of Money Laundering A person whose account has been frozen may move to lift the freeze order and
the court must resolve it before its expiration.
A. Covered institutions shall establish and record the true identity of their clients
based on official documents. Only the SC can issue a TRO or a writ of injunction against a freeze order.
a. Anonymous accounts, accounts under fictitious names (ex. Jose
Velarde), and all other similar accounts are prohibited. V. Inquiry into Bank Deposits
b. Non-checking numbered accounts are allowed.
The Anti-Money Laundering Council may inquire into any deposit or
B. All records of all transactions of covered institutions shall be maintained for investment, including related accounts, with any bank or financial institution
five (5) years from their dates. upon order of a court on ex-parte application in case of violation of this Act if
there is probable cause that it is related to an unlawful activity or a money
C. Covered institutions shall report to the Anti-Money Laundering Council all laundering activity, but no court order is required in cases involving unlawful
covered and suspicious transactions within five working days from their activities in Section 3 (i) (1) (2) and (12), i.e. kidnapping for ransom, violation
occurrence, unless it prescribes a longer period not exceeding 15 working of the Comprehensive Dangerous Drugs Act, and hijacking, destructive arson
days. and murder and offense similar to those offenses which are punishable under
the penal laws of other countries, and terrorism and conspiracy to commit
Covered persons and their officers and employees are prohibited from terrorism.
communicating to any person or entity, the fact that a covered or suspicious
transaction has been reported or is about to be reported, the contents of the Related accounts refer to accounts the funds and sources of which originated
report, or any other information in relation to it. Neither may such reporting from or are materially linked to the investments or properties subject of the
be published or aired in any manner or form by the mass media, electronic freeze order.
mail, or other similar devices.
A court order ex parte must first be obtained under the same procedure for the
1. Reporting covered transactions is not covered by Republic Act 1405, principal account. (Section 11)
Republic Act 6426, Republic Act 8741 and other similar laws. (Thus,
submission of reports is exempt in the said laws. No proceeding can be The law, previously, required that before the Council can look into an
instituted against a person who complied with the duty to make a report account, there has to be a court order. The court said that the owner must be
unless it can be shown that he acted in bad faith.) given notice. Court said dont blame us because it is the fault of the Congress.
2. No proceeding shall lie against a person for making a covered or They did not put ex parte before an account can be frozen. Thus, notice must
suspicious transaction report in the regular performance of his duties and still has to be given. Some protested because notice would defeat the purpose
in good faith. (Section 9) of the law. It would allow launderers to transfer their money before it can be
looked into. So the law was amended to add ex parte.
IV. Authority to Freeze In cases of kidnapping, drugs hijacking, terrorism, no court order is required.
The CA, upon ex parte petition by the Anti-Money Laundering Council, and after The BSP and PDIC are authorized to look into bank accounts to determine if the
determination that probable cause exists that any monetary instrument or AMLA is being complied with in connection with their regular or special investigation
property is related to an unlawful activity, may issue a freeze order effective of a covered institution. Banks are supposed to be examined by the BSP once a year.
immediately and not exceeding six months. The CA should act on the petition And if the bank is in distress, special examination is conducted. In connection with that,
within 24 hours from its filing. If no case is filed within the period determined they can look into bank accounts to find out if the law has been complied with. end
by the CA, the freeze order shall be automatically listed.
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Of course the Civil Code applies in the suppletory manner. For example, if
INSURANCE someone applies for a life insurance policy and the application was forwarded to
the head office abroad. The application was approved but the applicant died
NOTE: The governing law now is R.A. 10607, which amended the old Insurance Code. The codal
before he received the approval. Thus, there was no perfected contract. Apply
provisions copied and pasted into this document are those found in the New Insurance Code. The provisions now the provision on the Civil Code on contract entered into by correspondence.
with J are the provisions that Atty. Jimenez did NOT discuss in class, so skip at your own risk. o Great Pacific v. CA: What is being followed in insurance contracts is
the cognition theory. Generally, the insured is the one making the
Date: November 20, 2014 (KF) offer, by submitting an application to the insurer, and the latter
accepts the offer by approving the application. Thus, mere
J SEC. 1. This Decree shall be known as The Insurance Code. submission of the application without the corresponding approval of
the policy does not result in the perfection of the contract.
INTRODUCTION Now, the old Insurance Act was revised in 1976, from the old insurance act
copied from the Civil Code of California. Now the provision of the Insurance Act
Insurance started in Italy when Italy was the center of commerce. [Explains the on regulations were copied from the code of New York. Now when the Insurance
etymology of the term.] There were coffee shops where the merchants hung out. Act was revised in 1976, essentially the old Insurance Act was retained [but] the
They would pass around pieces of paper that contained the name of a ship, where provisions on regulations were revised to adopt provisions in American and
it was going, what were its cargo, and if the merchant was willing to insure the English laws. And then it was again revised, but most of the changes involved
cargo, he will sign his name on the piece of paper below where the date is written. supervision of insurance business. The amendments regarding the contracts
Thats why insurers came to be called underwriters. Later other types of involved refinements of the provision.
insurance were developed. In the Lloyd's association, insurance underwriters are
members of the association. And Lloyd's became the leading insurance center - if SEC. 2. Whenever used in this Code, the following terms shall have the
Lloyds will not insure it, nobody else will. Many years ago, there was an Italian respective meanings hereinafter set forth or indicated, unless the context
otherwise requires:
father who tried to insure the virginity of his daughter, but there were no takers
o A contract of insurance is an agreement whereby one undertakes for
in Lloyd, it was too risky. a consideration to indemnify another against loss, damage or liability
For example you have liability insurance like...remember there was a Ramon arising from an unknown or contingent event.
Katigbak. One of his eyeballs was hit by a little golf ball and the fellow was o A contract of suretyship shall be deemed to be an insurance
crushed, one of his eyes became blind. Sometimes a corporation sponsors a golf contract, within the meaning of this Code, only if made by a
tournament and they'll say that anybody who scores a hole-in-one will be given a surety who or which, as such, is doing an insurance
business, as hereinafter provided.
car, and the corporation would get insurance so that if somebody scores a hole- o The term doing an insurance business or transacting an insurance
in-one, the insured company will pay for the car. business, within the meaning of this Code, shall include:
Now the Insurance Act was copied from the Civil Code of California. And o Making or proposing to make, as insurer, any insurance
therefore the rule in statutory construction, when you copy the law of another contract;
country, interpretations of that law will be adopted. In cases where there is no o Making or proposing to make, as surety, any contract of
suretyship as a vocation and not as merely incidental to any
jurisprudence, California jurisprudence have persuasive effect in this court. But
other legitimate business or activity of the surety;
when it comes to buying insurance, our insurance companies switched so they o Doing any kind of business, including a reinsurance
formed a Lloyd's Institute A, Institute B, Institute C. When it comes to marine business, specifically recognized as constituting the doing of
insurance, it's English jurisprudence that should be cited because every phrase, an insurance business within the meaning of this Code;
every word in buying insurance policies got prepared by the court of England for o Doing or proposing to do any business in substance
centuries. equivalent to any of the foregoing in a manner designed to
evade the provisions of this Code.
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In the application of the provisions of this Code, the
FIVE (5) ELEMENTS OF INSURANCE CONTRACTS: [I-R-A-S-P]
fact that no profit is derived from the making of 2001 TRANSCRIPT:
insurance contracts, agreements or transactions or 1. Insurable interest the insured possesses an interest of some kind susceptible of
that no separate or direct consideration is received
pecuniary estimation
therefor, shall not be deemed conclusive to show
that the making thereof does not constitute the doing 2. Risk of loss the insured is subject to a risk of loss through the destruction or
or transacting of an insurance business. impairment of the above insurable interest by the happening of designated perils
o As used in this Code, the term Commissioner means the Insurance 3. Assumption of risk the insurer assumes the risk of loss mentioned above
Commissioner. 4. Scheme to distribute losses the said assumption of risk is a part of a general scheme
(plan) to distribute actual losses among a large group of persons bearing
Section 2 defines a contract of insurance. Sec. 2(a) says that a contract of insurance is somewhat similar risks; and
an agreement whereby one undertakes for a consideration to indemnify another against 5. Payment of premiums as consideration for the insurers promise to assume the risk
loss, damage or liability arising from an unknown or contingent event. and pay the losses from such risk, the insured makes a ratable contribution, called
A contract of suretyship shall be deemed to be an insurance contract, within a premium, to a general insurance fund
the meaning of this Code, only if made by a surety who or which, as such, is
doing an insurance business as hereinafter provided. If you only have insurable interest, risk of loss and assumption of risk of loss, you do not
have a contract of insurance. It is a mere risk-distributing device. But if it has all of the
JACK 2001 TRANSCRIPT: Suretyship is different from an insurance contract because five, it is a contract of insurance whatever its name or form.
there are three parties in suretyship and when the surety pays, he is entitled to
reimbursement. In insurance, when the insurer pays, he is not entitled to (a) 2014: First, the insured posseses an interest susceptible of pecuniary relations. The
reimbursement. Underlying concept in insurance: it deals with a scheme of distribution interest must be pecuniary. Second, the insured is subject to the risk of loss.
of risk/loss. Third, the insured assumed that risk of loss. Fourth, that is part of a scheme
to distribute losses among a large group of persons exposed to the same risk,
SEC. 3. then, as consideration he makes a contribution for the premium. Even if all
Any contingent or unknown event, whether past or future, which may
the elements are present, it doesn't necessarily follow that theres an
damnify a person having an insurable interest, or create a liability
against him, may be insured against, subject to the provisions of this insurance contractlike health maintenance organizations, like Maxicare.
chapter. (b) Now, the people there are saying that Maxicare will pay for medical
The consent of the spouse is not necessary for the validity of an expenses, but then the main purpose is to provide medical services that's
insurance policy taken out by a married person on his or her life or why it's not insurance. And if you will go to any court and file a petition,
that of his or her children. then Maxicare will pay in accordance with what's in your policy. But you
All rights, title and interest in the policy of insurance taken out by an will get benefits even if you're not sick, you're not injured, you're in perfect
original owner on the life or health of the person insured shall
health. And you have medical check-up, which costs a lot of money.
automatically vest in the latter upon the death of the original owner,
unless otherwise provided for in the policy. Maxicare will pay for that. They make a lot of money because many people
do not avail of their annual medical check-up X-ray, ultrasound, treadmill
SEC. 4. The preceding section does not authorize an insurance for or against test, blood test, urine test, high blood pressure.
the drawing of any lottery, or for or against any chance or ticket in a lottery (c) Protection and indemnity club are insurance companies [that] shipping
drawing a prize. companies join as members if they pay a fee. The court says that the
protection and indemnity club will pay in case the shipping company
SEC. 5. All kinds of insurance are subject to the provisions of this chapter so member becomes liability to third parties, that's insurance. But law offices
far as the provisions can apply. who want to retain counsel of shipping companies will have to deal with the
protection and indemnity club that would hire [a] lawyer.
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CHARACTERISTICS OF AN INSURANCE CONTRACT: difficult to collect from a small insurance company. Usually the big
2001 TRANSCRIPT: fish that small insurance companies get are what the big companies
Aleatory it is an aleatory but not a wagering contract. By an aleatory could not get ,like motor vehicle insurance policies.
contract, one of the parties or both reciprocally bind themselves to give or to o On the other hand, if the owner of a car is a teenager, automatically
do something in consideration of what the other shall give or do upon the the premium for the car will be high. High incident of accident
happening of an event which is uncertain, or which is to occur at an because the insured is high on drugs or drunk.
indeterminate time (Art. 2010, NCC) Conditional the insurers liability is based on the happening of the event
o Its aleatory because both parties assume certain risk. For instance, a insured against
building worth 10 million pesos was insured, and the premium was Indemnity is the basis
50,000. For that small amount, the insurance company would have
paid 10 million pesos if the loss occurs. On the other hand, the The general scheme/outline of the law on insurance
insured assumes the risk that he will not get a single centavo if no loss First it talks of who are the parties to the contract of insurance, the requisites
occurs. That's the concept of indemnities. You're not supposed to to a valid contract: object, consent, consideration (Sections 1 to 25)
make money, earn profit out of insurance. The goal is to make good, o Object insurable interest
make whole what you lost. o Consent what vitiates consent (Sec. 26)
o Some banks require borrowers to join a group life insurance plan and o Consideration premium
make the bank as the beneficiary, so that in case the borrower dies, Then it proceeds to the perfected contract of insurance
the bank need not file a claim to the proceedings of the settlement of Then the obligations under the contract of insurance
estate. All that the bank will do is collect from the insurance. But It then speaks of other types of insurance contracts
suppose the policy is for P500,000, and when the borrower dies, he
still owes P300,000. That's all that the bank can collect, the rest will SURETYSHIP V. INSURANCE
go to the estate of the borrower.
A contract of insurance is an agreement whereby one undertakes for a
o Suppose it costs half a million to rebuild a building and it was
consideration to indemnify another against loss, damage or liability arising
insured. The insurance company will not pay P1 million, that is the
from an unknown or contingent event.
cost of the brand new building. That has to be adjusted for
Hence, suretyship is a contract only for purposes of administrative
depreciation that building is 15 years old, it will have to be adjusted
supervision. Suretyship is different from insurance. In suretyship, you always
for depreciation. So if you look at your motor vehicle, notice that
have at least three parties a principal debtor, a surety and the obligee. In
every year the indemnity for loss of the vehicle is reduced because
insurance, you only have two parties, the insurer and the insured. In
depreciation.
suretyship, if the surety pays, he is entitled to be reimbursed by the principal
Unilateral a contract of insurance is wholly executed on the part of the insured
debtor in accordance with the Civil Code. But in insurance, if the insurer pays,
by the payment of the premium, and remains executory on the part of the
he doesn't get anything from the insured. But the insurance will run after the
insurer, subject to the condition of the happening of the event insured against.
wrongdoer who breaks the law, because the insurer subrogated the right of the
o the insured has already complied on his part of the bargain by paying
insured against the wrongdoer.
the premium. Only the insurer still has an obligation to be
Now, in the present law that's revised, only the first paragraph of Section 3
performed.
was retained. The rest were omitted because remember, under RA 7192, a
Personal it is personal in the sense that each party to it, in entering into the
married woman can enter into contracts without any restriction or limitation
insurance contract, takes into account the character, credit and conduct of the
on her capacity to enter into a contract. While RA 6809 dictates that [the age
other.
of] majority was reduced to 18.
o The character of both parties are critical considerations. Big
corporations usually insure with big insurance companies, because it's
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SEC. 6. Every corporation, partnership, or association, duly authorized to Example: Roselee mortgaged her house to Margo. Thereafter, Roselee
transact insurance business as elsewhere provided in this Code, may be an obtained a fire insurance policy on her house. The fire insurance policy
insurer.
contains a warranty, that the insured will not bring hazardous substances in
the premises. But Roselee brought fireworks in her house during New Year
The law mentions WHO CAN BE INSURER. It says partnership,
and fire broke out Margo cannot collect.
association or corporation. The revision eliminated person. Thus, a natural
The law will provides that if there are certain acts which the mortgagor has
person cannot be an insurer. Individuals cannot be insurers. It has to be a
performed, then the mortgagee can do that, such as payment of the premium.
corporation, partnership or association. The law provides the rate that they
If the mortgagor cannot pay the premium, the mortgagee can pay the
will pay, which is a capital of P1 billion. That will be effective by 2022. But
premium to keep the policy alive. Then the mortgagee can claim
meanwhile, theyre required to increase the _____ capital on a staggered basis.
reimbursement from the mortgagor.
SEC. 7. Anyone except a public enemy may be insured.
INSURABLE INTEREST
WHO CAN BE INSURED? Anyone except public enemies. A German
SEC. 10. Every person has an insurable interest in the life and health:
corporation obtained an insurance policy. A fire broke out, they filed a claim.
The court said that at the time, the United States and Germany were at war Of himself, of his spouse and of his children;
Germany was a public enemy. And because the Philippines was under Of any person on whom he depends wholly or in part for education or
American sovereignty, the German corporation was deemed a public enemy so support, or in whom he has a pecuniary interest;
it could not collect. 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
SEC. 8. Unless the policy otherwise provides, where a mortgagor of property
Of any person upon whose life any estate or interest vested in him
effects insurance in his own name providing that the loss shall be payable to
depends.
the mortgagee, or assigns a policy of insurance to a mortgagee, the insurance
is deemed to be upon the interest of the mortgagor, who does not cease to be
a party to the original contract, and any act of his, prior to the loss, which SEC. 11. The insured shall have the right to change the beneficiary he
would otherwise avoid the insurance, will have the same effect, although the designated in the policy, unless he has expressly waived this right in said
property is in the hands of the mortgagee, but any act which, under the policy. Notwithstanding the foregoing, in the event the insured does not
contract of insurance, is to be performed by the mortgagor, may be performed change the beneficiary during his lifetime, the designation shall be deemed
by the mortgagee therein named, with the same effect as if it had been irrevocable.
performed by the mortgagor.
SEC. 12.
SEC. 9. If an insurer assents to the transfer of an insurance from a mortgagor The interest of a beneficiary in a life insurance policy shall be forfeited
to a mortgagee, and, at the time of his assent, imposes further obligations on when the beneficiary is the principal, accomplice, or accessory in
the assignee, making a new contract with him, the acts of the mortgagor willfully bringing about the death of the insured.
cannot affect the rights of said assignee. o In such a case, the share forfeited shall pass on to the other
beneficiaries, unless otherwise disqualified.
Now under Section 8, if the mortgagor of the estate insures the property In the absence of other beneficiaries, the proceeds shall be paid in
mortgaged, the policy remains on the interest of the owner even if the accordance with the policy contract.
proceeds are favorable to the mortgagee. So that if loss occurs, then the If the policy contract is silent, the proceeds shall be paid to the estate
insurance company does not pay, its the mortgagor who can sue the insurance of the insured.
company. And if the mortgagor performed an act which will defeat the right
to collect, the mortgagee cannot collect.
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SEC. 13. Every interest in property, whether real or personal, or any relation money and told him to run an errand and buy something in the store. But then
thereto, or liability in respect thereof, of such nature that a contemplated peril the boy went into the streets and he lost all the money, so he became scared
might directly damnify the insured, is an insurable interest. and never returned. So the couple went now to the insurance agent: Pare,
may problema tayo, nawala yung bata. No problem! They picked up
You can only spend wholly or in part for education or support. Here, when another boy from the streets and told him the same story: that this couple
youre talking of support, its not limited to those obliged by law under the would adopt him, educate him, rear him.
Family Code to give support. It may be a total stranger, whos providing o Then sometime they went to the beach. One of them hit that boy in
support to somebody out of generosity. the head with an iron bar, then they drowned him. A claim was filed
There are some people who have an obligation for payment of money. Thats with the life insurance policy. The insurance company got the
why some banks require borrowers to join a group life insurance program. fingerprint of the boy when they insured the life of the boy, and the
But here is a marketing manager of a corporation and he brings in a lot of autopsy showed the fingerprints did not match. So the insurance
business. So its vital to the corporation that they can insure his life. company denied the claim. Eventually the insurance agent confessed,
There was a case of a rich man who picked up a laborer from the street who the couple were convicted of murder. At the time the Supreme
was earning minimum wage and tasked him to get 12 life insurance policies for Court decided the case, the real name of that unfortunate boy was
huge amounts with the businessman as the beneficiary. And of course because never known.
he is a rich man, he gave him money to pay the premiums. So the laborer died
and the businessman was now claiming. The court said, you have no insurable PROPERTY INSURANCE V. LIFE INSURANCE
interest over life of that laborer and it would never occur to that laborer to get
12 life policies for huge amounts with the businessman as the beneficiary. Rich There are differences between property insurance and life insurance. In
man is wagering on his life. property insurance, the expectation benefit must have a legal basis but that is
For example, the employee of a corporation janitor, messenger they not required in life insurance. In property insurance, the value of the property
cannot insure his life with the company as the beneficiary. But if its the life of is the limit of the insurable interest. But that is not true in life insurance, you
a marketing manager or an executive, then they can insure his life. cant place a price tag on human life; except when the interest has a
A married couple: The parents of the bridegroom said, Its only difficult commercial value, like the bank which requires a borrowers pension life.
when youre starting, so you can have usufruct of our old family home so long There was a time I lectured to Prudential Life when they did not want to
as were still alive. So the usufruct will end when the fellow died, so they can compete with the existing life insurance companies yet. In this country, you
insure the life of the parents. sell insurance by pounding the streets, banging on doors. You cannot pay
Now if the life of somebody will be insured, the consent of that person will insurance companies over the internet. The agents were alarmed. No, it didnt
serve as a certain guarantee that this is not being staged or so much as planned work, people would not get insurance from the internet. And then the
to execute the insured to collect proceeds of the policy. Prudential and the other life insurance companies Philam life, etc. had
Now the revision provides that if in case of insurance obtained by the husband already a large number of agents. So Prudential Life said, they were starting
or the wife on the life of either of them or the children, then the consent of the taking instead big accounts executives, businessmen, P10 million life
spouse and children need not be obtained. insurance, another market.
There was a case decided by Justice Hererra. There was an agent of a life Now, insurable interest in property insurance must exist when the policy goes
insurance company who conspired with a married couple, and picked up a boy in effect and where loss occurs. For instance, Stephen insured his building, but
from the street and they told him this couple would adopt him, educate him, was in debt, so a case was filed against him. The building was levied upon on
rear him just like their own son. Brought him to church, had him baptized execution, and was sold at a public auction to Angel. The redemption period
with the name of the father, given a Junior. Insured his life with the parents as lapsed without the property being redeemed, so the building was transferred
beneficiary. They were planning to kill the boy. The mother gave him some to Angel, the buyer. Then, fire broke out. Stephen can no longer collect
because at the time of loss, there was no more insurable interest.
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o But if life insurance, the insurable interest is only required when the dissolution, the properties will be distributed among them, they have inchoate
policy goes in effect. It need not exist when loss occurred. interest the properties of the partnership based on the articles of partnership.
If a spouse is insured, and the marriage was annulled, can losses still be An expectancy coupled with an existing interest in that out of which the
collected? The Family Code says if there was annulment of marriage or legal expectancy arises. A corporation insured its factory against a fire. They said,
separation, the guilty spouse was named as a beneficiary, even if it is Okay fine, if our factory is razed to the ground, we will have enough money
Not automatic irrevocable, the innocent spouse may revoke the designation of the beneficiary. to rebuild. But it will take 3 years. 3 years no operations, no profit. Lets get
big interruption(?) insurance, so that the insurance company will pay us the
CIVIL CODE Art. 739. The following donations shall be void: profits which we normally get based on our track record. They have
Those made between persons who were guilty of adultery or admitted(?) because that is an expectancy coupled with an interest in the
concubinage at the time of the donation; factory.
Those made between persons found guilty of the same criminal
offense, in consideration thereof;
Those made to a public officer or his wife, descendants and SEC. 15. A carrier or depository of any kind has an insurable interest in a thing
ascendants, by reason of his office. held by him as such, to the extent of his liability but not to exceed the value
thereof.
In life insurance, the insured can make anybody a beneficiary need NOT
have insurable interest in the life insurance. Common carriers can insure properties it is transporting, like a vessel, depositary.
Warehouseman can insure the goods stored in him.
A limitation is Article 739 of the Civil Code, where theres a provision, a title
Common carriers are liable for loss of the property.
in Civil Code called insurance code law.
Owners have insurable interest of the property.
It says that in life insurance, the insured cannot name as beneficiary someone
A buyer of undelivered property because of the equitable interest can
to whom he cannot give a donation. They are:
compel the seller to comply with the obligation to deliver. The seller has
someone with whom the insured is committing adultery or
legal title.
concubinage
Remember civil law, its delivery that transfers of ownership.
a public officer in consideration of public office Mortgagee can live on the property mortgaged, so he can insure the property.
a person in consideration of committing a crime Contractor can insure building hes constructing because under the law, he bears
the risk of loss now that the building is completed.
SEC. 14. An insurable interest in property may consist in: A lessee can insure the property that he is leasing.
o An existing interest;
o An inchoate interest founded on an existing interest; or
o An expectancy, coupled with an existing interest in that out of which SEC. 16. A mere contingent or expectant interest in any thing, not founded on
the expectancy arises. an actual right to the thing, nor upon any valid contract for it, is not insurable.
In property insurance, every persons property must be ???? for ownership or A mere possessory right is sufficient.
relation to it, like trustee or liability, third-party liability insurance for motor A majority stockholder owned a building and he allowed a school to use the
vehicle is an insurable interest. The law says, if existing interest or inchoate building that was insured against fire, and fire broke out. The stockholder
interest founded on an existing interest. Stockholders of a corporation can issued a claim on the ground that the school did not own the building. But the
insure the properties of the corporation because in case of dissolution, the court said, the owner allowed the school to use the building that is enough
properties will be distributed among them. And then the inchoate interest in to give it insurable interest, you cannot deny the ???? by the loss of the
the properties of the corporation based on an existing interest, subscription building.
contract. Partners can insure the properties of the partnership. In case of Before we had this garment industry, American companies would send their
textiles to be made into finished dresses which they would then ship and back.
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Embroidery companies can insure those textiles. They have insurable interest, collected the proceeds of the policy, the students name is Nelson Ng, he got
they will be paid for their services, converting them to finished dresses. the money but after that he couldnt get any more space in Divisoria.
SEC. 17. The measure of an insurable interest in property is the extent to The Court of Appeals ruled that smuggled properties couldnt be insured
which the insured might be damnified by loss or injury thereof. because smuggled properties are subject to forfeiture under the law. To allow
therefore its insurance is against public policy.
SEC. 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 SEC. 20. Except in the cases specified in the next four sections, and in the
property insured. 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
SEC. 19. An interest in property insured must exist when the insurance takes insurance, suspends the insurance to an equivalent extent, until the interest in
effect, and when the loss occurs, but need not exist in the meantime; and the thing and the interest in the insurance are vested in the same person.
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. SEC. 21. A change of 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
2001 TRANSCRIPT (copied here because Chuck case was mentioned in this indemnity for the loss.
recording):
Heres the case of Chuck. There was this landlord who required his tenant to insure his After loss has occurred, then the change of interest will not affect the right to collect. In
stocks in trade. It is still ok to require it to insure. Usually it is the commercial centers fact is void to stipulate that he cannot assign the proceeds. Because after the loss, liability
part, in addition to the basic rent. They charge 5% of your gross sales, so they want to has accrued. That is now a vested right, There is now a chose in action which can be
make sure you always have the stocks in trade so that if they get burned, you can assigned or a change of interest in one or some of several things separately insured by
replace them. But then the contract provided that in case of losses, the proceeds should one policy.
be payable to the lessor. Heres a taxi company with a fleet of taxis, 20 units. The taxicabs were
The court says that is void because theres no insurable interest in the stocks in insured. The owner sold 4 of them. The policy will remain subsisting. It
trade. So, a review on the loan agreement was required in a case where a bank would remain with respect to the remaining 16 units of taxicabs.
was found to require the borrower to insure the building, but the building was
not mortgaged. SEC. 22. A change of interest in one or more of several distinct things,
Moreover, a provision was placed that in case of loss, the proceeds are payable separately insured by one policy, does not avoid the insurance as to the
to the bank. That is void. Theres no insurable interest because you have no others.
lien on the building. The building is insured, but its not mortgaged to you.
SEC. 23. A change of interest, by will or succession, on the death of the
2014: Chuck case. There was someone who rented a space in Divisoria, he insured his insured, does not avoid an insurance; and his interest in the insurance passes
stock in trade. There was a provision which states, in case of loss, the proceeds should be to the person taking his interest in the thing insured.
payable to the lessor. A fire broke out. And so the lessor wanted to collect.
Supreme court said no, you have no insurable interest, thats the reason its Change of interest by will of succession does not avoid the insurance.
void. But you see, the reason why the lessor put that in the contract of lease, Case: The father, mother insured the family home. Then, they died and then
he was afraid that should the lessee be losing in the business, he might be the house caught fire so the children can collect. Now, 5 children inherited the
tempted to commit arson. But if he will not get the proceeds of the policy and house. They insured it, then 1 bought out the others and became sole owner.
go to the lessor, he will not be tempted to commit arson. Anyway, he Then a fire broke out. He can collect. The insurer cannot say, Well, you
bought out the other four. They were willing to insure with him, as one of
the insured theres no reason why they should object.
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2001 version: Concealment the neglect to communicate that which the party knows and ought to
A change of interest by succession because of death like, heres a father who communicate. Now when the Insurance Law was revised by Commissioner Arnaldo, he
insured his house. When he died, his children inherited the house. The policy placed there that the concealment be intentional and fraudulent. But the SC said in an
will remain in force. old decision that even if it is not fraudulent, the fact remains that the insurer is misled
into accepting a risk it might not otherwise have accepted and it is very hard to prove
SEC. 24. A transfer of interest by one of several partners, joint owners, or intent, as such is locked up in the recesses of human mind. It is something that can be
owners in common, who are jointly insured, to the others, does not avoid an perceived through the senses. Mambabatas Pambansa Hernando Perez has provided an
insurance even though it has been agreed that the insurance shall cease upon amendment that there would be concealment even if it is not intentional or fraudulent.
an alienation of the thing insured.
The four requisites for concealment:
The transfer of interest by one of several partners or co-owners 1. The party who made the concealment must have knowledge of the fact
o Here are brothers who inherited a building. They insured it. Then concealed. Usually concealment and misrepresentations crop up in life
one of them bought out the other three, so he became the exclusive insurance policies. When somebody applies for life insurance policy and not
owner. The policy remains in force so that if it is burned he can disclose that he has cancer, but the applicant was not aware there is no
collect. concealment.
2. The fact concealed must be material to the policy. It is material if the other
SEC. 25. Every stipulation in a policy of insurance for the payment of loss party would not have entered into the contract had that party known the facts or
whether the person insured has or has not any interest in the property might have entered but under different terms and conditions like the premium
insured, or that the policy shall be received as proof of such interest, and might be higher. Thats why this usually involves serious ailments (cancer,
every policy executed by way of gaming or wagering, is void. diabetes, high blood, liver disorder, cirrhosis of the liver, tuberculosis, heart and
kidney ailments). Theres a law which made it a criminal offense where an
Date: November 24, 2014 (VG) insurance company chose to accept the application on life insurance of somebody
suffering from AIDS, even provided that the applicant discloses he has aids. I
CONCEALMENT have my doubts about the validity of that law.
In a Grepa life case the Court said where a couple insured the life of their
SEC. 26. A neglect to communicate that which a party knows and ought to baby with themselves as beneficiary but didNot disclose that the child was a
communicate, is called a concealment. mongoloid baby, there was concealment. The mongoloid baby was a
result of a late child birth when the mother is in her late thirties, early
SEC. 27. A concealment whether intentional or unintentional entitles the forties..then begins to describe inaudibly what mongoloid babies look like. The
injured party to rescind a contract of insurance.
quality of ovum begins to deteriorate after the age of 25. Thats why it is
highly advisable to get pregnant as early as possible, sound advice, very
SEC. 28. Each party to a contract of insurance must communicate to the other,
sound advice.
in good faith, all facts within his knowledge which are material to the contract
and as to which he makes no warranty, and which the other has not the means If the ailment is minor ailment like having a headache, cough, upset
of ascertaining. stomach, such is only light and are not material.
But if the applicant wrote that he is confined in a hospital, and gave the
SEC. 29. An intentional and fraudulent omission, on the part of one insured, to name of the hospital and the dates but did not disclose for what ailment,
communicate information of matters proving or tending to prove the falsity of then the insurance company can no longer invoke concealment because
a warranty, entitles the insurer to rescind. in the application, theres a waiver of the confidentiality of hospital
records wherein it could have check Ed
the hospital but it did not do so.
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3. The party must have knowledge of the fact which could be material and Like when an oil tanker was insured and the insurance company says why did you
the party makes no warranty of such fact. Because if theres a warranty, the not tell us about the Somalian pirates would hijack the tankers? They should
defense of the insurance company will be breach of warranty and not know that.
concealment. There was a case where a nurse in Pampanga got an accident insurance and when
4. The other does not have the means of ascertaining the fact concealed. she filed a claim, insurance company denied on the ground that she concealed that
fact of poor peace and order situation. And at that time Pampanga and Tarlac were
The insurance agents are always very aggressive to close the deal so they can get the center of Huk movement. Court said they ought to know that.
their commission. No one have endurance like one who sells insurance. Those which the other waives or those which tended to prove the existence of the
If the insured allowed the insurance agent to fill up the application form, he is risk excluded. If you look at a fire insurance policy, it will not answer for loss of
bound if there are concealment and misrepresentation because of allowing that fire to due to rebellion, coup dtat, insurgency, riots. So if the insured did not
agent to fill up the form hence, he made the insurance agent his own agent. disclose the NPA elements in the place (where when you do not pay revolutionary
There was a case referred to me, a bank obtained a blanket bankers insurance to taxes, they will set your building on fire), insurer cannot claim that there was
answer for the defalcation (misappropriation) by bank tellers. In the application, the concealment because the insurer would not have been liable for the fire.
bank was asked to list all prior incidents of bank defalcation and they mentioned If theres a matter which was sought but the insured applicant has no personal
only 2. Later on, a claim was filed and in the course of the investigation, insurance knowledge, he can give what he knows based on the information given to him.
company found out that there were several cases of defalcation which were not Like they would usually ask about family history, what were the cause of the death
reported. They said you concealed that fact and the bank said the way we of the parents, brothers and sisters, because you are prone to contract the same
understood your form, you wanted us to report for cases where the teller was illnesses. Or some matter of opinion, such as do you think you will live long?
criminally prosecuted, and I said No, thats not in the question. This is critical
because that would give the insurer the idea whether the bank has good system of If the fact concealed was not the cause
controls. And so the insurance denied the claim. Both in concealment and misrepresentation, the insurer will not be liable if the fact
concealed was not the cause. In the case where the person who died in the plane
SEC. 30. Neither party to a contract of insurance is bound to communicate crash has kidney ailment, the insurance company said that the fact remains that it
information of the matters following, except in answer to the inquiries of the was misled into accepting a risk. He might not have accepted or might have
other:
accepted but with a higher premium.
a. Those which the other knows;
b. Those which, in the exercise of ordinary care, the other ought to know, SEC. 31. Materiality is to be determined not by the event, but solely by the
and of which the former has no reason to suppose him ignorant; probable and reasonable influence of the facts upon the party to whom the
c. Those of which the other waives communication; communication is due, in forming his estimate of the disadvantages of the
d. Those which prove or tend to prove the existence of a risk excluded by proposed contract, or in making his inquiries.
a warranty, and which are not otherwise material; and
e. Those which relate to a risk excepted from the policy and which are not SEC. 32. Each party to a contract of insurance is bound to know all the general
otherwise material. causes which are open to his inquiry, equally with that of the other, and which
may affect the political or material perils contemplated; and all general usages
Matters which the insurer need not disclose of trade.
First, if you filed for a fire insurance, the insurance company sends its agents to
inspect the place and the insurance is approved, then a fire broke out. They cannot SEC. 33. The right to information of material facts may be waived, either by the
terms of insurance or by neglect to make inquiry as to such facts, where they
claim concealment where there are inspectors who went to the place; or which in
are distinctly implied in other facts of which information is communicated.
the exercise of ordinary care, the other ought to know or has no reason to suppose
him ignorant.
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SEC. 34. Information of the nature or amount of the interest of one insured SEC. 41. A representation may be altered or withdrawn before the insurance is
need not be communicated unless in answer to an inquiry, except as effected, but not afterwards.
prescribed by Section 51.
SEC. 42. A representation must be presumed to refer to the date on which the
SEC. 35. Neither party to a contract of insurance is bound to communicate, contract goes into effect.
even upon inquiry, information of his own judgment upon the matters in
question. SEC. 43. When a person insured has no personal knowledge of a fact, he may
nevertheless repeat information which he has upon the subject, and which he
REPRESENTATION believes to be true, with the explanation that he does so on the information of
others; or he may submit the information, in its whole extent, to the insurer;
and in neither case is he responsible for its truth, unless it proceeds from an
SEC. 36. A representation may be oral or written.
agent of the insured, whose duty it is to give the information.
SEC. 37. A representation may be made at the time of, or before, issuance of
the policy.
In one case, it was questioned if the person was ever hospitalized and he said that he
was operated upon of tumor associated with ulcer. That was wrong; he was
operated with peptic ulcer. The Court said there is no misrepresentation because he
Representations - statements made to induce somebody else to enter into a
relied in good faith on what the physician told him.
contract. So they are not part of the terms and conditions of the contract, they are
For a question such as, have you ever applied an insurance policy or the
inducements made. Thats why once the contract has been signed, representations
reapplication of a lapse policy and such was denied?, the answer was no. It turns
can no longer be changed or withdrawn. Remember, we have parole evidence rule,
out when she applied for a reapplication, it was denied, but on reconsideration it
it is presumed that when the parties have reduced their contract in writing, they
was granted. Court said there was no misrepresentation because while it was
intend that it be the sole repository of their agreement. You cannot present
initially denied, it was later on granted.
external evidence to disprove that is in the contract.
SEC. 44. A representation is to be deemed false when the facts fail to
SEC. 38. The language of a representation is to be interpreted by the same correspond with its assertions or stipulations.
rules as the language of contracts in general.
SEC. 45. If a representation is false in a material point, whether affirmative or
SEC. 39. A representation as to the future is to be deemed a promise, unless it promissory, the injured party is entitled to rescind the contract from the time
appears that it was merely a statement of belief or expectation. when the representation becomes false.
SEC. 40. A representation cannot qualify an express provision in a contract of SEC. 46. The materiality of a representation is determined by the same rules
insurance, but it may qualify an implied warranty. as the materiality of a concealment.
Representation cannot quality an express provision but it can qualify an implied Serious ailments are the usual source of misrepresentation, like tuberculosis, cancer
warranty. An implied warranty is not the result of representation it is imposed by diabetes, heart ailments etc. In the application, it is questioned, do you take
law. You find that in Marine insurance as an implied warranty that the vessel is drugs? answering no would be a misrepresentation. But when asked if do
seaworthy, that it will not deviate, that it will not engage in illegal ventures and you drink alcoholic drinks, in a matter referred to me his answer was no, but
that the ship will carry documents of nationality or neutrality. They are imposed when he was 16 everyday he would drink 6 bottles of beer, he died of cirrhosis of
by law and not by contract. the liver, so that was misrepresentation. But when a fellow attends cocktails parties
and drinks a glass of wine that is not misrepresentation.
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SEC. 47. The provisions of this chapter apply as well to a modification of a becomes unlawful at the place of the contract, or impossible, the omission to
contract of insurance as to its original formation. fulfill the warranty does not avoid the policy.
SEC. 48. Whenever a right to rescind a contract of insurance is given to the SEC. 74. The violation of a material warranty, or other material provision of a
insurer by any provision of this chapter, such right must be exercised policy, on the part of either party thereto, entitles the other to rescind.
previous to the commencement of an action on the contract.
SEC. 75. A policy may declare that a violation of specified provisions thereof
After a policy of life insurance made payable on the death of the insured shall shall avoid it, otherwise the breach of an immaterial provision does not avoid
have been in force during the lifetime of the insured for a period of two (2) the policy.
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 SEC. 76. A breach of warranty without fraud merely exonerates an insurer
fraudulent concealment or misrepresentation of the insured or his agent. from the time that it occurs, or where it is broken in its inception, prevents the
policy from attaching to the risk.
This is the INCONTESTABLE CLAUSE. This will be discussed in detail later.-JT
Another way to minimize risk is warranty a statement in the policy relating to the
WARRANTIES insured or to the risk as a fact. While breach of warranty is a defense of the insurer, the
law provides that if the insured can prove that it is not material then that cannot be
Note: In the codal, the provisions covering the insurance policy come before warranties, but Atty. invoked as a defense.
Jimenez discussed warranties first. In fire insurance policies, there is a requirement to disclose if the applicant has other
fire insurance and it will include existing and those which may be obtained in the
SEC. 67. A warranty is either expressed or implied. future it is important because it may be indicative to commit arson.
In one case, the insured has insured his stocks in trade with himself as beneficiary.
SEC. 68. A warranty may relate to the past, the present, the future, or to any or Later on, he mortgaged his stocks in trade and got insurance coverage payable to
all of these. the mortgagee. When loss occurred, insurance company refused to pay because he
did not disclose that he had other insurance but the court said that it was not double
SEC. 69. No particular form of words is necessary to create a warranty. insurance because the interest insured are different. The first one is the interest of
the insured as owner and the second one in the interest of the mortgagee because
SEC. 70. Without prejudice to Section 51, every express warranty, made at or they deal on the stocks in trade.
before the execution of a policy, must be contained in the policy itself, or in In fire insurance, as warranty, the insured is prohibited from bringing hazardous
another instrument signed by the insured and referred to in the policy as substances inside the insureds premises. So if they bring fireworks that would be
making a part of it. a breach of warranty. And theres breach of warranty even if that is not the cause of
the loss. The insurer is not liable because the insurance was exposed to a risk
SEC. 71. A statement in a policy, of a matter relating to the person or thing beyond what the insurer was willing to assume. Like even if he brought fireworks
insured, or to the risk, as fact, is an express warranty thereof.
but fire broke out in the kitchen because of the gas tank insurer will not be liable.
If the use of the property was specified and it was used for another purpose without
SEC. 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 the consent of the insurer in that it increased the risk insurer is not liable. In a case
omission shall take place. in Cavite where the insured transferred to another place; based on the table of the
risk the premium should be higher so the Court said the insurer will not be liable.
SEC. 73. When, before the time arrives for the performance of a warranty HOWEVER, this should be given a reasonable interpretation, which is incidental
relating to the future, a loss insured against happens, or performance to the business, that will not be breach. For example, a restaurant uses LPG gas
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tank for cooking, and fire broke out because of that that is not a breach of Also the law provides that the insurer will be liable despite the breach if the insured
warranty because it is a natural activity in the kitchen. was given a certain time to comply with the warranty and such time has not yet
Likewise you have that Kwa Chee Gan case where the warehouse was brought lapsed. The owner applied for fire insurance and it should construct a firewall
down by fire and was found to have 2 drums of gasoline in the premises. It was within 60 days, fire broke out 30 days after, the insurer will be liable. Also if
explained that it was used as the gas of trucks for the delivery of the goods to their compliance is impossible, such as when cement disappeared and government had to
customers and such amount of gas was found to be equivalent to the consumed import cement from Indonesia, insured is excused.
gasoline for 2 days. Court said that such is incidental to the business. Or when compliance became unlawful, like in a fire insurance of apartment where
Or a factory which manufactures furniture, paint and varnish in the premises was the insurer asked the ejectment of tenants who had many children but then the
said to be natural because its used in the business; thus, incidental to the business. House Rental Law was passed prohibiting the eviction of tenants so the insured
In the Tantoco terminal case which got a fire insurance, it was said that they should cannot comply.
have internal and external fire hydrants, fire pump, fire extinguishers. Fire broke
out, insurer said it did not have internal fire hydrants and pumps and hence Date: November 25, 2014 (HQ)
committed breach. But the court they had sufficient external fire hydrants which
NOTE: At this point, the codal provisions are jumbled. Please bear with us. Oso = bear.
has several hose connected to them so it reached inside the warehouse. They had no
fire pump but had firetruck. The reason for the warranty is to make fire equipment PREMIUM
be available. This is complied with in the case, so the insurer is liable.
For motor vehicle insurance, for the insurer to be liable the one driving must be SEC. 77. An insurer is entitled to payment of the premium as soon as the thing
the owner or one authorized to drive with a valid drivers license. The wording of insured is exposed to the peril insured against. Notwithstanding any
the law deems that if the owner is the one driving, there is no need for a drivers agreement to the contrary, no policy or contract of insurance issued by an
license, insurer is liable. insurance company is valid and binding unless and until the premium thereof
If you bring your car to a repair shop, you allow them to put your car to a test has been paid, except in the case of a life or an industrial life policy whenever
the grace period provision applies, or whenever under the broker and agency
drive. So that if an accident happens, insurer cannot claim that it is not liable. agreements with duly licensed intermediaries, a ninety (90)-day credit
In the Villacorta case, the car brought to the repair shop was used to a baptismal extension is given. No credit extension to a duly licensed intermediary should
ceremony by an employee, the Court said that the unauthorized use was considered exceed ninety (90) days from date of issuance of the policy.
theft so the insurer is liable for the damage when it was involved in an accident.
(Owner gave no consent to such use and thus insurer was judged to be liable) SEC. 78. Employees of the Republic of the Philippines, including its political
subdivisions and instrumentalities, and government-owned or -controlled
Likewise, if the person driving has no or has expired license, such would be a corporations, may pay their insurance premiums and loan obligations through
breach of warranty. Foreigners are allowed to use their drivers license for 90 days. salary deduction: Provided, That the treasurer, cashier, paymaster or official
In case, where the foreigner was using a drivers license beyond the 90 days, the of the entity employing the government employee is authorized,
insurer was not liable. notwithstanding the provisions of any existing law, rules and regulations to
Non-professional drivers license can only be used to drive four-wheel vehicles and the contrary, to make deductions from the salary, wage or income of the latter
pursuant to the agreement between the insurer and the government employee
should be weighed not more than 4,500 kg. In a case where somebody was driving
and to remit such deductions to the insurer concerned, and collect such
a 10-wheeler, weighing more than 4,500 kg, the Court said that the person is not reasonable fee for its services.
authorized to drive and so the insurer is not liable. Or if the one driving is high on
drugs, taken ecstacy, or driving under the influence of liquor they are not SEC. 79. An acknowledgment in a policy or contract of insurance or the
authorized to drive and insurer is not liable. receipt of premium is conclusive evidence of its payment, so far as to make
Somebody gets a fire insurance policy, fire broke out in October and also in New the policy binding, notwithstanding any stipulation therein that it shall not be
binding until the premium is actually paid.
Years Eve because of the fireworks, insurer will only be liable on the fire in
October because there was no breach at that time.
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History: Exceptions:
Sec. 77 (as amended by RA Sec. 77 of 1978 Sec. 72 of the 1. Life insurance (grace period) the insured must be given a grace period of 30
10607) *latest Insurance Code Insurance Act days to pay the subsequent premiums after the initial premium.
An insurer is entitled to payment of An insurer is entitled to An insurer is entitled to
the premium as soon as the thing payment of the premium as payment of the premium 2. An acknowledgment in the policy that the premium has been paid - If the
insured is exposed to the peril soon as the thing insured is as soon as the thing policy contains a provision that the premium has been paid - that is conclusive for
insured against. Notwithstanding exposed to the peril insured insured is exposed to the the purpose of making the policy in force BUT not for the purpose of collecting
any agreement to the contrary, against. Notwithstanding peril insured against,
the premium.
no policy or contract of insurance any agreement to the unless there is a clear
issued by an insurance company is contrary, no policy or agreement to grant the
1. The insured will still be liable to pay premiums. If the loss occurred, the
valid and binding unless and until contract of insurance issued insured credit extension of the insurer will be liable to pay then deduct from there the amount of premiums.
the premium thereof has been paid, by an insurance company is premium due. No policy or
except in the case of a life or an valid and binding unless and contract of insurance 3. Makati Tuscany Case4
industrial life policy whenever the until the premium thereof has issued by an insurance Facts: Makati Tuscany (insured) agreed that it would be allowed to pay the
grace period provision applies, or been paid, except in the case company is valid and premiums in installments. Insured paid several premiums, all of which were
whenever under the broker and of a life or an industrial life binding unless and until accepted by AHAC (insurer). Thereafter, Tuscany refused to pay the balance
agency agreements with duly policy whenever the grace the premium thereof has of the premium. AHAC filed an action to recover unpaid balance/premiums.
licensed intermediaries, a ninety period provision applies been paid, except in the
Tuscany explained that it discontinued paying premiums because the policy
(90)-day credit extension is given. case of a life or an
No credit extension to a duly industrial life policy
did not contain a certain credit clause. The policy also contained the following
licensed intermediary should whenever the grace reservations:
exceed ninety (90) days from date period provision applies. a. Acceptance of this payment shall not waive any of the company
of issuance of the policy. rights to deny liability on any claim under the policy arising before
such payments or after the expiration of the credit clause of the
*Note: It can be seen that Section 77 DOES NOT RESTATE the portion of Section 72 expressly policy; and
permitting an agreement to extend the period to pay the premium. Such phrase was discarded and b. Subject to no loss prior to premium payment. If there be any loss
replaced by Notwithstanding any agreement to the contrary. such is not covered.
*BUT NOW: The Law expressly provides for credit extension J
Tuscany argued that the policy was never binding and valid, and no risk
GENERAL RULE: No insurance policy issued or renewed is valid and binding attached to the policy. Tuscany also filed a counterclaim for refund of
Insured
until ACTUAL PAYMENT of the PREMIUM. Any agreement to the contrary is premiums that were already paid. Insurer argued that the agreement was void
VOID. therefore it could not sue to collect the rest of the premiums and it filed a
counterclaim for refund for the premiums.
Note: In UCPB General Insurance v. Masagana Telemart, the Supreme Court held that the
parties may not agree expressly or impliedly on the extension of credit or time to pay the premium Held: Insurance policy is VALID. Tuscany ordered to pay the balance of the
and consider the policy binding before actual payment. premium after the expiration of the whole term of the third policy. Since the
risk is entire and the contract is indivisible, the insured is not entitled to a
In MR, however, the SC REVERSED the earlier decision and enumerated 5 EXCEPTIONS refund of the premiums paid if the insurer was exposed to the risk insured for
to the General rule or Section 77. any period, however brief or momentary.

4
Edited this digest: http://coffeeafficionado.blogspot.com/2012/03/makati-tuscany-condominium-
corporation.html
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Ratio: Insurance policy is valid notwithstanding the payment of the 5. Where the parties are barred by Estoppel
premiums by installment. Records clearly show that Tuscany and AHAC For quite some time, premiums were paid within 60-90 days. This led the
intended to subject insurance policies to be binding and effective insured to believe that they can pay the premium after quite some time.
notwithstanding the staggered payment of premiums. AHAC accepted all the
installment payments during the first 3 years. Such acceptance of payments Estoppel is based on equity and you cannot invoke equity if there is an
manifests the insurers intention to honor the policies it issued. Basic principles applicable law. You could only go to court if your cause of action fell under
of equity and fairness would not allow the insurer to continue collecting and any of the allowed classifications.
accepting the premiums, although paid installments, and later deny liability on For example, recovery of real property = detainer, recovery of
the lame excuse that premiums were not paid in full. Thus, while the import personal property = replevin.
of Section 77 is that prepayment of premiums is strictly required as a condition If the facts of your case do not fall under any allowed causes of action, the
to the validity of the contract, the Court was not prepared to rule that the party cannot sue. It was realized that this is causing injustice. Equity was
request to make installment payments duly approved by the insurer, would created to provide a remedy when you do not have a remedy in law.
prevent the entire contract of insurance from going into effect despite
payment and acceptance of the initial premium or first installment. Classic example:
Every morning somebody using binoculars is peering into the bedroom of the
Doctrine: Section 77 may not apply if the parties have agreed to the payment wife of his neighbor. This neighbor cannot sue for detainer because the other
of the premium in installments and partial payment has been made at the time person did not set foot at the land of the neighbor, equity created a remedy
of the loss. Section 77 merely precludes the parties from stipulating that the injunction. Estoppel is a principle of equity. Our courts have said equity
policy is valid even if premiums are not paid, but does not expressly prohibit follows the law. You cannot invoke equity if there is a law.
an agreement granting credit extension, and such an agreement is not contrary
to morals, good customs, public order or public policy. I have not met any professor in insurance who agrees with this UCPB decision - HQ
But in Matibag case: SC made distinctions the policy provided

that the premiums could be paid in installments but it will not be Now, the present provision injected little additions.
binding until the premiums have been fully paid. Therefore, insurer A. Credit Extension
will not be answerable for losses which occurred before the premium v A 90-day credit extension may be given whenever credit extension is given
was fully paid. under the broker and agency agreements with duly licensed intermediaries.
v Requisites:
In the old original insurance act, it was provided that the parties may agree to grant (a) Credit extension must be provided under the broker and agency
extension of credit and now, the provision in the policy acknowledging the premium has agreements; and
been paid is conclusive. Some insurance companies are still using the forms they had under (b) Credit extension should NOT EXCEED 90 days fro the date of
the Old Law, thats why they still contain that provision acknowledging the premium issuance of the policies
has been paid. B. Salary Deductions for Government Employees (Section 78)
4. Where a credit term was agreed upon Different kinds of agents:

If the parties agreed to the extension of credit, then thats not prohibited by Special agent
law. This is like what happened in UCPB v. Telemart case where the insurer i. Bring the prospective applicant to the company, and company
granted a 60-90-day credit term for the payment of the premiums despite full will be the one who will decide on the application
awareness of Section 77. ii. Company will collect the premiums.
iii. Special agents will be paid commissions.
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Unit manager has several agents under him (which he supervises). Again, they can only COVER NOTES (Under Title 6: Policy)
solicit customers, and bring them to the company. The company will decide whether to SEC. 52. Cover notes may be issued to bind insurance temporarily pending
issue the policy, and the company will collect the premiums then they will be given the issuance of the policy. Within sixty (60) days after issue of a cover note, a
commissions. policy shall be issued in lieu thereof, including within its terms the identical
insurance bound under the cover note and the premium therefor.
General Agents Cover notes may be extended or renewed beyond such sixty (60) days with the
Authorized to underwrite and issue policies. written approval of the Commissioner if he determines that such extension is
They are authorized to issue the policies then collect the not contrary to and is not for the purpose of violating any provisions of this
premiums. Code. The Commissioner may promulgate rules and regulations governing
Industry practice: They are given 60 days to keep the money. such extensions for the purpose of preventing such violations and may by
such rules and regulations dispense with the requirement of written approval
They can invest that. BUT often they go beyond that period
by him in the case of extension in compliance with such rules and regulations.
Broker
Cover note is NOT a separate insurance policy.
Agent of the insured. So, the insured will ask a broker: Can you get
It is a temporary coverage granted to the insured before the policy is issued.
insurance coverage for our needs from a reputable insurance
Note that separate policies have separate premiums.
company who will give us competitive and reasonable rates?
Common example: Compulsory 3rd party liability insurance
Now, the broker is the agent of the insured BUT the insured will not
o When you register or renew registration of your car, you have to
pay the compensation.
submit to the LTO proof that you have compulsory 3rd party liability
It is the insurer who will pay broker the commission it would have
insurance. But it takes time to apply for it and people always do last
paid its agent
minute renewal. It takes time to issue the policy so they will issue only
a cover note and tie up with the computer of the LTO.
Amendment in the new law: Where an insurer authorizes an insurance o Side comment: There is a complaint that people are submitting fake
agent or broker to deliver a policy to the insured, it is deemed to insurance policies in renewal of car registration this cannot happen
have authorized said agent to receive the premium in its behalf. (The without collusion with the LTO!
insurer is also bound by its agents acknowledgment of receipt of
payment of premium.)
Cover Notes are common in marine insurance
Now, the law provides that if the insurance company delivers the o Example: Importer wants to make sure that his goods are insured the
policy to the broker to be transmitted to the insured it is making moment they are loaded in the vessel. but he does not know when the
the broker agent to collect the premium. seller will be able to get a chartered vessel to transport goods to Manila.
If the insured pays the premium to the broker, that is considered What will you do? You will get a cover note.
payment to the insurance company and the insurance company will
be liable if loss occurs. A cover note is not a separate insurance policy, so you cannot charge separate
premiums.
What happens when the brokers keep the money, they do not remit If loss occurs before the policy has been issued, the rights and obligations will
the money for a long time? They put it on money market placements be governed by the policy that would have been issued.
(especially the big ones, they are arrogant!) Law now provided agents
and brokers are allowed to keep the premium for a maximum of 90
days.
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REFUND OF PREMIUMS 2. Some policies provide for a proportionate refund if the policy is cancelled.
SEC. 80. A person insured is entitled to a return of premium, as follows: Policy provided that if you cancel the policy before one year, there is
(a) To the whole premium if no part of his interest in the thing insured be table there showing month by month how much will be the refund.
exposed to any of the perils insured against;
(b) Where the insurance is made for a definite period of time and the insured
3. If the policy is voidable because of fraud, under the provisions of the Civil
surrenders his policy, to such portion of the premium as corresponds with the
unexpired time, at a pro rata rate, unless a short period rate has been agreed Code or on account of fraud or misrepresentation of the insurer, insured can
upon and appears on the face of the policy, after deducting from the whole get a refund.
premium any claim for loss or damage under the policy which has previously Example: Insured said I want to institute a marine policy BUT the
accrued: Provided, That no holder of a life insurance policy may avail himself insurer gave a different policy. The insured can ask for a refund.
of the privileges of this paragraph without sufficient cause as otherwise
provided by law.
4. When the insurer never incurred any liability under the policy because of the
SEC. 81. If a peril insured against has existed, and the insurer has been liable default of the insured other than actual fraud.
for any period, however short, the insured is not entitled to return of Example: Insured obtained a fire insurance policy. The insurer says: We
premiums, so far as that particular risk is concerned. will insure your house on the condition that a firewall must be built. But
the insured never built a firewall. The insured was in default but there
SEC. 82. A person insured is entitled to a return of the premium when the was no fraud on his part.
contract is voidable, and subsequently annulled under the provisions of the
Civil Code; or on account of the fraud or misrepresentation of the insurer, or
of his agent, or on account of facts, or the existence of which the insured was NO REFUND: The insured, however, is NOT entitled to refund of premium IF the
ignorant of without his fault; or when by any default of the insured other than policy is annulled by reason of fraud or misrepresentation of the insured.
actual fraud, the insurer never incurred any liability under the policy.
What if the insured is guilty of fraud?
A person insured is not entitled to a return of premium if the policy is
Policy is annulled. Claim was denied, because of fraud you cannot ask for a
annulled, rescinded or if a claim is denied by reason of fraud.
refund.
Example: There was a case where a retired naval captain got medical
If the peril insured has existed no matter how ever short may be the period of time,
insurance from 3 companies. The medical insurance policy provides that for
insured CANNOT ask for refund for the insurer has already earned the premium.
everyday he is confined in the hospital, the insurance company will pay him
Example 1: a vessel was insured to freight from Manila to Cebu. While it was
something. He filed a claim for confinement in Veterans memorial hospital
in Romblon, the insured changes his mind and cancels the policy and files a
for 60days. Ailment: Arthritis. Atty. Jack asked a physician: Does arthritis
refund. The moment the vessel left port, it already assumed the risk of loss
require confinement? NO.
therefore the insurer has already earned premium.
This retired navel captain was influential and he was able to borrow the
Example 2: Somebody paid the initial premium for 1-year life insurance. LOL
medical records. He corrected them using snowpaint haha that he was
After 6 months, he changes his mind, he cancels the policy and asks for refund confined for 60days. He was there but he would go out to buy cigarettes. The
of half of the premium. This cannot be because human life is indivisible! nurse would be making her rounds and recorded that he was not in the
hospital. But he argued that he was only outside to buy cigarettes so the
The insurer can get a refund of the premium under certain circumstances: records corrected. But one of the insurance companies was able to photocopy
the records before they were altered. So the claim against the insurance
1. If the property insured is never exposed to peril, insurer can ask for refund. company was denied. The policy was revoked.
Example: 100 sacks of rice was insured but the rice was never shipped
insured can ask for refund.
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OVER INSURANCE SEC. 64. No policy of insurance other than life shall be cancelled by the
SEC. 83. In case of an over insurance by several insurers other than life, the insurer, except upon prior notice thereof to the insured, and no notice of
insured is entitled to a ratable return of the premium, proportioned to the cancellation shall be effective unless it is based on the occurrence, after the
amount by which the aggregate sum insured in all the policies exceeds the effective date of the policy, of one or more of the following:
insurable value of the thing at risk.
(a) Nonpayment of premium;
There should be a proportionate refund of the premium. (b) Conviction of a crime arising out of acts increasing the hazard insured
Example: against;
Building worth P10M insured with:
Malayan P10M, insured paid P10k premium (c) Discovery of fraud or material misrepresentation;
Pioneer P5M; P5k premium
(d) Discovery of willful or reckless acts or omissions increasing the hazard
Prudential Guarantee P5M; P5k premium insured against;
Over insured by P10,000!
The insurance companies should make a proportionate refund to reduce the (e) Physical changes in the property insured which result in the property
insurance coverage: becoming uninsurable;
(a) Malayan should refund P 5,000.
(b) Pioneer: P 2,500. (f) Discovery of other insurance coverage that makes the total insurance in
excess of the value of the property insured; or
(c) Prudential: P 2,500.
(g) A determination by the Commissioner that the continuation of the policy
Now, the law now contains an amendment: would violate or would place the insurer in violation of this Code.
SEC. 84. An insurer may contract and accept payments, in addition to regular
premium, for the purpose of paying future premiums on the policy or to Grounds:
increase the benefits thereof. 1. The non-life insurance company can cancel if premium was not paid.
An insurance company may accept that or pay additional premium to increase 2. Convicted a crime increasing the hazard
the benefits. Example: A person was convicted of arson.
Example: I got a life insurance policy then the agent said: I suggest you get a double 3. Discovery of fraud or material misrepresentation
indemnity rider if the death is accidental amount to be paid will be doubled. The Example: The naval captain who misrepresented that he was confined for 60days.
insurance company may charge additional premium for that.
4. Discovery of willful/reckless acts or omissions increasing the hazard of the
CANCELLATION OF POLICY (Under Title 6: Policy) insured
Theres this bus company transporting passengers along EDSA (DM Transit) Every
There was an amendment introduced in 1978 insurance code which authorized and regulated week it has 2-3 major accidents.
cancellation of non-life insurance policy. Atty: Jack: I think the policy was eventually cancelled. (kaya DM kasi mga Demonyong
Magmaneho!) so the insurance company cancelled the policy.
Before: A non-life issued a fire insurance policy. The insured is suffering losses in his business. So
the insurer cancelled the policy because the insured might commit arson. Now, that is regulated. An 5. Physical changes in the property insured which result in the property
amendment is carried over with some variation. becoming uninsurable.
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There used to be a bowling alley along UN Avenue owned by a family but when the SEC. 65. All notices of cancellation mentioned in the preceding section shall
lease expired, they could no longer own land. So they sold the property to Bong Bong be in writing, mailed or delivered to the named insured at the address shown
Arayta? and leased the premises to someone. The lessee converted the property to a in the policy, or to his broker provided the broker is authorized in writing by
warehouse of copra. If that was insured, the insurance company can cancel the policy. the policy owner to receive the notice of cancellation on his behalf, and shall
state:
You converted the property to a copra warehouse, eh copra is oil-based, thats (a) Which of the grounds set forth in Section 64 is relied upon; and
hazardous! (b) That, upon written request of the named insured, the insurer will furnish
the facts on which the cancellation is based.
6. Additional ground added by the amendment recently: Discovery of other
insurance coverage that makes the total insurance in excess of the value of SEC. 66. In case of insurance other than life, unless the insurer at least forty-
the property insured five (45) days in advance of the end of the policy period mails or delivers to
the named insured at the address shown in the policy notice of its intention
not to renew the policy or to condition its renewal upon reduction of limits or
7. Last: Determination by the Commissioner that the continuation of the elimination of coverages, the named insured shall be entitled to renew the
policy would violate the Insurance Code policy upon payment of the premium due on the effective date of the renewal.
Any policy written for a term of less than one (1) year shall be considered as if
LIMIT OF SINGLE RISK written for a term of one (1) year. Any policy written for a term longer than one
SEC. 221. No insurance company other than life, whether foreign or domestic, (1) year or any policy with no fixed expiration date shall be considered as if
shall retain any risk on any one subject of insurance in an amount exceeding written for successive policy periods or terms of one (1) year.
twenty percent (20%) of its net worth. For purposes of this section, the term
subject of insurance shall include all properties or risks insured by the same Written notice should be given either by (1) mail or (2) delivery to the insured or broker
insurer that customarily are considered by non-life company underwriters to (if the insured told the insurance company that it is authorizing the broker to receive
be subject to loss or damage from the same occurrence of any hazard insured notice). But the prudent thing is it should be mailed by registered mail.
against. Malayan Case: Malayan Insurance denied the claim and said that it sent notice that it is
cancelling the policy. It sent the notice by ordinary mail. Insured denied the receipt of
The Commissioner may issue regulations providing for a maximum limit on
the overall retained risks of insurers to serve as a catastrophe cover notice of cancellation. So, Malayan was held liable.
requirement for the same.
CONTENTS: Notice must indicate the following -
Reinsurance ceded as authorized under the succeeding title shall be deducted Ground for cancellation
in determining the risk retained. As to surety risk, deduction shall also be
State that upon request of the insured, it will furnish the facts on which it bases
made of the amount assumed by any other company authorized to transact
surety business and the value of any security mortgaged, pledged, or held its decision to cancel the policy
subject to the suretys control and for the suretys protection.
INTERPRETATION OF INSURANCE CONTRACTS
There is a limit to the maximum amount that an insurance company can insure per
policy. 1. MOST COMMONLY INVOKED: Insurance contracts are contracts of
Maximum underwriting capacity: 20% of net worth (Assets minus Liabilities = adhesion; therefore, in case of obscurity, insurance contracts should be
Net Worth) strictly construed against insurer and liberally in favor of the insured.
Example: Net Worth: P100M Maximum amount it can insure is P20M
Example: Equitable insurance issued an accident policy. One provision said that the
It can issue policies in excess of that but the excess must be reinsured. indemnity is P1k and another one saying that the indemnity is P3k. Court said that it is
the fault of the insurer if there are conflicting provisions. So the insurer paid P3k.
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2. If words are clear, there is no room for interpretation. Example 4: Insured has an old coconut mill covered by an insurance policy. It built a
new coconut mill and applied for insurance. By mistake, the policy issued covered the
Example: Accident policy provided for indemnity if there is amputation of the arm or old mill. New mill got burned. Insured filed a claim. Insurance company refused to pay
wrist. What happened was the finger of the insured was fractured. Court said: clearly saying that the policy covered the old mill.
that's not covered by the policy. Policy provides that the wrist must be amputated.
SC: Clearly there was a mistake! The old mill is already fully covered, while the new
3. Policy must be interpreted to carry out intention of the parties. mill is not covered at all. Clearly, the intention was to cover the new mill. (American
(then Atty. Jack told something about Justice Paras quoting the story of Samson (Bible) Home Assurance Company v. Tantuco Enterprises, GR No. 138491)
in one decision that Delilah complied with the contract that she did not touch any part
of Samsons body wahaha) 4. Forfeiture of benefits is NOT favored. It is frowned upon!
Example 1: Payroll of the company was insured. It provided that the insurer would not 5. Decisions of California Courts involving insurance are persuasive.
be liable if the loss was due to the fault of an agent or employee/representative of the
insured. The insured asked a security guard agency to provide an armored van with The Philippine Insurance Code was based from Civil Code of California.
security guards and driver. It was the driver and security guards who stole the money. SC said that in the absence of Philippine jurisprudence, decisions of the courts of
Claim was filed. Insurer said it is not be liable. Insured argued that the driver and California involving insurance have persuasive force.
security guards were not their employees/representatives, but were only independent
contractor. Date: November 27, 2014 (JG)
SC: What is the reason behind that? It means that the insurer is not willing to assume THE INSURANCE POLICY
the risk of the money being stolen by the very people who have physical possession of
the money and thats the situation here. Hence, the driver and the guards should be SEC. 49. The written instrument in which a contract of insurance is set forth is
deemed representatives of the insured. Insurance company is not liable (Fortune Insurance called a policy of insurance.
v. CA and Producers Bank, GR No. 115278)
When a major life insurance company opened in 1910, the very first life insurance
Example 2: There was somebody who got an accident insurance policy which provided policy was written in the handwriting of the company president. In the amendment of
indemnity for loss of the legs. SC: the legs were not amputated but he could not use the present code, it states there that it can also be issued in electronic forms.
it. So the inability to use both of the legs is equivalent to loss of both legs.
J SEC. 50.
The policy shall be in printed form which may contain blank spaces;
Example 3: A resort insured its pool against earthquake with American Insurance. The
o and any word, phrase, clause, mark, sign, symbol, signature,
insurance company was able to convince to resort transfer insurance with another number, or word necessary to complete the contract of
insurance company (Philippine Charter) when it is up for renewal. The agreement was insurance shall be written on the blank spaces provided
that the insurance policy must be exactly the same to the previous policy. But when the therein.
policy was issued, a rider was attached which included the clubhouse under the Any rider, clause, warranty or endorsement purporting to be part of
coverage. During the 1989 earthquake, the clubhouse was damaged. Claim was filed. the contract of insurance and which is pasted or attached to said
SC: That was not the intention of the parties! Agreement was that the policy must be policy is not binding on the insured,
o unless the descriptive title or name of the rider, clause,
the exact duplicate of the previous policy which did not include clubhouse! warranty or endorsement is also mentioned and written on
Secondly, the premium paid covered only insurance on swimming pools. Clearly, the the blank spaces provided in the policy.
clubhouse was not covered by the policy! (Gulf Resorts v. Philippine Charter Insurance Unless applied for by the insured or owner, any rider, clause, warranty
Corporation, GR No. 156167) or endorsement issued after the original policy shall be countersigned
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by the insured or owner, which countersignature shall be taken as his Keppel Cebu Shipyard v. Pioneer Insurance
agreement to the contents of such rider, clause, warranty or WG&A Jebsens Ship Mgt (Owner/Operator of M/V Superferry 3) and Keppel
endorsement.
Cebu Shipyard entered into an agreement that the Drydocking and Repair of
the above-named vessel ordered by the Owners Authorized Representative
Notwithstanding the foregoing, the policy may be in electronic form subject to
shall be carried out under the Keppel Cebu Shipyard Standard Conditions
the pertinent provisions of Republic Act No. 8792, otherwise known as the
Electronic Commerce Act and to such rules and regulations as may be Contract for Ship repair, guidelines and regulations on safety and security
prescribed by the Commissioner. issued by Keppel Cebu Shipyard. In the course of its repair, M/V Superferry 3
caught fire and it was damaged. So WG&A sued the Insurance company and
J SEC. 51. A policy of insurance must specify: the latter sued the Shipyard. Shipyard argued that it paid the insurance policy
(a) The parties between whom the contract is made; and that it was insured. Therefore, the shipping company should collect from
(b) The amount to be insured except in the cases of open or running insurance policy.
policies; o HELD: Keppel Shipyard is not paid. Therefore, its defense must be
(c) The premium, or if the insurance is of a character where the exact rejected. Keppel Shipyard was ordered to pay the insurance
premium is only determinable upon the termination of the contract, a
company.
statement of the basis and rates upon which the final premium is to
be determined;
(d) The property or life insured; J SEC. 54. When an insurance contract is executed with an agent or trustee
(e) The interest of the insured in property insured, if he is not the as the insured, the fact that his principal or beneficiary is the real party in
absolute owner thereof; interest may be indicated by describing the insured as agent or trustee, or by
(f) The risks insured against; and other general words in the policy.
(g) The period during which the insurance is to continue.
SEC. 55. To render an insurance effected by one partner or part-owner,
applicable to the interest of his co-partners or other part-owners, it is
J SEC. 52. necessary that the terms of the policy should be such as are applicable to the
Cover notes may be issued to bind insurance temporarily pending the joint or common interest.
issuance of the policy.
Within sixty (60) days after issue of a cover note, a policy shall be
issued in lieu thereof, including within its terms the identical
FACTS: Husband and wife co-owned a car and the car was registered exclusively in the
insurance bound under the cover note and the premium therefor. name of wife. Husband drove the car but his drivers license was expired. The car was
Cover notes may be extended or renewed beyond such sixty (60) days damaged. Insurance company argued that the one driving is not a registered owner. The
with the written approval of the Commissioner if he determines that policy provides that the driver must have a valid drivers license. The lawyer for the
such extension is not contrary to and is not for the purpose of couple argued that the car was conjugal property; the husband is a co-owner. Insurance
violating any provisions of this Code. company argues that the law says he must be named, he is not. Lawyer for the couple:
The Commissioner may promulgate rules and regulations governing But the premium was paid with conjugal funds, therefore the policy is conjugal.
such extensions for the purpose of preventing such violations and
may by such rules and regulations dispense with the requirement of HELD: The fact that you paid a premium does not mean youre the insured. A
written approval by him in the case of extension in compliance with total stranger can pay the premium. The mortgagee can pay the premium,
such rules and regulations. while the policy is owned by the mortgagor.
Lawyer for couple: insurance contracts should be liberally construed strictly
Characteristics of an Insurance Policy: against the insurer and liberally in favor the insured.
SC: No, that is not applicable in the case at bar, because the issue is who is
Sec. 53. The insurance proceeds shall be applied exclusively to the proper covered by the policy? Because the policy names the wife only as the insured.
interest of the person in whose name or for whose benefit it is made unless Husband
Why was the name of the wife written there? Because you are the one the one
otherwise specified in the policy.
who said that the wife should be named in the policy. If there was any
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obscurity, you are the one at fault. Its not the fault of the insurance company Open Policy v. Valued Policy
they were not the ones who decided to include the name of the wife as the Theres an amendment made in the present law. It added a sentence: The amount
insured. indicated in an open policy represents its maximum liability. Why? The specialty of
Jack: If description is couched in general terms, then it will be easier to collect Justice Isagani Cruz was constitutional law. Many of his decisions in commercial law are
from the insurance policy. E.g. Life insurance policy mentions children; quite questionable. In one case he said, this case involves a fire insurance policy, this is a
grandchildren are not included, but it will include all kinds of children (legit, valued policy. Jack: No, its an open policy. The amount there is the maximum
illegit, adopted). liability. A valued policy expresses an agreement that the thing insured will be valued at
a specific sum.
J SEC. 56. When the description of the insured in a policy is so general that it Classic example of a valued policy: Marine Insurance Policy.
may comprehend any person or any class of persons, only he who can show
that it was intended to include him, can claim the benefit of the policy. SEC. 62. A running policy is one which contemplates successive insurances,
and which provides that the object of the policy may be from time to time
J SEC. 57. A policy may be so framed that it will inure to the benefit of defined especially as to the subjects of insurance, by additional statements or
whomsoever, during the continuance of the risk, may become the owner of the indorsements.
interest insured.
Example: Goodyear manufactures tires, and it has distributors all over the Philippines.
SEC. 58. The mere transfer of a thing insured does not transfer the policy, but Through the years, it will be shipping tires to its distributors. Instead of getting a
suspends it until the same person becomes the owner of both the policy and marine insurance every time it will ship tires, it will get a running policy. What the law
the thing insured. calls running policy in insurance is called open policy. So Goodyear will get a marine
open policy. Lets say, Jan 1st to Dec. 31st. Every time they ship tires within the year, it
Insurance is personal in character. The policy does not attach the property will be covered. But of course, they have to inform the insurer in writing. Its not
insured. automatic.
If you insured your car and sold it, buyer does not automatically be covered by
the policy, it will be suspended until you get the consent of the insurance SEC. 63. A condition, stipulation, or agreement in any policy of insurance,
company. So the buyer should tell the insurance company: I bought the car limiting the time for commencing an action thereunder to a period of less than
and here is the deed of sale. And normally the insurance company will agree to one year from the time when the cause of action accrues, is void.
execute an indorsement assigning the policy to the buyer.
The law provides a condition fixing the period for filing case should not be less
KINDS OF INSURANCE than one year. So thats the maximum period to file a case. Sometimes the
policy provides that before filing a case, the insured must first file a claim. In
SEC. 59. A policy is either those cases, the Supreme Court said, the one-year period should be counted
open, from denial of the claim. Otherwise, they should simply sit on the claim, wait
valued, or for one year to lapse.
running. This period to file a case is not the same with the period to file an appeal. If the
claim be denied, and the insured asks the insurance company to reconsider,
SEC. 60. An open policy is one in which the value of the thing insured is not
agreed upon, and the amount of the insurance merely represents the insurers that will not suspend the running of the period.
maximum liability. The value of such thing insured shall be ascertained at the Likewise, in one case, the insured wrote the insurance company asking the
time of the loss. latter to explain its reasons for the denial of the claim, the court said that did
not suspend of running of period to file a claim.
SEC. 61. A valued policy is one which expresses on its face an agreement that
the thing insured shall be valued at a specific sum.
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LOSS An insurer is liable in the ff instances:
(1) The thing is exposed to a peril not insured against, which permanently
SEC. 85. An agreement not to transfer the claim of the insured against the deprives the insured of its possession
insurer after the loss has happened, is void if made before the loss except as Example: Somebody insured his house and its contents against fire. His
otherwise provided in the case of life insurance. neighbors house caught fire. The expenses of transfer of valuables, appliances
and furniture will be answered by the insurer.
Why? Because liability has not accrued. That is now a chose in action. If you recall your (2) Loss caused by efforts to rescue the thing from the peril insured against.
Civil Law, in Sales, there is a portion there about sale of receivables/credits. Example: Again, somebody got an insurance policy for his house and its
contents. Fire broke out in his neighbors house. Fire engines arrived and the
SEC. 86. Unless otherwise provided by the policy, an insurer is liable for a loss
of which a peril insured against was the proximate cause, although a peril not
firemen trained their hoses at the house of the insured, and because of very
contemplated by the contract may have been a remote cause of the loss; but strong pressure of the water, the contents of his house, valuables, furniture
he is not liable for a loss of which the peril insured against was only a remote were damaged. The insurer will answer for that.
cause.
The insurance company is liable for loss, the proximate cause of which is the SEC. 88. Where a peril is especially excepted in a contract of insurance, a loss,
peril insured against, even though the immediate cause is not the peril insured which would not have occurred but for such peril, is thereby excepted
against. although the immediate cause of the loss was a peril which was not excepted.
Glorie insured her house and its contest. Then, the house of Blu, her neighbor,
caught fire. So the wall of Blus house fell onto the house of Glorie, so Glories SEC. 89. An insurer is not liable for a loss caused by the willful act or through
house was damaged. In that case, Glorie can collect from the policy. The the connivance of the insured; but he is not exonerated by the negligence of
the insured, or of the insurance agents or others.
proximate cause of the loss was the fire in Blus house; the immediate cause was
the fall of the wall.
Losses for which the insurer will not be liable:
John Terry got a fire insurance policy. Fire broke out because of defective wiring
(1) Loss caused by connivance of the insured Insured got a brand new car
installation. Immediate cause: fire; Proximate cause: defective wiring
and asked an acquaintance to steal it, cannibalize its parts and sell it in Banawe.
installation. The policy will answer for the immediate cause, the peril insured
Insurer will not be liable.
against, although the proximate cause is not the peril insured against.
(2) Loss caused by willful act of the insured Somebody got a fire insurance
Loss caused by the negligence of the insured
policy and committed arson.
Somebody got a comprehensive motor vehicle policy. The he was trying to
switch lanes, so he swerved. He did not notice there was a forthcoming vehicle,
(3) Loss caused by gross negligence of the insured there was a case decided
which sideswiped his vehicle. The insurer will be answerable for the damage to
by the Supreme Court where San Miguel Corporation insured 2500 cases of
his vehicle.
beer. They were being transported by a barge. When the barge arrived in San
Jose, Antique, the representative of the office of San Miguel met the captain
SEC. 87. An insurer is liable where the thing insured is rescued from a peril
insured against that would otherwise have caused a loss, if, in the course of and told him to transfer because theres a strong typhoon coming. While all
such rescue, the thing is exposed to a peril not insured against, which the other ships went to a safer place the captain still continued. He tied the
permanently deprives the insured of its possession, in whole or in part; or barge to the wharf by means of a rope. At the height of the typhoon, the rope
where a loss is caused by efforts to rescue the thing insured from a peril broke, and all the SMB bottles went into the sea. A claim was filed. SC said it
insured against. was gross negligence. Captain already saw that a strong typhoon was coming,
the clouds were darkening, the sea water was rising.
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Somebody bought a brand new car. A claim was filed that it was stolen. The loss. After that he can rest his case. Now if the insurer is claiming that the loss
driver said he parked it outside the house of the owner. The owner had is not due to rebellion, then the insured must be discharged of the burden.
another car there which was old. The owner said that the battery of that old But in American jurisprudence, it is valid to shift the burden to the insured
car was charged so he asked the driver to connect it to the battery of the new because he is the one in possession of property. The insured is in the best
car so that it will be recharged. After the driver had connected the battery, the position to say what the cause of the loss was. But our court does not follow
owner told the driver to have merienda in the kitchen. He was gone for about that.
an hour. When the driver returned the car was gone. There was a decision of
the Court of Appeals of England which said that if someone has a car insurance NPA raided Compostella. They forced the bank manager to open the bank
policy which included loss thru theft, and the key was not in the ignition and vault and they took away the money. Now the bank had insurance. So Jack
the car was unattended, that is gross negligence. said (to the insurance co.?) do not deny the claim on the ground of rebellion.
Then youll have to prove again that there were rebels whose purpose was
In one case, somebody had a brand new Mercedes Benz. It was raining then political to overthrow the government. The exception is rebellion,
and he drove it along Buendia avenue. Then water entered into the engine. insurgency, coup detat, and riot. Riot, in insurance jurisprudence, is defined
The car dealer said it will cost 1,800,000. So he filed a claim with the insurance to mean as an act of violence by a group of armed men. You only have to
company and argued that theres a rider in the motor vehicle insurance policy prove a group of armed men did it; you dont have to prove that the purpose
stating that it will answer for damage due to flood. SC: Thats gross was to overthrow the government.
negligence. Its common knowledge that the drainage in Buendia avenue is
inadequate. When it rains, the water will accumulate. Its common knowledge (5) Loss where the peril insured against was the remote cause of the loss. -
that if you drive your car into water, theres a danger that water will go inside Somebody got a fire insurance policy for his store. Fire trucks arrived.
your engine. Everyone was watching how the fire was being put out. Some robbers took
advantage of the occasion. They went to the store, smashed the display
Besides, flood as a technical definition in jurisprudence it means overflow of windows and got away with the merchandise on display. Now the fire across
water in natural bodies of water like a river, a creek, or a lake. It does not the street is not the proximate cause of the loss. The fire had nothing to do
include accumulation of water because of poor drainage. with the robbery; it was merely a remote cause.
(4) Loss the proximate cause of which is an excepted peril even though the NOTICE OF LOSS
immediate cause is a peril insured against a fire insurance policy contains
a provision that it will not answer for fire due to rebellion, insurgency, coup SEC. 90. In case of loss upon an insurance against fire, an insurer is
detat. During the coup detat in 1989, the renegade soldiers who were in exonerated, if written notice thereof be not given to him by an insured, or
Dusit hotel, there was a store, it was hit, it caught fire and was razed to the some person entitled to the benefit of the insurance, without unnecessary
delay. For other non-life insurance, the Commissioner may specify the period
ground. If that store was insured against fire, the insurer will be not liable for the submission of the notice of loss.
because the immediate cause was fire and the proximate cause was rebellion.
In a fire insurance claim, notice of loss must be given without necessary delay.
The fire insurance policies provide: the insured has the burden of proof to o This is to give the insurer time to investigate whether or not the fire
establish that the loss was not due to rebellion, insurgency, coup detat. In one was due to arson. Because if you inform it 6 months later, the traces
case, the Mindanao insurgents set fire to part of Mindanao because of failure of of arson will be gone.
negotiations regarding revolutionary taxes. The insurer invoked that
provision and said that insured failed to prove that the loss was not due to
Many years ago there was an American Jesuit, a consultant of the Baltimore
rebellion. SC: thats not the correct interpretation insured must prove his
Police. He gave a lecture of forensic chemistry to police officers in arson,
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they get a hypodermic needle and get a sample of the hair and test it in the Defects in the notice of loss or in the proof are waived if the insurer did not tell the
laboratory if there are traces of gasoline. You cannot do that if you delay your insured.
notice. Example: A claim against a motor vehicle policy. What are the things that are
Sometimes policy will contain a stipulation saying that a claim must be filed at usually required? Police report, photographs of the damaged portions of the
a certain date; if that is not done, the claim will be barred. Amendment to the vehicle, appraisal of cost of repairs by accredited car repair shops, certificate of
provision a sentence was added: the insurance commission is deemed registration of the motor vehicle, and drivers license. If the insurance
authorized to prescribe the period to file a notice of loss. The purpose is to company did not tell the insured to submit a police report, and the former
give the insurer time to investigate the validity of the claim. Even if the notice denies the claim, and when the case was filed it raised the defense of non-
was filed out of time, but it will not prejudice the insurer, the insurer will be submission, that requirement is deemed waived because the insurance
liable (California jurisprudence). company did not inform the insurer to submit such requirement.
Insured
JACK: Our client was a subcontractor of a powerplant. Then a strong
typhoon came and the project was seriously damaged. Investigation was SEC. 93. Delay in the presentation to an insurer of notice or proof of loss is
conducted and a report was submitted detailing the extent of the damage and waived
if caused by any act of him, or
saying that it was covered by the policy. The insurance company paid. Our
if he omits to take objection promptly and specifically upon that
client (subcontractor) did not know that it had been included (by the
ground.
contractor) as co-insured. When I found that out I sent a letter claiming
indemnity. Insurance company said the claim was filed out of time. I said you Delay is waived if it is due to the fault of the insurer, or it was not invoked as a ground
were not prejudiced. Because (someone) already came here and inspected the for denying the claim. See an ordinary insured does not know how to go about the
jobsite. So although the claim was filed out of time, you already have the filing of a claim.
report. We have no option but to sue you in PH courts. Its very sad the
moment they learned they will be sued in PH courts; they settled double the SEC. 94.
amount of what our client should have accepted. If the policy requires, by way of preliminary proof of loss, the
certificate or testimony of a person other than the insured, it is
SEC. 91. When a preliminary proof of loss is required by a policy, the insured sufficient for the insured to use reasonable diligence to procure it,
is not bound to give such proof as would be necessary in a court of justice; and in case of the refusal of such person to give it, then to furnish
but it is sufficient for him to give the best evidence which he has in his power reasonable evidence to the insurer that such refusal was not induced
at the time. by any just grounds of disbelief in the facts necessary to be certified
or testified. >>Not because the one making the report believes that there was no loss or that
In an old case, it was held that the insured cannot be required by insurer to circumstances surrounding loss were not true
produce proof that is very difficult for insured to obtain. In that case the court If the policy requires a certificate from someone, it is sufficient to show that it
said a police report is sufficient to support a claim. cannot be produced because the person supposed to issue it refuses to issue it,
JACK: There was an explosion in a supermarket in Ayala Center. The PNP because it would be certifying to a falsehood.
said it was due to a leakage in gas. Ayala got an opinion from someone from JACK: I have a client who used to have a property along Arnaiz Avenue
Malaysia but the opinion was not conclusive. I think the report was just which was being leased by a restaurant. In New Years Eve, the cook went out
talking about possibilities. When my opinion was sought, I said the report of to watch fireworks. Fire broke out. Arson investigator of the Makati police
PNP was sufficient. went to investigate. Before he could submit the report, he resigned and
immigrated. Then I told the lessee of my client, well it shows that you cannot
SEC. 92. All defects in a notice of loss, or in preliminary proof thereof, which produce the report of the arson investigator, not because he made a finding of
the insured might remedy, and which the insurer omits to specify to him, arson but because he resigned before making the report.
without unnecessary delay, as grounds of objection, are waived.
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DOUBLE INSURANCE 5M from Malayan. Lets say he collected from everybody; heis overpaid. He
should refund the excess, proportionally. So he must refund 5M to Malayan,
SEC. 95. A double insurance exists where the same person is insured by and 2.5M each to Pioneer and Prudential.
several insurers separately in respect to the same subject and interest. But sometimes the policy provides, if there are other insurers, he must claim
first from the other insurers. It is only when he cannot be indemnified fully
(1) First, the person insured must be the same. that he can claim - that is valid. But suppose all the policies contain that same
In that case of Wyeth Pharmaceutical, it insured its pharmaceutical products provision they will cancel out each other. So you will apply all other rules in
before being delivered to its distributors, and then it required a contract with the law.
the service company that was using its trucks for delivery provided that it
must get insurance and that it will be liable for all kinds of losses including loss SEC. 96. Where the insured in a policy other than life is over insured by double
due to fortuitous events and hijacking. Then armed men hijacked the truck. insurance:
Wyeth sued its insurer, then a third-party complaint was filed against Malayan
Insurance, the insurer of the delivery truck. Malayan Insurance argued that The insured, unless the policy otherwise provides, may claim
this was a case of double insurance and it was not informed that there was a co- payment from the insurers in such order as he may select, up to the
insurer. But the court said no. The insured is different. Malayan Insurance amount for which the insurers are severally liable under their
insured the service provider, not Wyeth. The interest of Wyeth is also respective contracts;
different than that of the service provider. Wyeth is the owner of the Where the policy under which the insured claims is a valued policy,
products, while the interest of the service provider is the safety of the goods any sum received by him under any other policy shall be deducted
from the value of the policy without regard to the actual value of the
being delivered.
subject matter insured;
Where the policy under which the insured claims is an unvalued
(2) There must be several insurers. policy, any sum received by him under any policy shall be deducted
against the full insurable value, for any sum received by him under
(3) The subject matter must be the same. any policy;
The owner of a factory insured his factory. Later on he insured his stocks in 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
trade. That is not double insurance.
unvalued policies, he must hold such sum in trust for the insurers,
according to their right of contribution among themselves;
(4) The interest insured must be the same. Each insurer is bound, as between himself and the other insurers, to
In the Cha (?) case, where he insured his stocks in trade, the proceeds payable contribute ratably to the loss in proportion to the amount for which he
to him. Then he mortgaged his stocks in trade, then insured the same. Then is liable under his contract.
the policy provided that the proceeds be payable to the mortgagee. The court
said that is not double insurance, because the interest involved are different. REINSURANCE
(5) The risk must be the same SEC. 97. A contract of reinsurance is one by which an insurer procures a third
Somebody got a fire insurance policy, then it also got insurance against person to insure him against loss or liability by reason of such original
insurance.
typhoon. (He did not continue his thought, but I suppose that what he meant
Wouldn't it be was this is not a case of double insurance)
In the final analysis, reinsurance is nothing more than insurance of liability.
proportionally Suppose somebody has a building worth 10M pesos. He insured it with
reduced ???
Malayan for 10M pesos, Pioneer for 5M, Prudential for 5M. Then total loss SEC. 98. Where an insurer obtains reinsurance, except under automatic
Overinsurance ? occurred. He can claim 10M from Malayan OR 5M from Pioneer, 5M from reinsurance treaties, he must communicate all the representations of the
Oh well Prudential OR 5M from Pioneer, 5M from Malayan OR 5M from Prudential,
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original insured, and also all the knowledge and information he possesses, defense that the reinsurance treaties were contracts with a stipulation for the
whether previously or subsequently acquired, which are material to the risk. benefit of a third person, therefore Artex should sue the reinsurers and not
Wellington. But in the decision penned by Justice Teehankee, that was
Two basic types of reinsurance rejected. The Court said there is no privity of contract between the original
1. Treaty theres automatic cession per percentage of the risk every time the insured and reinsurer. So the defense cannot be given merit.
original insurer issues a policy. So everytime a fire insurance policy is issued a But sometimes reinsurance contract contains a cut-through clause providing
portion will automatically be insured. that the original insured can proceed directly against the reinsurer. In England
2. Facultative case to case. Jack: If for example I insure something for 20M its void. But in California its valid, because they said its a contract with a
pesos, I ask (another insurer?) will you be interested in getting 500k. stipulation for the benefit of a third person. Since we follow rules of the civil
law system, that will have persuasive force here, because we all follow the
Insurance is a contract of utmost good faith that applies to everybody, not Code of Napoleon.
only to the insurer but also to the insured. You must not file a fraudulent
claim. That also applies to a reinsurer. If it is not a treaty but facultative, then DATE: December 1, 2014 (RC)
you must inform the reinsurer of material information regarding the risk.
In the old days if an employee got sick or injured in the course of work, the MARINE INSURANCE
employer is liable for workmens compensation. The employer will get
insurance for that so many people were getting workmens compensation SEC. 101. Marine Insurance includes:
insurance. Numerous insurance companies incurred losses because they did not (a) Insurance against loss of or damage to:
know asbestos was carcinogenic and causes cancer. a. Vessels, craft, aircraft, vehicles, goods, freights, cargoes,
Sometimes the reinsurance policy will stipulate that the reinsurer will be merchandise, effects, disbursements, profits, moneys,
securities, choses in action, instruments of debts, valuable
bound by the outcome of any litigation concerning the original insurer. papers, bottomry, and respondentia interests and all other
kinds of property and interests therein, in respect to,
SEC. 99. A reinsurance is presumed to be a contract of indemnity against appertaining to or in connection with any and all risks or
liability, and not merely against damage. perils of navigation, transit or transportation, or while being
assembled, packed, crated, baled, compressed or similarly
prepared for shipment or while awaiting shipment, or during
Reinsurance is presumed to be a contract against liability, not against damage.
any delays, storage, transhipment, or reshipment incident
For example an insurance company obtained reinsurance. Then it became thereto, including war risks, marine builders risks, and all
insolvent and could not pay its claims. The SC reiterated it can collect from personal property floater risks;
the reinsurer. And the money collected can be used to pay claims of everybody b. Person or property in connection with or appertaining to a
in accordance with concurrence or preference of credits. marine, inland marine, transit or transportation insurance,
including liability for loss of or damage arising out of or in
connection with the construction, repair, operation,
SEC. 100. The original insured has no interest in a contract of reinsurance. maintenance or use of the subject matter of such insurance
(but not including life insurance or surety bonds nor
Then theres this new provision that the original insured has no interest in a insurance against loss by reason of bodily injury to any
contract of reinsurance. Artex Development Company insured its factory with person arising out of ownership, maintenance, or use of
automobiles);
Wellington Insurance for 18M. Fire broke out and the factory was razed to the
c. Precious stones, jewels, jewelry, precious metals, whether in
ground. No question about it, it was covered by the policy. But Wellington course of transportation or otherwise; and
could not afford to pay the 18M. They had to collect from reinsurers. d. Bridges, tunnels and other instrumentalities of transportation
Meanwhile a case was filed by Artex. The lawyer of Wellington raised the and communication (excluding buildings, their furniture and
furnishings, fixed contents and supplies held in storage);
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piers, wharves, docks and slips, and other aids to navigation judgment or mere negligence, unless criminally gross, can be
and transportation, including dry docks and marine railways,
Error in
judgment barratry. [Sundiang, p.146-147]
dams and appurtenant facilities for the control of waterways. is not o There was a case, where there was a ship with a barge with logs on it.
(b) Marine protection and indemnity insurance, meaning insurance
against, or against legal liability of the insured for loss, damage, or
barratry The barge sprung a leak and the logs were lost. The insured argued
expense incident to ownership, operation, chartering, maintenance, that the policy was answerable for the loss because there was
use, repair, or construction of any vessel, craft or instrumentality in barratry. SC said that the captain had decided to cut loose the barge
use of ocean or inland waterways, including liability of the insured for from the tugboat that was pulling it. This was not barratry, this was
personal injury, illness or death or for loss of or damage to the an error in judgment. He simply made a wrong decision.
property of another person.
INSURABLE INTEREST OF SHIP OWNER
In an ALL-RISK POLICY, the insured needs only to prove that there was loss. He
need not prove what was the cause of the loss, he need not prove that it was due to SEC. 102. The owner of a ship has in all cases an insurable interest in it, even
fortuitous event. when it has been chartered by one who covenants to pay him its value in case
of loss: Provided, That in this case the insurer shall be liable for only that part
However, there are still EXCLUSIONS like willful misconduct of the insured. In this of the loss which the insured cannot recover from the charterer.
instance, the burden will shift to the insurer to prove that the loss was due to an
excluded risk. Owner of a ship still has insurable interest even when it was chartered and the charter
party stipulates that the charterer will pay him in case of loss; to the extent that the
In marine insurance, the policy covers PERILS OF THE SEA, not perils of the ship. payment fell short of the value of the vessel, the insurer will be liable for that difference.
The policy will also answer for BARRATRY. And the freightage (the profits that would be received/earned) will also be insured.
PERILS OF THE SEA
o Essentially refers to fortuitous event J SEC. 103. The insurable interest of the owner of the ship hypothecated by
o The loss must be due to the unusual violence of the waves and the bottomry is only the excess of its value over the amount secured by bottomry.
peril must be connected with navigation
PERILS OF THE SHIP J SEC. 104. Freightage, in the sense of a policy of marine insurance, signifies
all the benefits derived by the owner, either from the chartering of the ship or
o Means that the vessel is not sea-worthy its employment for the carriage of his own goods or those of others.
o As in the case where the ships pipers became rusty and corroded and
there was a leak, which lead to a shipment of rice being damaged. (In
J SEC. 105. The owner of a ship has an insurable interest in expected
the old transcript, theres mention of the Cathay Ins. Case, which has freightage which according to the ordinary and probable course of things he
the same facts and Jack disagrees with this. In this case, the SC held would have earned but for the intervention of a peril insured against or other
that the leaking pipes was a peril of the sea. But according to Jack, peril incident to the voyage.
there was no unusual violence of the waves. The damage was due to
unsea-worthiness of the ship.) J SEC. 106. The interest mentioned in the last section exists, in case of a
BARRATRY charter party, when the ship has broken ground on the chartered voyage. If a
o The willful misconduct on the part of the master of crew in price is to be paid for the carriage of goods it exists when they are actually on
board, or there is some contract for putting them on board, and both ship and
pursuance of some unlawful or fraudulent purpose without the
goods are ready for the specified voyage.
consent of the owners, and to the prejudice of the owners interest.
This may be expressly covered by the policy. When so covered,
J SEC. 107. One who has an interest in the thing from which profits are
proof of willful and intentional act is necessary. No honest error of expected to proceed has an insurable interest in the profits.
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J SEC. 108. The charterer of a ship has an insurable interest in it, to the extent For example, NATIONAL CHARACTER OF THE VESSEL:
that he is liable to be damnified by its loss. Recall that under the laws of war, merchant vessels of the enemy can be seized as
prizes of war. So heres an English vessel being represented to be a Swedish vessel
CONCEALMENT (Sweden being a neutral country). If vessel is seized, then insurer not liable. (Jack
then proceeds to give an incoherent example about an US ship in Liberia)
SEC. 109. In marine insurance, each party is bound to communicate, in
addition to what is required by Section 28, all the information which he For example, BREACH OF FOREIGN LAWS OF TRADE:
possesses, material to the risk, except such as is mentioned in Section 30,
Ship is engaged in smuggling.
and to state the exact and whole truth in relation to all matters that he
represents, or upon inquiry discloses or assumes to disclose.
If the ship misrepresented its nationality and the loss was caused by an encounter with a
SEC. 110. In marine insurance, information of the belief or expectation of a typhoon; hence, loss was unrelated to the misrepresentation, then the insurer will still
third person, in reference to a material fact, is material. be liable.
In marine insurance, the rule is stricter because the insurer has no opportunity to inspect REPRESENTATION
the property being insured, unlike a building, the vessel is usually there in the high seas.
Thats why the opinion of a third party regarding material facts that must be disclosed is SEC. 113. If a representation by a person insured by a contract of marine
material. For example a marine surveyors opinion that a vessel is not sea-worthy, that insurance, is intentionally false in any material respect, or in respect of any
has to be disclosed. fact on which the character and nature of the risk depends, the insurer may
rescind the entire contract.
SEC. 111. A person insured by a contract of marine insurance is presumed to
have knowledge, at the time of insuring, of a prior loss, if the information SEC. 114. The eventual falsity of a representation as to expectation does not,
might possibly have reached him in the usual mode of transmission and at the in the absence of fraud, avoid a contract of marine insurance.
usual rate of communication.
IMPLIED WARRANTIES
In marine insurance, you can even insure a past event, which has already happened but
its occurrence being unknown.
(a) Vessel is seaworthy
(b) Vessel will not deviate from the agreed voyage, unless deviation is proper
SEC. 112. A concealment in a marine insurance, in respect to any of the
following matters, does not vitiate the entire contract, but merely exonerates (c) Vessel will not engage in illegal venture
the insurer from a loss resulting from the risk concealed: (d) Warranty of possession of documents of neutrality; that the ship will carry
the requiste documents of nationality or neutrality of the ship or cargo where
1. The national character of the insured; such nationality or neutrality is expressly warranted
2. The liability of the thing insured to capture and detention;
3. The liability to seizure from breach of foreign laws of trade; First Warranty: Vessel is Seaworthy
4. The want of necessary documents; and
5. The use of false and simulated papers.
SEC. 115. In every marine insurance upon a ship or freight, or freightage, or
upon any thing which is the subject of marine insurance, a warranty is implied
Now, concealment will not exculpate the insurer from liability unless the loss was that the ship is seaworthy.
caused by the matter concealed.
SEC. 116. A ship is seaworthy when reasonably fit to perform the service and
to encounter the ordinary perils of the voyage contemplated by the parties to
the policy.
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SEC. 117. An implied warranty of seaworthiness is complied with if the ship be seaworthy at the commencement of the voyage and the cargo owner
seaworthy at the time of the commencement of the risk, except in the has the duty to see to it that the vessel it is dealing with is seaworthy.
following cases: o In the case of Coca-Cola, the vessel may be seaworthy for the voyage,
(a) When the insurance is made for a specified length of time, the
implied warranty is not complied with unless the ship be seaworthy
but not for the cargo. The boat was a seaworthy fishing boat, but it
at the commencement of every voyage it undertakes during that was loaded with 2,500 cases of Coke. SC: it was not seaworthy,
time; insurer not liable.
(b) When the insurance is upon the cargo which, by the terms of the The seaworthiness is not limited to the hull of the vessel, it also requires that it
policy, description of the voyage, or established custom of the trade, must be properly laden. If it is overloaded than it is not seaworthy (this is
is to be transhipped at an intermediate port, the implied warranty is based on the waterline on the side of ships, if the water crosses that line, it is
not complied with unless each vessel upon which the cargo is
overloaded).
shipped, or transhipped, be seaworthy at the commencement of
each particular voyage. The ship vessel must also have a competent master and competent crew. Thats
why in claims, the insurer requires proof that the master and crew passed the
SEC. 118. A warranty of seaworthiness extends not only to the condition of the merchant marine exams (licensure test), to show such competence.
structure of the ship itself, but requires that it The vessel must also have the necessary equipment, food, water and fuel. (At
be properly laden, and this point Jack deviates and talks about his experience on a cruise where the
provided with a competent master, staff told him about how they keep dead bodies in refrigerators and inform the
a sufficient number of competent officers and seamen, (hehe)
families when they reach port.)
and the requisite appurtenances and equipment, such as ballasts,
o Lifeboats must be equipped with supplies (food and fishing
cables and anchors, cordage and sails, food, water, fuel and lights,
and other necessary or proper stores and implements for the voyage. equipment, flares, orange powder) and there must be periodic drills.
This means that the ship should not follow the example of Titanic.
SEC. 119. Where different portions of the voyage contemplated by a policy An implied warranty of seaworthiness is complied with if the ship be
differ in respect to the things requisite to make the ship seaworthy therefor, a seaworthy at the time of the commencement of the risk (meaning start of
warranty of seaworthiness is complied with if, at the commencement of each the voyage), except in following cases:
portion, the ship is seaworthy with reference to that portion.
TIME POLICY When the insurance is made for a specified length
SEC. 120. When the ship becomes unseaworthy during the voyage to which an of time, the implied warranty is not complied with unless the vessel
insurance relates, an unreasonable delay in repairing the defect exonerates is seaworthy at the commencement of every voyage it undertakes
the insurer on ship or shipowners interest from liability from any loss arising during that time. (Ex. Contract is for one year, the vessel must be
therefrom. seaworthy at the start of every voyage in that one year)
When the insurance is upon the cargo, which is to be transshipped at
SEC. 121. A ship which is seaworthy for the purpose of an insurance upon the
ship may, nevertheless, by reason of being unfitted to receive the cargo, be an intermediate port, at the commencement of each portion. (Ex.
unseaworthy for the purpose of insurance upon the cargo. Cargo from San Francisco, crossing the Pacific, reaches Manila, and is
to be transshipped by Sulpicio Lines to Cebu. The vessel from SF
SEAWORTHINESS OF VESSEL means that the vessel is capable of navigating and must be seaworthy to cross the Pacific. The vessel from Manila must
meeting the perils of the voyage contemplated by the parties. be seaworthy for the voyage to Cebu, though the Sulpicio vessel
This implied warranty may be waived by contract; some insurers will might not be seaworthy to cross the Pacific.)
stipulate/admit that the vessel is seaworthy. Where different portions of the voyage are contemplated, at the
Applies not only to the vessel, but also to the cargo. commencement of each portion. This refers to cases where there are
o In the case of San Roque, logs were lost when a barge sprung a leak. several vessels, one for each portion. Here, each vessel must be
San Roque (cargo owner) argued that the warranty of seaworthiness seaworthy for the portion it is to navigate.
applies only to the vessel. SC: it applies to both. The vessel must be
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When the ship was seaworthy at the commencement of the voyage have been better visibility. Or the vessel which you collided
but becomes unseaworthy during the voyage to which an insurance with would not have been there. Or the weather would have
relates, an unreasonable delay in repairing the defect exonerates the fair.)
insurer on ship or shipowners interest from liability from any loss
arising therefrom. SEC. 126. A deviation is proper:
1. When caused by circumstances over which neither the master nor the
owner of the ship has any control;
Second Warranty: Vessel will not deviate from the agreed voyage, unless
2. When necessary to comply with a warranty, or to avoid a peril,
deviation is proper whether or not the peril is insured against;
3. When made in good faith, and upon reasonable grounds of belief in
SEC. 123. When the voyage contemplated by a marine insurance policy is its necessity to avoid a peril; or
described by the places of beginning and ending, the voyage insured is one 4. When made in good faith, for the purpose of saving human life or
which conforms to the course of sailing fixed by mercantile usage between relieving another vessel in distress.
those places.
SEC. 127. Every deviation not specified in the last section is improper.
SEC. 124. If the course of sailing is not fixed by mercantile usage, the voyage
insured by a marine insurance policy is that way between the places specified, SEC. 128. An insurer is not liable for any loss happening to the thing insured
which to a master of ordinary skill and discretion, would mean the most subsequent to an improper deviation.
natural, direct and advantageous.
Deviation is excusable in the instances enumerated under Sec. 126.
SEC. 125. Deviation is a departure from the course of the voyage insured,
mentioned in the last two (2) sections, or an unreasonable delay in pursuing o Example for 126(b): to avoid a typhoon
the voyage or the commencement of an entirely different voyage. o Example for 126(c): captain received information that pirates were
going to ambush you on your route
a. There is deviation in three cases: o Example for 126(d): when Carpathia deviated from its route in order
1. Departure from the course to save the passengers of Titanic. Unfortunately, Carpathia was 4
(a) Course may refer to that fixed by mercantile hours late L
usage, or In first three instances of Sec. 126, the deviation was made to save the vessel.
(b) the course which is the most natural, direct, and The law presumes that the insurer would agree with that because otherwise,
advantageous to a master of ordinary skill and the vessel would be lost. The last one is based on humanitarian considerations.
discretion
2. Unreasonable delay in pursuing the voyage Fourth Warranty: Warranty of possession of documents of neutrality
3. Commencement of entirely different voyage
b. Unnamed US case, there was a ship full of fur coats departing from Paris, SEC. 122. Where the nationality or neutrality of a ship or cargo is expressly
bound for New York. But the captain decided to pick up more cargo in warranted, it is implied that the ship will carry the requisite documents to
show such nationality or neutrality and that it will not carry any documents
London and earn more freight. While crossing the Atlantic, it sank, just
which cast reasonable suspicion thereon.
like the Titanic. The court ruled that there was a deviation and the insurer
was not liable. LOSS
c. Even if the vessel returns to its original route, the insurer will not be liable.
Otherwise, parties will argue endlessly and will keep on speculating. SEC. 129. A loss may be either total or partial.
(Ex. If the ship hadnt deviated, it would have been day time
when it crossed that portion of the Atlantic and there would SEC. 130. Every loss which is not total is partial.
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SEC. 131. A total loss may be either actual or constructive. Nothing in this section shall prevent an insurer from requiring an
additional premium if the hazard be increased by this extension of
SEC. 132. An actual total loss is caused by: liability.
1. A total destruction of the thing insured;
2. The irretrievable loss of the thing by sinking, or by being broken up; SEC. 136. In addition to the liability mentioned in the last section, a marine
3. Any damage to the thing which renders it valueless to the owner for insurer is bound for damages, expenses of discharging, storage, reshipment,
the purpose for which he held it; or extra freightage, and all other expenses incurred in saving cargo reshipped
4. Any other event which effectively deprives the owner of the pursuant to the last section, up to the amount insured.
possession, at the port of destination, of the thing insured. Nothing in this or in the preceding section shall render a marine insurer liable
for any amount in excess of the insured value or, if there be none, of the
SEC. 133. A constructive total loss is one which gives to a person insured a insurable value.
right to abandon, under Section 141. If the vessel is prevented from continuing the voyage and transfer of the cargo
is necessary to complete the voyage, the insurer will still be liable. The insurer
SEC. 134. An actual loss may be presumed from the continued absence of a will have to pay for the stevedoring and arrastre fees for unloading, any
ship without being heard of. The length of time which is sufficient to raise this
presumption depends on the circumstances of the case.
charges for storage while waiting for another vessel, and the stevedoring and
arrastre fees for loading on the new vessel.
Loss may be TOTAL or PARTIAL. In this instance, the insurer will still be liable, without prejudice to
Total loss may be ACTUAL or CONSTRUCTIVE. Total constructive loss is raising the premium on the policy. (Ex. If the first vessel was only 10
peculiar to marine insurance. years old and the second one was 25 years old, since the second one is
TOTAL ACTUAL LOSS much older, the premium will be increased)
Total destruction of the thing insured (Ex. Vessel razed by fire)
SEC. 137. Upon an actual total loss, a person insured is entitled to payment
Irretrievable loss by sinking (Ex. Titanic, which still exists but it is in without notice of abandonment.
the bottom of the ocean. Seriously, what are the chances that Titanic
would hit an iceberg?!). [PS. Jack gave this example!] SEC. 138. Where it has been agreed that an insurance upon a particular thing,
Damage renders it valueless to the owner (Ex. A racing aficionado or class of things, shall be free from particular average, a marine insurer is not
ships his horses from Bukidnon to Manila, during transport there was liable for any particular average loss not depriving the insured of the
a typhoon and the horses panicked on the ship and broke their legs. possession, at the port of destination, of the whole of such thing, or class of
things, even though it becomes entirely worthless; but such insurer is liable
The horses cannot be used for racing anymore. Some horses jumped for his proportion of all general average loss assessed upon the thing insured.
off the ship and died. They now became seahorses.).
Owner is deprived of possession (Ex. In the case of Malayan Insurance, SEC. 139. An insurance confined in terms to an actual loss does not cover a
which insured a shipment of palay. The palay was kept in the hold of constructive total loss, but covers any loss, which necessarily results in
the ship; during the voyage it came into contact with water and depriving the insured of the possession, at the port of destination, of the
became palay seedlings. SC: the owner was deprived of what was entire thing insured.
loaded upon departure, it was total loss.) The policy also answers for SHARE IN GENERAL AVERAGE.
Actual loss may be PRESUMED from continuing absence of the ship GENERAL AVERAGE LOSS includes damages and expenses which
without being heard of. are deliberately caused by the master of the vessel or upon his
authority, in order to save the vessel, her cargo, or both at the same
SEC. 135. When a ship is prevented, at an intermediate port, from completing time from a real or known risk. It must be borne equally by all the
the voyage, by the perils insured against, the liability of a marine insurer on interests concerned in the venture.
the cargo continues after they are thus reshipped. The requisites to the right to claim general average contribution are:
1. There must a common danger to the vessel or cargo;
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2. Part of the vessel or cargo was sacrificed deliberately; Abandonment is the act of the insured, after a total constructive loss,
3. The sacrifice must be for the common safety or for the relinquishing to the insurer his interest in the thing insured.
benefit of all; TOTAL CONSTRUCTIVE LOSS is peculiar to marine insurance.
4. It must be made by the master or upon his authority; More than loss, owner can declared total constructive loss. In
5. It must successful (resulted in the saving of the vessel or the Unnamed case, where the cost of repairs exceed of the value of the
cargo); and vessel, the court said that there was total constructive loss. The
6. It must be necessary. [Sundiang, p.184] owner properly declared total constructive loss.
Ex. A vessel encounters a strong typhoon and to lighten the vessel, The idea behind is that when more than of value is lost, it would
the captain jettisons some cargo, those that benefitted will contribute not be worth it to repair anymore. Might as well buy a new one.
to the general average, and the marine policy will answer for that. Oriental Insurance case, there was a shipment of logs placed on 2
(Jack talks about a certain assessors form that you give to your barges, insured with 1 policy. Some of the logs on one barge fell into
insurer stipulating the amount each one benefitted will have to the sea. If you compute the value of these logs it would amount to
contribute as their share in the general average. If that form isnt more than of the value of the logs on that one barge. So the
signed by the insurer and submitted, the cargo will not be released insured declared total constructive loss. SC: there was only one
from the warehouse.) policy covering both barges, it was an indivisible contract. There was
Insurer is not liable for particular average, unless otherwise no constructive total loss because the value should be the total
stipulated. aggregate value of the 2 barges, not just the 1 barge.
Id rather be his whore than your wife. Rose
ABANDONMENT and CONSTRUCTIVE TOTAL LOSS
SEC. 142. An abandonment must be neither partial nor conditional.
SEC. 140. Abandonment, in marine insurance, is the act of the insured by Abandonment cannot be partial or conditional. The shipowner cannot say that
which, after a constructive total loss, he declares the relinquishment to the I will keep this new radar because its not that damaged, so just deduct it from
insurer of his interest in the thing insured.
the value of the loss.
SEC. 141. A person insured by a contract of marine insurance may abandon
the thing insured, or any particular portion thereof separately valued by the SEC. 143. An abandonment must be made within a reasonable time after
policy, or otherwise separately insured, and recover for a total loss thereof, receipt of reliable information of the loss, but where the information is of a
when the cause of the loss is a peril insured against: doubtful character, the insured is entitled to a reasonable time to make
o If more than three-fourths () thereof in value is actually lost, or would inquiry.
have to be expended to recover it from the peril;
o If it is injured to such an extent as to reduce its value more than three- SEC. 144. Where the information upon which an abandonment has been made
fourths (); proves incorrect, or the thing insured was so far restored when the
o If the thing insured is a ship, and the contemplated voyage cannot be abandonment was made that there was then in fact no total loss, the
lawfully performed without incurring either an expense to the insured of abandonment becomes ineffectual.
more than three-fourths () the value of the thing abandoned or a risk
which a prudent man would not take under the circumstances; or SEC. 145. Abandonment is made by giving notice thereof to the insurer, which
o If the thing insured, being cargo or freightage, and the voyage cannot be may be done orally, or in writing: Provided, That if the notice be done orally, a
performed, nor another ship procured by the master, within a written notice of such abandonment shall be submitted within seven (7) days
reasonable time and with reasonable diligence, to forward the cargo, from such oral notice.
without incurring the like expense or risk mentioned in the preceding
subparagraph. But freightage cannot in any case be abandoned unless SEC. 146. A notice of abandonment must be explicit, and must specify the
the ship is also abandoned. particular cause of the abandonment, but need state only enough to show that
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there is probable cause therefor, and need not be accompanied with proof of Acceptance may be done expressly or impliedly.
interest or of loss. Impliedly when the insurer says nothing, but begins to give orders to the
SEC. 147. An abandonment can be sustained only upon the cause specified in
captain and the crew.
the notice thereof.
It must be made within a REASONABLE TIME because you are turning over SEC. 153. The acceptance of an abandonment, whether express or implied, is
conclusive upon the parties, and admits the loss and the sufficiency of the
the ownership to the insurer. The insurer must be given the opportunity to
abandonment.
take prompt steps to secure his interests since he is now the owner.
If the information about the loss turns out to be erroneous, the abandonment SEC. 154. An abandonment once made and accepted is irrevocable, unless the
will become ineffective. ground upon which it was made proves to be unfounded.
o Unnamed case, a shipment of oranges from Israel were loaded on an
Egyptian vessel, which rammed against a wharf in Egypt. The Israeli SEC. 155. On an accepted abandonment of a ship, freightage earned previous
to the loss belongs to the insurer of said freightage; but freightage
got info that the oranges were massively damaged so he declared subsequently earned belongs to the insurer of the ship.
total constructive loss. It turned out that when the vessel rammed
into the wharf, the oranges were not harmed. The captain figured SEC. 156. If an insurer refuses to accept a valid abandonment, he is liable as
that by the time they would resume the voyage, the oranges would upon an actual total loss, deducting from the amount any proceeds of the
be spoiled, so he sold them. The declaration became ineffectual. thing insured which may have come to the hands of the insured.
Abandonment may be written or oral. If oral, a written notice of such If the abandonment is proper, but the insurer refuse to accept it, that will not
abandonment shall be submitted within 7 days from such oral notice. And the prejudice the insured.
notice must specify the cause of the abandonment. Example, an insurer refused to accept the abandonment of the vessel, so the
owner can sell the remains of the vessel as scrap iron. He can then sue the
SEC. 148. An abandonment is equivalent to a transfer by the insured of his insurer for the difference between the proceeds of the sale and the amount that
interest to the insurer, with all the chances of recovery and indemnity. should have been paid under the insurance policy.
So if the captain ordered that repairs be made to the vessel, the insurer will Once accepted, abandonment is irrevocable. UNLESS, it turns out that the
now be liable to pay for the repairs. If a salvor is to be paid his fee, well its the ground on which it was based was mistaken.
insurer who will be liable.
SEC. 157. If a person insured omits to abandon, he may nevertheless recover
SEC. 149. If a marine insurer pays for a loss as if it were an actual total loss, his actual loss.
he is entitled to whatever may remain of the thing insured, or its proceeds or
salvage, as if there had been a formal abandonment. CO-INSURANCE IN MARINE INSURANCE
The law provides for co-insurance in marine insurance.
SEC. 150. Upon an abandonment, acts done in good faith by those who were
agents of the insured in respect to the thing insured, subsequent to the loss, Unnamed case, which said that marine insurance policy is a valued policy. The
are at the risk of the insurer, and for his benefit. law makes the owner co-insurer if he insured it for less than its actual value.
Example, if a vessel is worth 20M, it was insured for only 10M; therefore, it
SEC. 151. Where notice of abandonment is properly given, the rights of the was underinsured. So the owner is deemed self-insurer for half of the value. So
insured are not prejudiced by the fact that the insurer refuses to accept the if there was partial damage of 2M, then the owner can only collect 1M.
abandonment. The policy also answers for so-called sue and labor expenses. These are
SEC. 152. The acceptance of an abandonment may be either express or expenses incurred to save a vessel for repairs, to recover property.
implied from the conduct of the insurer. The mere silence of the insurer for an
unreasonable length of time after notice shall be construed as an acceptance. J SEC. 158. A valuation in a policy of marine insurance is conclusive between
the parties thereto in the adjustment of either a partial or total loss, if the
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insured has some interest at risk, and there is no fraud on his part; except that the same proportion of the value which the market price at that port, of the
when a thing has been hypothecated by bottomry or respondentia, before its thing so damaged, bears to the market price it would have brought if sound.
insurance, and without the knowledge of the person actually procuring the
insurance, he may show the real value. But a valuation fraudulent in fact, J SEC. 165. A marine insurer is liable for all the expenses attendant upon a
entitles the insurer to rescind the contract. loss which forces the ship into port to be repaired; and where it is stipulated in
the policy that the insured shall labor for the recovery of the property, the
J SEC. 159. A marine insurer is liable upon a partial loss, only for such insurer is liable for the expense incurred thereby, such expense, in either
proportion of the amount insured by him as the loss bears to the value of the case, being in addition to a total loss, if that afterwards occurs.
whole interest of the insured in the property insured.
J SEC. 166. A marine insurer is liable for a loss falling upon the insured,
J SEC. 160. Where profits are separately insured in a contract of marine through a contribution in respect to the thing insured, required to be made by
insurance, the insured is entitled to recover, in case of loss, a proportion of him towards a general average loss called for by a peril insured
such profits equivalent to the proportion which the value of the property lost against: Provided, That the liability of the insurer shall be limited to the
bears to the value of the whole. proportion of contribution attaching to his policy value where this is less than
the contributing value of the thing insured.
J SEC. 161. In case of a valued policy of marine insurance on freightage or
cargo, if a part only of the subject is exposed to risk, the valuation applies J SEC. 167. When a person insured by a contract of marine insurance has a
only in proportion to such part. demand against others for contribution, he may claim the whole loss from the
insurer, subrogating him to his own right to contribution. But no such claim
J SEC. 162. When profits are valued and insured by a contract of marine can be made upon the insurer after the separation of the interests liable to
insurance, a loss of them is conclusively presumed from a loss of the property contribution, nor when the insured, having the right and opportunity to
out of which they are expected to arise, and the valuation fixes their amount. enforce contribution from others, has neglected or waived the exercise of that
right.
J SEC. 163. In estimating a loss under an open policy of marine insurance the
following rules are to be observed: J SEC. 168. In the case of a partial loss of ship or its equipment, the old
materials are to be applied towards payment for the new. Unless otherwise
stipulated in the policy, a marine insurer is liable for only two-thirds (2/3) of
1. The value of a ship is its value at the beginning of the risk, including the remaining cost of repairs after such deduction, except that anchors must
all articles or charges which add to its permanent value or which are be paid in full.
necessary to prepare it for the voyage insured;
2. The value of the cargo is its actual cost to the insured, when laden on
board, or where the cost cannot be ascertained, its market value at FIRE INSURANCE
the time and place of lading, adding the charges incurred in
purchasing and placing it on board, but without reference to any loss SEC. 169. As used in this Code, the term fire insurance shall include insurance
incurred in raising money for its purchase, or to any drawback on its against loss by fire, lightning, windstorm, tornado or earthquake and other
exportation, or to the fluctuation of the market at the port of allied risks, when such risks are covered by extension to fire insurance
destination, or to expenses incurred on the way or on arrival; policies or under separate policies.
3. The value of freightage is the gross freightage, exclusive of primage,
without reference to the cost of earning it; and
4. The cost of insurance is in each case to be added to the value thus IGNITION HOSTILE FIRE #itsthefreakingweekendbaby
estimated.
For it to be covered, there must be an ignition.
The policy will only answer for hostile fire, not friendly fire.
J SEC. 164. If cargo insured against partial loss arrives at the port of
destination in a damaged condition, the loss of the insured is deemed to be o HOSTILE FIRE fire that escapes and burns in a place where it is
not supposed to be. It may also refer to fire that started out as
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friendly fire but escapes from its original place or becomes too strong valuation in a policy of fire insurance, the effect shall be the same as in
as it becomes out of control. a policy of marine insurance.
o FRIENDLY FIRE fire that burns in a place where it is supposed to
SEC. 174.
burn (stove, fire place) [Sundiang, p.157]
Whenever the insured desires to have a valuation named in his policy,
Ex: Restaurant was insured. Through the years, the wall in the kitchen insuring any building or structure against fire, he may require such
became covered in soot and smoke because it was facing the gas range. Can the building or structure to be examined by an independent appraiser and
owner file a claim against the policy? No, this was friendly fire, not hostile fire. the value of the insureds interest therein may then be fixed as
between the insurer and the insured.
USE, STIPULATED IN CONTRACT The cost of such examination shall be paid for by the insured.
A clause shall be inserted in such policy stating substantially that the
value of the insureds interest in such building or structure has been
SEC. 170. An alteration in the use or condition of a thing insured from that to
thus fixed.
which it is limited by the policy made without the consent of the insurer, by
In the absence of any change increasing the risk without the consent
means within the control of the insured, and increasing the risks, entitles an
of the insurer or of fraud on the part of the insured, then
insurer to rescind a contract of fire insurance.
o in case of a total loss under such policy, the whole amount so
insured upon the insureds interest in such building or
SEC. 171. An alteration in the use or condition of a thing insured from that to
structure, as stated in the policy upon which the insurers
which it is limited by the policy, which does not increase the risk, does not
have received a premium, shall be paid, and
affect a contract of fire insurance.
o in case of a partial loss, the full amount of the partial loss
shall be so paid, and in case there are two (2) or more
SEC. 172. A contract of fire insurance is not affected by any act of the insured
policies covering the insureds interest therein, each policy
subsequent to the execution of the policy, which does not violate its
shall contribute pro rata to the payment of such whole or
provisions, even though it increases the risk and is the cause of the loss.
partial loss.
But in no case shall the insurer be required to pay more than the
Use must be specified/stipulated in the contract. amount thus stated in such policy.
If the use is altered, then it will increase the risk and insurer will not be liable. This section shall not prevent the parties from stipulating in such
But if the alteration will not increase the risk, then it will not affect the liability. policies concerning the repairing, rebuilding or replacing of buildings
Unnamed case: There was an office in Rosario, Cavite that was insured. or structures wholly or partially damaged or destroyed.
However, it transferred location offices without the consent of the insurer and
the other tenants in the new building had a different line of business that was If there is a loss, and the building cost 250M to build, the insurance wont pay
more risky (based on some table in the policy), which had a higher premium. the same amount if it is an old building. The value will be adjusted to reflect
SC: the insurer is not liable. depreciation suffered by the building before it was burned.
Also, during the WWII, there was a scorched earth policy. Insurance policies San Miguel case, the head office in Ortigas took 3 years to finish. Under the
will not answer for fires started because of the war. construction contract, the contractor had to keep it insured the whole time. In
November 1983, the prices of materials skyrocketed. Sometime thereafter,
VALUED POLICY there was a fire. San Miguel was going to claim under the policy, it computed
it losses based on the skyrocketed prices, not the value in the contract (pre-
SEC. 173. skyrocket prices). The policy had a stipulation regarding underinsurance (prior
If there is no valuation in the policy, the measure of indemnity in an to the amendment, Sec. 174 did not exist so the insured did not have to pay
insurance against fire is the expense it would be to the insured at the a share when the policy was underinsured). San Miguel defended itself by
time of the commencement of the fire to replace the thing lost or injured saying that they were not underinsured since the computation was based on
in the condition in which it was at the time of the injury; but if there is a
the pre-skyrocket prices. SC: you must be consistent, the valuation of the
building cannot be based on different valuation of materials. They cannot
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claim under the skyrocketed material prices and at the same time pay only the Third party liability
premium based on the computation of the pre-skyrocket prices. [from Sundiang:]
OPTION TO REBUILD Casualty insurance may provide for third party liability (in the nature of
o Under fire insurance and motor vehicle insurance, theres a stipulation stipulation pour autrui for personal injury and even damage to property), in
that the insurer has the option to rebuild instead of paying for the loss. which case, the third party may directly sue the insurer upon the occurrence of
o When the insurer exercises this option, the contract of insurance is the loss. However, the insurer is not liable with the insured or the tortfeasor
NOVATED into a contract for a piece of work and the insurer for the latters obligation. If the insurer pays the third person, the right of
becomes liable for the quality of the work done. subrogation operates.
o Jacks case, his client was in the business of dam trailers. During a If there is no stipulation in favor of third persons, but the insurance is an
particular transport of coal, the trailer lost balance and the hydraulic insurance against liability to third persons, any third person who might be
lift was damaged. The insurance didnt want to pay for the hydraulic injured may not sue the insurer. Only the insured (sought to be held liable by
lift so it exercised option to rebuild. The company bought an old the third person) can recover from the insurer.
cannon to fabricate a replacement hoist. But this didnt work, so they Liabilities arising out of acts of negligence, which are also criminal, are also
tried other things, this led to massive losses of profits for the client insurable on the ground that such acts are accidental. Thus, a motor insurance
because they couldnt use the trailer. Jack sued the insurance company policy covering the insureds liability for accidental injury caused by his
for damages and lost profits. The company then said that there was a negligence, even though gross and unattended by criminal consequences, such
provision in the policy that it was not liable for consequential as homicide through reckless imprudence, will not be void as against public
damages. SC: rule in favor of Jack and client. When the company policy. But liability consequences of deliberate criminal acts are not insurable.
exercised its option to rebuild, the contract was novated and under
this novated contract for piece of work, the company would be liable Case of liability insurance: whether a third person who was injured can sue the
for consequential damages pursuant to the Civil Code. insurance company directly depends on wording of policy.
If it is answering for loss incurred by the insured, third persons cannot sue the
J SEC. 175. No policy of fire insurance shall be pledged, hypothecated, or insurance company because it will only be liable when there is a final judgment
transferred to any person, firm or company who acts as agent for or otherwise declaring the insured liable; or by agreement where there was negotiation for
represents the issuing company, and any such pledge, hypothecation, or
settlement and the insurance company, insured and third party agreed.
transfer hereafter made shall be void and of no effect insofar as it may affect
other creditors of the insured. But if it answers for liability, yes. Third parties can sue directly the insurance
company.
Date: December 2, 2014 (MR)
Of course party must be liable cause its liability insurance. If the party is not liable, he
CASUALTY INSURANCE has no cause of action. Examples:
There was a parking lot near a national library. There was a sign there saying
SEC. 176. FULL. But if you go to the casino, they will allow you to park. The casino
Casualty insurance is insurance covering loss or liability arising from will make an arrangement with the parking lot management that it will be
accident or mishap, excluding certain types of loss which by law or reserved for customers of the casino. The casino got liability insurance policy
custom are considered as falling exclusively within the scope of other and there were many incidents where a car that is parked there is bumped by a
types of insurance such as fire or marine.
car coming in or going out. One time the casino paid for all the damages. The
It includes, but is not limited to, employers liability insurance, motor
vehicle liability insurance, plate glass insurance (wtf is this!), burglary owner of the car at fault wrote a note saying it will answer for the damages.
and theft insurance, personal accident and health insurance as written Casino paid though and now they claim from the liability policy. Company
by non-life insurance companies, and other substantially similar kinds said you are not liable. You have nothing to do with the accident. Casino
of insurance. won in the MTC, RTC reversed, CA affirmed RTC, SC denied appeal.
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There was a matter referred to me involving a resort. There was a group of Accident insurance
Japanese tourists going to the resort and they had to take boat to go to the
resort. The boat capsized. The Japanese claimed loss of belongings. The resort Cases:
asked them to list the belongings lost and the value. No questions asked, they You remember the old case where the mining company organized the amateur
paid the total more than Php 500million. And they claimed from the liability boxing competition among the employees. One of the employees took part and
policy. Now I went to the library of the Manila Observatory in Loyola he slipped and while falling down, opponent punched him and he fell down and
Heights and consulted acquaintances who engaged in fishing and asked, how died. And there was a claim against the accident policy. Court said the death there
does this happen? Its a sudden burst of wave. It happens during certain times was not intentional and therefore they can recover.
of the year. You cannot predict when it will happen. So this is a fortuitous The house of the lawyer was being robbed. Lawyer proceeded to the police
event. Resort was not liable and cannot hold the company liable. station to report the incident. The station sent a policeman to accompany him. On
Insurance
the way they saw a security guard and they waved at him, Sama ka samin! And
Insurance company taking up defense he did go with them. The robbers saw the 3 of them approaching so he fired his
Usually these policies contain a condition that the insured must promptly gun. The security guard was killed. He had an accident insurance policy and the
notify the insurance company in case there is a potential claim. And if the court said the insurance company was liable. Even if a killing was intentional but
insured should eventually be sued, it should forward the summons and the victim was chosen at random, thats considered accident.
complaint to the insurance company. And the latter will undertake the defense Robbers held up passengers in a bus and to prevent any of them from running and
of the case. reporting the incident, they fired their guns and a passenger was hit. That was an
Example: This case I took over, the insured was a construction company accident.
making a highway in Mindanao. Some machinery was parked there by the side There was a case where somebody was eating in a resto in Lipa city. Some
of road in the middle of the night and somebody, claiming there was no sign customers entered and ordered food but then they tried to leave and not pay.
there, ran into it and got injured. He filed a case for damages. And the There was trouble with the waiters. So this guy decided to leave and ask for his
insurance company said Ah typical vehicular accident case, so they sent some bill because he didnt want to be involved in the trouble. Meanwhile, one of the
insurance adjuster and lawyer to handle it. Court rendered judgment in favor customers in the adjoining table dashed out of the resto. This fellow paid, stood
of plaintiff and awarded PHP 500k in moral damages, because the plaintiff up and was leaving. The customer, who had run, saw the door opening and
testified that as a result of his injuries he suffered diminished sex drive. And the thought the waiters were going out to pursue him so he pulled out his revolver
lawyer for plaintiff filed a motion for execution pending appeal. Court and shot the fellow. Killed. Now he had a life insurance policy, which had a rider
granted. Sheriff levied on construction equipment of the defendant. Lawyer of provision for double indemnity if the death is accidental. Insurance company paid
insurance company failed to have a supersedeas bond approved and all the basic indemnity but refused to pay the double indemnity, arguing it wasnt
equipment were subject to auction sale. Construction company filed a case accidental. In fact, they argued, the accused is charged with homicide, not reckless
saying the insurance company was grossly negligent in handling its defense. It imprudence resulting to homicide. I said that that is for purposes of criminal
didnt question the execution pending appeal, it didnt even file a petition for liability under the RPC. But for purposes of liability under the insurance code,
certiorari. In the answer the insurance company alleged they should not be that is accidental when the victim was killed because of mistaken identity.
held liable until there is a final judgment against the defendant. But I said there There was a case where somebody suffered a heart attack. Then he fell down and
I am not suing you for breach of obligation to indemnify the defendant. I am hit his head and his skull was fractured and he died. That was accident.
suing you for breach of your obligation to undertake the defense of the Somebody was standing along the sidewalk waiting for a ride. An assailant
defendant, which is separate and distinct. TC sustained. CA affirmed. approached him and stabbed him in the back and he was killed. Now the claim
You jump, I jump. Huhuhuhu L was filed against the accident policy. Insurance company argued the killing was
intentional. The SC said in determining if the killing is accidental, it should be
taken from the viewpoint of the victim and not the assailant. As far as the victim
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was concerned, he was just there standing in a place where he had a legitimate strictly by the terms of the contract of suretyship in relation to the principal
right to be, waiting for a ride. And he had no reason to believe somebody would contract between the obligor and the obligee.
assault him and stab him in the back. That is accidental. That is correct because of
the policy involved in that case. But most accident policies contain a rider, which SEC. 179.
contains an exclusion: it will not answer for homicide or assault. If that policy had The surety is entitled to payment of the premium as soon as the
contract of suretyship or bond is perfected and delivered to the
that exclusion, the insurance company would not have been liable.
obligor.
Two crazy decisions in US and Canada: Insured had an accident policy. He heard that No contract of suretyship or bonding shall be valid and binding
reducing the oxygen going to the brain increases sexual pleasure. He placed a unless and until the premium therefor has been paid, except where
plastic bag over his head and masturbated. And he suffocated to death. Claim was the obligee has accepted the bond, in which case the bond becomes
filed against the policy. The American Court ruled that when he engaged in valid and enforceable irrespective of whether or not the premium has
autoeroticism, it wasnt his intention to die. been paid by the obligor to the surety:
o Provided, That if the contract of suretyship or bond is not
accepted by, or filed with the obligee, the surety shall collect
In Canada, they ruled that the suffocation was a foreseeable possibility. So it only a reasonable amount, not exceeding fifty percent (50%)
should not be considered accidental. of the premium due thereon as service fee plus the cost of
stamps or other taxes imposed for the issuance of the
Well you cannot do that in Makati. We have ordinance prohibiting using plastic contract or bond:
bags. (Okay natawa ako dito JT) o Provided, however, That if the nonacceptance of the bond be
due to the fault or negligence of the surety, no such service
fee, stamps or taxes shall be collected.
There is this case Jack doesnt agree with A person showed off his gun to In the case of a continuing bond, the obligor shall pay the subsequent
another person and to prove it was empty, he aimed at his temple and pulled the annual premium as it falls due until the contract of suretyship is
trigger. Oops, booboo, may bullet pala. He died. Supreme Court held heirs can cancelled by the obligee or by the Commissioner or by a court of
collect because it was a mistake. But Jack says it is common sense not to aim a gun competent jurisdiction, as the case may be.
at anyone, even oneself, even though the gun is empty. Jacks viewpoint is more
sensible, really! SEC. 180. Pertinent provisions of the Civil Code of the Philippines shall be
An example of accident again: a seaman who jumped into the sea to save a child applied in a suppletory character whenever necessary in interpreting the
provisions of a contract of suretyship.
who fell overboard. The seaman died. Seamans heirs can collect under accidental
death, because he had no intent to die.
If a surety company wants to issue bonds in favor of the government, this is called a
SURETYSHIP public bond. There must be an administrative order signed by the Chief Executive. So
that surety companies who want to post bonds in favor of the government must have
SEC. 177. A contract of suretyship is an agreement whereby a party called the Admin Order signed by President.
surety guarantees the performance by another party called the principal or
obligor of an obligation or undertaking in favor of a third party called the The law provides the surety shall be jointly and severally liable with the obligor and
obligee. surety shall be limited to the amount of the bond. Exceptions:
It includes official recognizances, stipulations, bonds or undertakings But the surety can be held liable for a larger amount if, for example, it was
issued by any company by virtue of and under the provisions of Act
No. 536, as amended by Act No. 2206.
guilty of delay in paying. Interest will be imposed.
Or if they unreasonably refused to pay so that the obligee had to sue, they will
SEC. 178. The liability of the surety or sureties shall be joint and several with be liable for attorneys fees.
the obligor and shall be limited to the amount of the bond. It is determined
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Liability is determined strictly by terms of the suretyship contract in relation to the But I think lawyers who are not familiar with the construction industry do not know
principal contract. that there are different bonds that can be required in construction. (Unlike Jack, made
For instance, an accused applies for a bond with an insurance company. The apparent by the following examples):
obligee (the court) is not concerned if the premium is not paid. If the accused
absconds, the court will proceed against the insurance company (because of the I had a case where the owner required the contractor to post a non-payment
solidary nature of the obligation). bond and advance payment bond. But then the contractor did not finish the
project so they had to hire someone else to finish the project and there was cost
In construction contracts there are many kinds of bonds that may be required in a overrun. They were trying to recover it through advance payment bond. I
construction contract project: said no, it doesnt answer for that. TC exempted surety company from
Performance bondUsually it will provide that for every day of delay, liability.
liquidated damages in the amount of 1/10 of 1% will be assessed. But theres a I had a case where contractor signed a contract and he was paid down
cap. It will not exceed 10% of the contract price. So if theres a performance payment. He was required to put up performance bond. He never started and
bond, it will answer for liquidated damages. Or suppose the contractor he committed suicide. Owner now claiming from the performance bond. I
abandoned the project so the owner will have to hire a new one. When a new wrote that the performance bond does not answer for that, but the advance
contractor is hired, there is cost over run; the performance bond will answer payment bond. I cited two SC decisions ordering payment from advance
for that. payment bond and another from performance bond to show that even the SC
Advance payment bond Owner will give contractor a down payment regards these as different bonds. I cited the book of Hudson on construction: if
because he has to mobilizehe has to hire workers; he has to purchase no advance payment bond was posted, you cannot claim. Another book said
supplies. Now every time he sends a bill, the down payment will be the same thing. Sometimes the owner feels it would be burdensome to have
proportionately liquidated. the contractor post so many bonds. And so they do away with the advance
For example, he sent a billI have finished 10% of the work. The payment bond. But the effect is you cannot recover from the performance
owner will not pay him 10% of the contract price. He will deduct from bond what can only be recovered from the advance payment bond.
the payment 10% of the advance payment. Then he sends another bill
another 10%. The owner will again deduct 10% of the advance payment. Judicial bond
So you can see after he completes 100% project, the full amount of the Sometimes in court theres a criminal case called ahead. The judge tells
down payment would have been liquidated. Now suppose the contractor accused, hmm you posted your bail bond last year but you have not submitted
abandoned when he only finished 30% so the owner was not able to proof that you have paid premium your bond this year. It is no longer valid.
recoup 100% advance payment, only 30%. Advance payment bond will Wrong. The SC has already issued 2 resolutions: a judicial bond remains valid
answer for the 70% that was not recouped. and binding until and unless it is ordered cancelled by the court. It is up to the
Non-payment bondUnder the LC, the owner will be liable in case the surety to run after the principal to pay the premium. Meanwhile it remains
laborers of the contractor were not paid by the contractor. Under the CC, liable.
suppliers can run after the owner if the contractor did not pay him. So here the [If the bond is not accepted, the principal is entitled to the return of the
owners will ask the contractors to post a bond to answer for claims of unpaid premiums paid. (2001 transcript)] Now if the bond was not accepted, the
laborers and suppliers. That is the liability bond. Pay for unpaid laborers and surety company can charge a service fee because the manager of the
suppliers. department is studied the application, terms and conditions of the contract.
Then usually after acceptance, the contract provides that the contractor will And during that time, the company was paying his salary. The clerk who was
correct any hidden defects that may be discovered within a period of one year. typing all the necessary documents was being paid salary. So they can charge a
A bond can answer for that. reasonable service fee. Of course taxes paid will also have to be reimbursed. All
that can be recovered. Now what companies with frequent contracts do is they
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have a list of accredited surety companies so they can give contractors this list. Five hundred thousand pesos (P500,000.00) or in such reasonable
To make sure the bond will get accepted, get your bonds from these. amount as may be determined by the Commissioner. Such right may
What the SC requires is that surety companies must quarterly get clearance include, but shall not be limited to, obtaining a policy loan,
surrendering the policy, receiving the proceeds of the Policy, and
from the SC, which should be attached every time they file bond in court. giving the minors consent to any transaction on the policy.
Courts are required to submit reports to SC. For example, someone jumps In the absence or in case of the incapacity of the father or mother, the
bail, the bond was confiscated, judgment was rendered against him but the grandparent, the eldest brother or sister at least eighteen (18) years of
surety company does not pay. It will be blacklisted; it will not be given age, or any relative who has actual custody of the minor insured or
clearance. Aside from clearance from the SC that will be given to all courts, it beneficiary, shall act as a guardian without need of a court order or
will also need to get clearance from CA, CTA, SB; and in multiple sala courts, judicial appointment as such guardian, as long as such person is not
otherwise disqualified or incapacitated. Payment made by the insurer
they used to require clearance from COC. In QC, they require you to get
pursuant to this section shall relieve such insurer of any liability
clearance from all courts in MM. Suppose a blacklisted company issued a bond under the contract.
and was rejected by the court, then it cannot charge service fee or ask principal
to shoulder expenses for taxes. Life insurance is insurance on life.
In case of continuing bond, the annual premium should be paid every 3 Principal types: (from 2001 transcript because better explained)
anniversary of the issuance of the bond until the bond is ordered cancelled. CC
Term for a fixed period (e.g., for 5 years, for 10 years, etc), after that it
provisions on guaranty to be applied in suppletory manner.
expires. This is the least expensive type of insurance. It does not have any
cash surrender value.
LIFE INSURANCE
Whole life the insured pays premiums up to a certain time and then he will
SEC. 181.
be insured up to a certain age or until he dies, whichever comes first. For
Life insurance is insurance on human lives and insurance example, the policy states that the insured will pay premiums until hes 65.
appertaining thereto or connected therewith. After that hell be insured until hes 96.
Every contract or undertaking for the payment of annuities including Endowments For example, the policy states that if the insured reaches 60,
contracts for the payment of lump sums under a retirement program the insurer will pay him annuities for life. This is the most expensive type of
where a life insurance company manages or acts as a trustee for such life insurance.
retirement program shall be considered a life insurance contract for
purposes of this Code.
Which one the insured will get depends on his status in life. Examples:
A practicing professional will be interested in term insurance. He can continue
SEC. 182.
An insurance upon life may be made payable on practicing beyond retirement age of 65. The longer he practices, the bigger his
o the death of the person, or income tends to be: My problem is not myself but my family. If I die, they
o on his surviving a specified period, or will lose their source of livelihood. So he will go for term insurance.
o otherwise contingently on the continuance or cessation But heres an ordinary employee: When I retire, I wont have regular income.
of life. SSS premiumredemption is very minimal. You would want to have
Every contract or pledge for the payment of endowments or annuities
shall be considered a life insurance contract for purposes of this
additional income. Endowment would be attractive to him.
Code.
In the absence of a judicial guardian, the father, or in the latters One of the amendments: every contract for payment of annuities including payment of
absence or incapacity, the mother, of any minor, who is an insured or lump sum retirement programs under the management of insurance companies is a life
a beneficiary under a contract of life, health, or accident insurance, insurance contract.
may exercise, in behalf of said minor, any right under the policy,
without necessity of court authority or the giving of a bond, where the
interest of the minor in the particular act involved does not exceed
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Beneficiary o There is a farmer who named his angelic faced baby irrevocable
beneficiary. But when he grew up, he became a problem child.
CIVIL CODE Art. 739. The following donations shall be void: Father wanted to borrow cash surrender value. Philamlife argued the
1. Those made between persons who were guilty of adultery or child was irrevocable beneficiary so his consent must be obtained.
concubinage at the time of the donation; But hes a minor. Father said, no problem, Im the father! Conflict
2. Those made between persons found guilty of the same criminal
offense, in consideration thereof;
of interest! You have to institute guardianship proceedings. What?!
3. Those made to a public officer or his wife, descedants and In that case, cancel the policy! Hindi po pwede; you need to
ascendants, by reason of his office. institute case for that. So the father sued. The court sustained the
insurance company.
General rule: insured can make anyone beneficiary. Even a total stranger. o But now, the law says up to PHP 500K, the father can get cash
Exceptions: Civil Code art. 739 surrender value without going to court. This is the order: father and
o Where the insured named his mistress the beneficiary that is void. mother not available grandparent; Brother or sister 18yo;
Proceeds should be paid to his intestate heirs. Relative actually having custody of minor.
o Insured named his mistress and illegitimate children beneficiaries.
Wife argued that the designation is void. Legitimate children also SEC. 183.
1. The insurer in a life insurance contract shall be liable in case of
said they should share in the proceeds with the illegitimates in the
suicide only when it is committed after the policy has been in force for
proportion 2:1. Held: Wife cannot get anything because she was not a period of two (2) years from the date of its issue or of its last
designated. Share of the mistress should go to illegitimate children reinstatement, unless the policy provides a shorter period:
because that designation is not prohibited. Legitimate children v Provided, however, That suicide committed in the state of
cannot get anything because they were not designated. Rules of insanity shall be compensable regardless of the date of
succession not applicable; this is insurance. commission.
SEC. 11. The insured shall have the right to change the beneficiary he Suicide
designated in the policy, unless he has expressly waived this right in said o Amendmentif the insured committed suicide within 2 years of its issuance or
policy. Notwithstanding the foregoing, in the event the insured does not its last reinstatement, presumed he contemplated committing suicide and
change the beneficiary during his lifetime, the designation shall be deemed insurance company not liable. But if he was insane at the time, insurance will
irrevocable. be liable because that is an intelligent human act.
o Who has the burden of proving suicide? The basic instinct of self-preservation
Insurance companies usually push you to make the designation irrevocable. militates against the commission of suicide. Thus, it is incumbent upon the
That is tax exempt, the best form of estate planning. Irrevocable beneficiaries party alleging suicide as a defense, especially in actions involving insurance
have vested right. You want to change him, you need to get his consent. Even policies to prove it by clear and convincing proof. (2001 transcript)
if insured stops paying premium, the beneficiary can keep it alive by paying
the premium himself. The insured cannot include additional beneficiaries J SEC. 184. A policy of insurance upon life or health may pass by transfer,
without consent of the irrevocable beneficiary because what the latter will will or succession to any person, whether he has an insurable interest or not,
receive will be diminished. and such person may recover upon it whatever the insured might have
However, there was an amendment: if beneficiary is revocable, but the insured recovered.
did not change the beneficiary until he dies, then that revocable designation
will become irrevocable. So it will be exempt from estate tax. J SEC. 185. Notice to an insurer of a transfer or bequest thereof is not
But sometimes its good to make the designation revocable so the insured will necessary to preserve the validity of a policy of insurance upon life or health,
unless thereby expressly required.
always have that power to change the beneficiary:
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J SEC. 186. Unless the interest of a person insured is susceptible of exact When there are exclusions in a life insurance policy like car
pecuniary measurement, the measure of indemnity under a policy of insurance racing, skydiving, flight which is not a regular commercial flight,
upon life or health is the sum fixed in the policy riding on a private plane, or scuba diving, the insurance company
will not be liable.
INCONTESTABLE CLAUSE / INCONTESTABILITY RULE o The policy lapsed because the premiums were not paid
o The insured joined the military service
SEC. 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 CREEPY AF o The policy was taken pursuant to a scheme to murder the insured
previous to the commencement of an action on the contract.
If the beneficiary killed the insured he/she will be disqualified
from getting the proceeds.
After a policy of life insurance made payable on the death of the insured shall If there are other beneficiaries mentioned, they will get
have been in force during the lifetime of the insured for a period of two (2) the money.
years from the date of its issue or of its last reinstatement, the insurer cannot If they are also involved in the killing of the insured,
prove that the policy is void ab initio or is rescindable by reason of the
none of them will be qualified to get the proceeds. If
fraudulent concealment or misrepresentation of the insured or his agent.
theres another provision in the policy governing what
History of the rule: Insurance companies became aware of criticisms against them: You should be done with the money, that will apply. If
collect premiums for 40 years and then you will refuse to pay because he concealed his theres none, the proceeds will be paid to the heirs of
health 50 years ago? You squished him for money all these years! So the insurance the insured.
companies voluntarily incorporated this provision in their policies. Government Winning that ticket, Rose, was the best thing that
eventually incorporated it in the law. happened to me. It brought me to you. Jack L
o The insured substituted another person for himself during the medical
Requisites to apply: examination
1. life insurance policy That will not take over the incontestability clause. The insurance
2. payable on the death of the insured is void because there was no meeting of the minds as to the
3. has been in force for a period of two years from the date of its issue or last subject matter. The person whom the insurer agreed to insure is
reinstatement not the applicant.
o Failure to furnish proof of death
What is the meaning of that provision? Eg. In case of strong typhoon, and where the bodies of casualties
2 years must lapse while the insured was still alive. If the insured died within 2 were not recovered, you have to wait until the period when the
years, beneficiary cannot delay filing of the case and say I will wait until after 2 presumption of death will expire.
years and then sue and then say you cannot invoke the incontestability rule. o Action was not filed within the time required
Under a life insurance, when the time comes that it should be
Date: December 4, 2014 (MB) delivered, the insured must be insurable.
o Devices adopted to temper the harshness of the forfeiture of benefits of a

Defenses of the insurer even if the policy has become incontestable:
life insurance policy for failure to pay premium
o The person who is claiming the policy has no insurable interest
o The grace period of at least 30 days to pay subsequent premiums
Eg. Businessman who got a laborer on the street and asked him to
o Insured may surrender the policy and claim the cash surrender value
get insurance and name the rich man as beneficiary
This is usually in connection with the life insurance policies.
o The cause of death is an excepted risk
Eg. If you insured your life from age 21 to age 60 you will be
paying the same premium every year. But in the early years the
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risk of the insured dying is less if he is age 60. So at that point in c) Third party is any person other than a passenger as defined in this
time he is paying more than what would correspond to the risk section and shall also exclude
the insurance company is assuming and that excess is the cash a member of the household, or
a member of the family within the second degree of consanguinity
surrender value. If you look at the life insurance policy there is a
or affinity, of a motor vehicle owner or land transportation
table indicating the cash surrender value so you can surrender the operator, as likewise defined herein, or
policy and get the cash surrender value or you can even get a his employee in respect of death, bodily injury, or damage to
policy loan cheap money you can borrow money with 6% property arising out of and in the course of employment.
interest.
o Insured may apply for reinstatement 3rd party term excludes:
But insured will be asked to pay the premium in arrears and a member of the household (like a household helper living with them)
undergo medical examination. In other words, he/she must be member of the family within the 2nd degree of consanguinity or affinity
insurable again. an employee with the insured in the course of employment
Case: A lawyer was on his way to the office of a client and he asked his
COMPULSORY MOTOR VEHICLE LIABILITY INSURANCE secretary to take down notes. Secretary was hit by the lawyers car
when it was backing up in the firms premises. Secretary cannot file a
Before someone can register his/her motor vehicle, he/she must present proof of 3rd party liability because her presence is within the course of
a compulsory 3rd party liability insurance. employment. But if theyre out on a date, secretary may file
If the policy provides that final judgment is needed before liability attaches, such
provision is void. d) Owner or motor vehicle owner means the actual legal owner of a
motor vehicle, in whose name such vehicle is duly registered with the
SEC. 386. For purposes of this chapter: Land Transportation Opatriffice;
e) Land transportation operator means the owner or owners of motor

a) Motor Vehicle is any vehicle as defined in Section 3, paragraph (a) of vehicles for transportation of passengers for compensation, including
Republic Act No. 4136, otherwise known as the Land Transportation school buses.
and Traffic Code.
f) Insurance policy or Policy refers to a contract of insurance against
Motor Vehicle shall mean any vehicle propelled by any power other than muscular passenger and third-party liability for death or bodily injuries and
power using the public highways, but excepting road rollers, trolley cars, street- damage to property arising from motor vehicle accidents.
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, SEC. 387. It shall be unlawful for any land transportation operator or owner of
and tractors, trailers and traction engines of all kinds used exclusively for agricultural a motor vehicle to operate the same in the public highways unless there is in
force in relation thereto a policy of insurance or guaranty in cash or surety
purposes. Trailers having any number of wheels, when propelled or intended to be bond issued in accordance with the provisions of this chapter to indemnify the
propelled by attachment to a motor vehicle, shall be classified as separate motor vehicle death, bodily injury, and/or damage to property of a third-party or passenger,
with no power rating. (taken from RA 4136) as the case may be, arising from the use thereof.
b) Passenger is any fare paying person being transported and conveyed in J SEC. 388. The Commissioner shall furnish the Land Transportation Office
and by a motor vehicle for transportation of passengers for with a list of insurance companies authorized to issue the policy of insurance
compensation, including persons expressly authorized by law or by the or surety bond required by this chapter.
vehicles operator or his agents to ride without fare.
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SEC. 389. The Land Transportation Office shall not allow the registration or o Under the Revised Insurance Code, no fault indemnity amounts to maximum
renewal of registration of any motor vehicle without first requiring from the of P15,000.
land transportation operator or motor vehicle owner concerned the The no fault indemnity clause is without prejudice to the
presentation and filing of a substantiating documentation in a form approved
by the Commissioner evidencing that the policy of insurance or guaranty in
claimants getting more.
cash or surety bond required by this chapter is in effect. Eg. If medical expenses reach P100,000, for him to claim an
additional amount over and above the P15,000 indemnity, he/she has
SEC. 390. Every land transportation operator and every owner of a motor to prove fault. It is void for the insurer to require as a condition to
vehicle shall, before applying for the registration or renewal of registration of release the indemnity for the person to sign a quitclaim or waiver.
any motor vehicle, at his option, either secure an insurance policy or surety Eg. The claim is for P15,000. Under the no fault indemnity clause,
bond issued by any insurance company authorized by the Commissioner or he/she gets P5,000 (because P15,000 is only the maximum rate). This
make a cash deposit in such amount as herein required as limit of liability for does not mean that the P10,000 is barred. Only that the claimant has
purposes specified in Section 387. xxx
to prove that there was negligence. It is void for the insurance
company to require the claimant to waive his other claims as a
see full text of the New Insurance Code for the values of the bonds condition precedent to the release of the P5,000.
o An insurer may be held liable under the no fault indemnity provision
SEC. 391. Any claim for death or injury to any passenger or third-party without the necessity of proving fault or negligence of any kind, provided the
pursuant to the provisions of this chapter shall be paid without the necessity following requisites are present:
of proving fault or negligence of any kind: Provided, That for purposes of this
The claim is for death or injury to any passenger or third party
section:
The total indemnity in respect of any one person does not exceed
P15,000
o The total indemnity in respect of any person shall not be less than
Fifteen thousand pesos (P15,000.00); The necessary proof of loss under oath to substantiate the claim must
o The following proofs of loss, when submitted under oath, shall be be submitted
sufficient evidence to substantiate the claim: In case of death, submit the death certificate.
1. Police report of accident; and In case of injury, submit a medical report (receipt of
2. Death certificate and evidence sufficient to establish the proper medicines, professional fee, hospital bills etc.).
payee; or In ALL cases, submit a police report.
3. Medical report and evidence of medical or hospital
disbursement in respect of which refund is claimed;
o A claim under the no fault indemnity provision may be made against the
o Claim may be made against one motor vehicle only. insurer of one motor vehicle only. Such claim may be made directly by the
In the case of an occupant of a vehicle, claim, shall lie against injured party against the insurer as follows:
the insurer of the vehicle in which the occupant is riding, In case of an occupant of a vehicle, claim shall lie against the insurer
mounting or dismounting from. of the vehicle in which the occupant is riding, mounting, or
In any other case, claim shall lie against the insurer of the dismounting from (even if it is the fault of the other vehicle because
directly offending vehicle.
this is no fault)
In all cases, the right of the party paying the claim to recover
against the owner of the vehicle responsible for the accident In any other case, claim shall lie against the insurer of the directly
shall be maintained. offending vehicle.
Eg. If it is a pedestrian, file a claim with the insurer of the
NO FAULT INDEMNITY PROVISION vehicle which struck him/her.
o The person injured can recover without need of proving fault or negligence o In all cases, the right of the party paying the claim to recover against the
on the part of the insured. owner of the vehicle responsible for the accident shall be maintained
o This was upheld as a valid exercise of police power.
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J SEC. 392. J SEC. 395. In case of change of owner ship of a motor vehicle, or change of
No land transportation operator or owner of motor vehicle shall be the engine of an insured vehicle, there shall be no need of issuing a new
unreasonably denied the policy of insurance or surety bond required policy until the next date of registration or renewal of registration of such
by this chapter by the insurance companies authorized to issue the vehicle, and: Provided, That the insurance company shall agree to continue
same, otherwise, the Land Transportation Office shall require from the policy, such change of ownership or such change of the engine shall be
said land transportation operator or owner of the vehicle, in lieu of a indicated in a corresponding endorsement by the insurance company
policy of insurance or surety bond, a certificate that a cash deposit concerned, and a signed duplicate of such endorsement shall, within a
has been made with the Commissioner in such amount required as reasonable time, be filed with the Land Transportation Office.
limits of indemnity in Section 390 to answer for the passenger and/or
third-party liability of such land transportation operator or owner of J SEC. 396. In the settlement and payment of claims, the indemnity shall not
the vehicle. be availed of by any accident victim or claimant as an instrument of
No insurance company may issue the policy of insurance or surety enrichment by reason of an accident, but as an assistance or restitution
bond required under this chapter unless so authorized under existing insofar as can fairly be ascertained.
laws.
The authority to engage in the casualty and/or surety lines of
SEC. 397.
business of an insurance company that refuses to issue or renew,
without just cause, the insurance policy or surety bond therein Any person having any claim upon the policy issued pursuant to this
required shall be withdrawn immediately. chapter shall, without any unnecessary delay, present to the
insurance company concerned a written notice of claim setting forth
the nature, extent and duration of the injuries sustained as certified by
J SEC. 393. a duly licensed physician.
o No cancellation of the policy shall be valid unless written notice Notice of claim must be filed within six (6) months from the date of
thereof is given to the land transportation operator or owner of the accident, otherwise, the claim shall be deemed waived.
vehicle and to the Land Transportation Office at least fifteen (15) Action or suit for recovery of damage due to loss or injury must be
days prior to the intended effective date thereof. brought, in proper cases, with the Commissioner or the courts within
o Upon receipt of such notice, the Land Transportation Office, unless one (1) year from denial of the claim, otherwise, the claimants right of
it receives evidence of a new valid insurance or guaranty in cash or action shall prescribe.
surety bond as prescribed in this chapter, or an endorsement of
revival of the cancelled one, shall order the immediate confiscation
of the plates of the motor vehicle covered by such cancelled policy. Time to file --- 2 periods:
o The same may be reissued only upon presentation of a new 6 months --- You have to file the claim with the insurance company within 6
insurance policy or that a guaranty in cash or surety bond has been months from the time of the accident, otherwise it is deemed waived.
made or posted with the Commissioner and which meets the 1 year --- Then you have to go to court within 1 year from the denial of the
requirements of this chapter, or an endorsement or revival of the claim, otherwise the claim will be barred.
cancelled one.
Where to file --- Insurance Commission has exclusive jurisdiction to decide cases of 3rd
J SEC. 394. If the cancellation of the policy or surety bond is contemplated by
the land transportation operator or owner of the vehicle, he shall, before the
party liability.
policy or surety bond ceases to be effective, secure a similar policy of
insurance or surety bond to replace the policy or surety bond to be cancelled J SEC. 398. The insurance company concerned shall forthwith ascertain the
or make a cash deposit in sufficient amount with the Commissioner, and truth and extent of the claim and make payment within five (5) working days
without any gap, file the required documentation with the Land Transportation after reaching an agreement. If no agreement is reached, the insurance
Office, and notify the insurance company concerned of the cancellation of its company shall pay only the no-fault indemnity provided in Section 391 without
policy or surety bond. prejudice to the claimant from pursuing his claim further, in which case, he
shall not be required or compelled by the insurance company to execute any
quit claim or document releasing it from liability under the policy of insurance
or surety bond issued.
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In case of any dispute in the enforcement of the provisions of any o Importance of a license
policy issued pursuant to this chapter, the adjudication of such If the insured himself is the driver, he has the right to recover
dispute shall be within the original and exclusive jurisdiction of the damages even if his license has expired.
Commissioner, subject to the limitations provided in Section 439.
If the driver is merely authorized by the owner (i.e. chauffer, friend,
boyfriend), such driver must have a valid license, otherwise the claim
J SEC. 399. It shall be unlawful for a land transportation operator or owner of
is barred.
motor vehicle to require his or its drivers or other employees to contribute in
the payment of premiums. This is intended to protect the riding public.
o It is wrong to adjudge the insurer and insured jointly and severally liable.
J SEC. 400. No government office or agency having the duty of implementing An insurance policy is based on contract, not on quasi-delict. Under
the provisions of this chapter nor any official or employee thereof shall act as the Civil Code, joint tortfeasors are solidarily liable. But the
agent in procuring the insurance policy or surety bond provided for herein. insurance company did not commit a tort.
The commission of an agent procuring the said policy or bond shall in no case Malaysian Insurance case --- recent case which modified the
exceed ten percent (10%) of the amount of the premiums therefor. previous ruling. Malaysian Insurance and the insured were
held jointly and severally liable. Malaysian Insurance
J SEC. 401. Any land transportation operator or owner of motor vehicle or any argued that it has already been held that such was wrong.
other person violating any of the provisions of the preceding sections shall be
SC: The previous ruling was applicable in cases
punished by a fine of not less than Five hundred pesos (P500.00) and/or
imprisonment for not more than six (6) months. The violation of Section 390 by where the liability of the insurer under the policy
a land transportation operator shall be a sufficient cause for the revocation of was LESS than the amount for which the insured
the certificate of public convenience issued by the Land Transportation was held liable. In this case, they were liable for
Franchising and Regulatory Board covering the vehicle concerned. the same amount.
J SEC. 402. Whenever any violation of the provisions of this chapter is Maximum Underwriting Capacity
committed by a corporation or association, or by a government office or o The law provides that the maximum underwriting capacity of insurance
entity, the executive officer or officers of said corporation, association or companies is 20% of net worth.
government office or entity who shall have knowingly permitted, or failed to
prevent, said violation shall be held liable as principals. 1) Eg. Net worth is P200M, maximum P40M.
2) They can issue policies in excess of that but they will have to re-issue
excess.
Doctrines from jurisprudence:
o Perla Compania de Seguros case --- It is of no moment that the vehicle insured is
CLAIMS SETTLEMENT
not the one that caused the accident since the law provides that the insurer
paying the claim may recover from the owner of the vehicle responsible for
the accident. SEC. 247.
o No need for final judgment before the injured person can file a claim No insurance company doing business in the Philippines shall refuse,
without just cause, to pay or settle claims arising under coverages
They way the Code is written, insurer will be liable in case of loss. In provided by its policies, nor shall any such company engage in unfair
order for there to be a loss, there must be a final judgment. But the claim settlement practices. Any of the following acts by an insurance
Court said that there is no need for a final judgment. By making the company, if committed without just cause and performed with such
policy compulsory, the law recognizes that motor vehicles are frequency as to indicate a general business practice, shall constitute
dangerous contraptions. unfair claim settlement practices:
This was imposed to protect the public. The victim cannot wait to
get the indemnity. Enumeration of acts is not exclusive, but merely illustrative.
INSURANCE
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1. Knowingly misrepresenting to claimants pertinent facts or policy If it is found, after notice and an opportunity to be heard, that an
provisions relating to coverage at issue insurance company has violated this section, each instance of non-
Eg. Robber shot and killed a man. The man had a life insurance from compliance with paragraph (1) may be treated as a separate violation of
UCPB worth P2.5M. The wife filed a claim and the insurance this section and shall be considered sufficient cause for the suspension
or revocation of the company's certificate of authority.
company said that the 2 years have not lapsed, hence, contestability is
still enforced. The wife was asked to submit her husbands annual SEC. 248.
check-ups. The insurer refused to pay saying that the husband had The proceeds of a life insurance policy shall be paid immediately
pretenuria, a serious ailment which he did not disclose. Turns out, upon maturity of the policy, unless such proceeds are made payable
pretenuria was not serious. It just means that there are traces of in installments or as an annuity, in which case the installments, or
protein in the urine like when you exercise. annuities shall be paid as they become due:
o Provided, however, That in the case of a policy maturing by
the death of the insured, the proceeds thereof shall be paid
2. failing to acknowledge with reasonable promptness pertinent within sixty (60) days after presentation of the claim and filing
communications with respect to claims arising under its policies; of the proof of death of the insured.
Refusal or failure to pay the claim within the time prescribed herein
3. failing to adopt and implement reasonable standards for the prompt will entitle the beneficiary to collect interest on the proceeds of the
investigation of claims arising under its policies; policy for the duration of the delay at the rate of twice the ceiling
o Insurance Commission allows evaluation of claims of motor vehicle prescribed by the Monetary Board, unless such failure or refusal to
policies internally. The insurers themselves can evaluate the claim. pay is based on the ground that the claim is fraudulent.
o But all other policies, they have to investigate. The proceeds of the policy maturing by the death of the insured
payable to the beneficiary shall include the discounted value of all
premiums paid in advance of their due dates, but are not due and
4. not attempting in good faith to effectuate prompt, fair and equitable
payable at maturity.
settlement of claims submitted in which liability has become
reasonably clear; or
SEC. 249.
o Finman Insurance case --- Finman Insurance admitted its liability under 1. The amount of any loss or damage for which an insurer may be liable,
the accident policy but it still did not pay. Thats not fair settlement. under any policy other than life insurance policy, shall be paid within
thirty (30) days after proof of loss is received by the insurer and
5. compelling policyholders to institute suits to recover amounts due ascertainment of the loss or damage is made either by agreement
under its policies by offering without justifiable reason substantially between the insured and the insurer or by arbitration;
less than the amounts ultimately recovered in suits brought by them. but if such ascertainment is not had or made within sixty (60) days
o Insurance companies tend to delay payment by opting for litigation. after such receipt by the insurer of the proof of loss, then the loss or
damage shall be paid within ninety (90) days after such receipt.
o Eg. Planting a gun on the hand of a dead person to make it appear
that the insured committed suicide, faking a police report to claim 2. Refusal or failure to pay the loss or damage within the time prescribed
from a motor vehicle policy, submitting spurious documents for herein will entitle the assured to collect interest on the proceeds of
investigation the policy for the duration of the delay at the rate of twice the ceiling
o Insured should not initiate fraudulent claims. prescribed by the Monetary Board, unless such failure or refusal to
pay is based on the ground that the claim is fraudulent.
Evidence as to numbers and types of valid and justifiable complaints to

When proceeds are payable:
the Commissioner against an insurance company, and the
Commissioner's complaint experience with other insurance companies o Life Insurance
writing similar lines of insurance shall be admissible in evidence in an Proceeds must be paid within 60 days after submission of
administrative or judicial proceeding brought under this section. proof of the death of the insured
INSURANCE
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If there is delay in payment, it will earn legal interest of 6%
(Art. 209, Civil Code and Monetary Board Circular)
If delay is unreasonable, double ceiling of 12%
legal interest is 6%, so double is 12%
Judge must determine whether or not insurer
unreasonably refused to pay.
o Non-life Insurance
Proceeds should be paid within 30 days from submission of
receipt and insurance company ascertains amount of the loss
or as stated in the agreement
Failure to pay on time entitles claimant to interest like life
insurance (legal interest and double ceiling)
J SEC. 250. In case of any litigation for the enforcement of any policy or
contract of insurance, it shall be the duty of the Commissioner or the Court, as
the case may be, to make a finding as to whether the payment of the claim of
the insured has been unreasonably denied or withheld; and in the affirmative
case, the insurance company shall be adjudged to pay damages which shall
consist of attorneys fees and other expenses incurred by the insured person
by reason of such unreasonable denial or withholding of payment plus
interest of twice the ceiling prescribed by the Monetary Board of the amount of
the claim due the insured, from the date following the time prescribed in
Section 248 or in Section 249, as the case may be, until the claim is fully
satisfied: Provided, That failure to pay any such claim within the time
prescribed in said sections shall be considered prima facie evidence of
unreasonable delay in payment.
J SEC. 251. It is unlawful to:

o Present or cause to be presented any fraudulent claim for the
payment of a loss under a contract of insurance; and
o Fraudulently prepare, make or subscribe any writing with intent to
present or use the same, or to allow it to be presented in support of
any such claim. Any person who violates this section shall be
punished by a fine not exceeding twice the amount claimed or
imprisonment of two (2) years, or both, at the discretion of the court.
NOTE: All other codal provisions not included in this compilation were not discussed (e.g. business
of insurance, policy forms, microinsurance, etc). Read them if you want, but I wont put them here
anymore. end
.
INTELLECTUAL PROPERTY
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(a) Books, pamphlets, articles and other writings;
(b) Periodicals and newspapers;
INTELLECTUAL PROPERTY (c) Lectures, sermons, addresses, dissertations prepared for oral
delivery, whether or not reduced in writing or other material form;
LAW ON COPYRIGHT (d) Letters;
(e) Dramatic or dramatico-musical compositions; choreographic
March 2, 2015 (RL) works or entertainment in dumb shows;
(f) Musical compositions, with or without words;
(g) Works of drawing, painting, architecture, sculpture, engraving,
RA 10372 made amendments to the Intellectual Property Code (hereinafter IPC) lithography or other works of art; models or designs for works of
mostly involving copyrights. A legal opinion was issued saying that the IPO has no art;
authority to file criminal cases for violations of the IPC and that it could not apply for a (h) Original ornamental designs or models for articles of
search warrant. The IPO asked the president to have the law amended to expressly manufacture, whether or not registrable as an industrial design,
grant them the power to enforce the law. and other works of applied art;
(i) Illustrations, maps, plans, sketches, charts and three-dimensional
works relative to geography, topography, architecture or science;
BUREAU OF COPYRIGHT (j) Drawings or plastic works of a scientific or technical character;
(k) Photographic works including works produced by a process
RA 10372: SEC. 9A. The Bureau of Copyright and Other Related Rights. the analogous to photography; lantern slides;
Bureau of Copyright and Other Related Rights shall have the following (l) Audiovisual works and cinematographic works and works
functions: produced by a process analogous to cinematography or any
a) Exercise original jurisdiction to resolve disputes relating to the terms process for making audio-visual recordings;
of a license involving the authors right to public performance or other (m) Pictorial illustrations and advertisements;
communication of his work; (n) Computer programs; and
b) Accept, review and decide on applications for the accreditation of (o) Other literary, scholarly, scientific and artistic works.
collective management organizations or similar entities;
c) Conduct studies and researches in the field of copyright and related (He started enumerating examples such as compiled lecture of CJ Davide which was published in
rights; and book form, sermons of certain priests, compilations of love letters, photographs by world renowned
d) Provide other copyright and related rights service and charge
photographer Robert Capa, etc.)
reasonable fees therefor.
Also, the Bureau of Copyright was created. Among its powers is the to resolve The Court said that a dictionary can be copyrighted. Serrano wrote a Spanish-
disputes relating to the terms of a license involving the authors right to public tagalog dictionary. Now, Paglinawan copied about 87% of the entries. He was
performance or other communication of his work (Section 9A, IPC). So instead of sued for infringement. He argued that a person has no monopoly over words,
filing your application with the national library, you give it to the Bureau of Copyright hence he, as well as anybody, can use the words. The Court said NO. Serrano
and they will forward it to the national library. It is the national library that has the used his judgment when he chose the entries he would put in his dictionary
records. such as the translation of the word maganda which is equivalent to bella,
bonita, Hermosa, etc in Spanish. He also used illustrations. But in the case of
COPYRIGHTABLE WORKS Paglinawan, he also used the same illustrations by Serrano, changing merely a
word in the sentences.
Now, the law enumerates what works can be copyrighted: There was a case in the CA where again the author would copy all the
Sec. 172. Literary and Artistic Works. - illustrations even the very words used to express the idea. This is NOT
172.1 Literary and artistic works, hereinafter referred to as "works", are allowed.
original intellectual creations in the literary and artistic domain protected
from the moment of their creation and shall include in particular:
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There was somebody whose business is to manufacture of face cream. She used (Jack again gives examples such as dramatizationswhere a short story is converted to a
the Chinese words which are translated to young, beautiful, and cream. one-act play, or Miss Saigon which is a modern adaptation of that opera Madam
She wanted to copyright them. They were already registered as a trademark Butterfly, or the abridgment of the 800-page novel of Charles Dickens David
but she wanted to copyright the words. But the Court said NO. Those words Copperfield)
do not constitute an artistic work. For collections, an example would be a person publishing an anthology of
For example, professional singers have a signature song. They will usually end short stories. He uses his judgment as to which ones should be included. He
their concerts with such songs. In the case of Andy Williams, his signature would then decide to use the works of Nick Joaquin, F. Sionil Jose and Greg
song was (Jack starts singing the lyrics) May each day in the year be a good Cervantes.
day Bocelli would end his encores with Time to Say Goodbye. Pilita
Corales signature song was A Million Thanks. Somebody decided to WORKS NOT PROTECTED
publish a book and he used the word thanks and printed it a million times.
He wanted it to be copyrighted but it wasnt allowed. Sec. 175. Unprotected Subject Matter. - Notwithstanding the provisions of
Sections 172 and 173, no protection shall extend, under this law, to any idea,
The national library gave a copyright for the bushing of a motor vehiclethat
procedure, system method or operation, concept, principle, discovery or mere
is for the suspension of the m/v. The Court said that it is a spare part for cars. data as such, even if they are expressed, explained, illustrated or embodied in
It is NOT an artistic creation. It should have probably been allowed as a utility a work; news of the day and other miscellaneous facts having the character of
model not as a copyright. mere items of press information; or any official text of a legislative,
Sportswear cannot be copyrighted. administrative or legal nature, as well as any official translation thereof. (n)
Blank forms, such as those used by accountants, cannot also be copyrighted.
Plot of a story is NOT copyrightable. It is merely an idea. There will be NO
DERIVATIVE WORKS those based on an original work. infringement if, for example, a person decides to use the plot of Romeo and
Julietboy meets girl, forbidden love storyprovided the language or the
Sec. 173. Derivative Works. - words used to describe the story is different.
173.1. The following derivative works shall also be protected by copyright: Method of operation, such as how to boot a computer, is NOT
(a) Dramatizations, translations, adaptations, abridgments, copyrightable.
arrangements, and other alterations of literary or artistic works; and Another example is the format of a TV show where there are 3 male
(b) Collections of literary, scholarly or artistic works, and compilations of
data and other materials which are original by reason of the selection contestants. A series of questions will be asked to the males and the one whose
or coordination or arrangement of their contents. answers are most compatible with the female contestant in the show would be
arranged with a date. This show went off air. Another show, called Its a
173.2. The works referred to in paragraphs (a) and (b) of Subsection 173.1 date, with the same format. The only difference is that the crew would go
shall be protected as a new works: Provided however, That such new work school-to-school and that it was televised live. Somebody sued the new show
shall not affect the force of any subsisting copyright upon the original works for infringement of copyright. The Court said that the show format is merely
employed or any part thereof, or be construed to imply any right to such use
of the original works, or to secure or extend copyright in such original works.
a concept or ideait is NOT copyrightable.
Principles, such as the Archimedes Principle, are NOT copyrightable.
Sec. 174. Published Edition of Work. - In addition to the right to publish Discoveries, such as when Newton discovered the law of gravity, are NOT
granted by the author, his heirs or assigns, the publisher shall have a copy copyrightable.
right consisting merely of the right of reproduction of the typographical
The official text of laws, administrative regulations, and decisions are of public
arrangement of the published edition of the work. (n)
interest. Hence, these are required to be disseminated to the public. These are
NOT copyrightable.
The one making the derivative work must obtain the consent of the author of
the original work. Otherwise, that will be infringement.
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There is this dividendazo, which is the racing program. It lists the names of the the former can ask the latter to pay for royalty. For example, the government
horses that will run in every race as well as the jockeys. There are records of releases a census periodically (on trade, population, etc). The data therein is
the wins and losses of the horses in the Philippine Racing Commission. A man useful. Someone compiles the data in a handbook and sells the same. This
would go there and look over the track records, then he would put asterisks person is exploiting government works for commercial gain; this person must
over the names of the horses that would be the favorites. The Court said that pay the government royalties.
this cannot be copyrighted. It is not an artistic work. It only required legwork o Other examples include the SCRA. Where SC said that the govt
to obtain the records from the Phil. Racing Commission. used money for the judges salaries in order for decisions to be made.
Pornography CANNOT be copyrighted because it is against public policy. But instead of asking for royalties, the SC said that 20 copies of such
There was someone who made postcards showing scenic spots in the works must be given to the judiciary for free and the same be sold to
Philippines like Banaue Rice Terraces and Mayon Volcano. Someone also members of the judiciary at cost. Hence, the prices of SCRA were
took photographs of the said spots. He was sued for infringement. The Court increased to make up for the lost income for selling these at cost.
said that the postcard maker does not own subject matter of the photographs.
He cannot prohibit other people from taking photos of the same, provided OWNERSHIP OF COPYRIGHTS
that the composition is different. Example, there is a coconut in the
foreground of someones photo of the Mayon Volcano. You cannot take a The works are protected from the moment of creation. There is no need to file
photo of the same spot with a coconut in the foreground. This will be for an application in the national library before the protection sets in.
infringement because the treatment of the photo is the same as that of the first. Proctor and Gamble released an advertisement of a detergent and Unilever
released a similar advertisement, which was admittedly copied 75% from the
Sec. 176. Works of the Government. - former. P&G sued Unilever. Unilever argued that P&G had not registered it
176.1. No copyright shall subsist in any work of the Government of the in the national library. The court rejected this argument. There is no need to
Philippines. However, prior approval of the government agency or office
register. The right exists from the moment of creation. The giving of copies is
wherein the work is created shall be necessary for exploitation of such work
for profit. Such agency or office may, among other things, impose as a only for the completion of the national librarys Filipiniana collection.
condition the payment of royalties. No prior approval or conditions shall be 2 copies are required to be given to the National Library. If it is a law book,
required for the use of any purpose of statutes, rules and regulations, and then 2 additional copies should also be provided for the Supreme Court.
speeches, lectures, sermons, addresses, and dissertations, pronounced, read o Sec. 191. Deposit and Notice of Deposit with the National
or rendered in courts of justice, before administrative agencies, in deliberative Library and the Supreme Court Library. At any time during
assemblies and in meetings of public character. the subsistence of the copyright, the owner of the copyright
or of any exclusive right in the work may, for the purpose of
176.2. The Author of speeches, lectures, sermons, addresses, and completing the records of the National Library and the
dissertations mentioned in the preceding paragraphs shall have the exclusive Supreme Court Library, register and deposit with them, by
right of making a collection of his works. (n) personal delivery or by registered mail, two (2) copies or
reproductions of the work such form as Directors of said
176.3. Notwithstanding the foregoing provisions, the Government is not libraries may prescribe in accordance with regulations:
precluded from receiving and holding copyrights transferred to it by Provided, That only works in a field of law shall be deposited
assignment, bequest or otherwise; nor shall publication or republication by with the Supreme Court Library. Such registration and
the government in a public document of any work in which copy right is deposit is not a condition of copyright protection.
subsisting be taken to cause any abridgment or annulment of the copyright or o UP Law Center must also be given two copies of every law book.
to authorize any use or appropriation of such work without the consent of the
copyright owners.
For a mark, it must be ORIGINAL.
Government works cannot be copyrighted. However, if the government That is why the back pocket of Levis blue jeans would contain designs. Those
spends money using that, and somebody will use it for commercial gain, then for women would have flowers; those of men would have horses. Somebody
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tried to apply for the copyright of those designs. The Court said that NO, that doubts as to the authors identity, or if the author of the anonymous works
is not original. That is already registered as a trademark of Levis. discloses his identity.
Sec. 178. Rules on Copyright Ownership. - Copyright ownership shall be The copyright belongs to the author of the work.
governed by the following rules: The author of a letter, for example, owns the copyright. But the addressee of
the letter owns the document. But the addressee cannot publish such letter
178.1. Subject to the provisions of this section, in the case of original literary without the consent of the one who wrote the same.
and artistic works, copyright shall belong to the author of the work;
If the author uses a penname or anonymous, it is the publisher who will
178.2. In the case of works of joint authorship, the co-authors shall be the represent the author until his identity is published. For example, Nick Joaquin
original owners of the copyright and in the absence of agreement, their rights was using the penname Quijano de Manila.
shall be governed by the rules on co-ownership. If, however, a work of joint The co-authors of joint works will own the copyright. For example, Professor
authorship consists of parts that can be used separately and the author of De Leon now includes the name of his son, after the latter passed the bar exam,
each part can be identified, the author of each part shall be the original owner
in his works.
of the copyright in the part that he has created;
See codal for rules re: audiovisual works and work-for-hires.
178.3. In the case of work created by an author during and in the course of his o In cases of work-for-hires, if it is part of the duties of the person
employment, the copyright shall belong to: hired, the copyright belongs to the employer. An advertising
(a) The employee, if the creation of the object of copyright is not a part of company asked a copyrighter to make an advertisement for a client.
his regular duties even if the employee uses the time, facilities and The copyright will belong to the employer. But if it is not part of his
materials of the employer.
work then the copyright will belong to him.
(b) The employer, if the work is the result of the performance of his
regularly-assigned duties, unless there is an agreement, express or o A bank teller, during slack hours, would draw designs for pieces of
implied, to the contrary. jewelry. The copyright would belong to her and not to the bank.
o If the work was commissioned, for example for a portrait of yourself,
178.4. In the case of a work-commissioned by a person other than an employer you own the canvass with your portrait but you do not own the
of the author and who pays for it and the work is made in pursuance of the copyright. The painter retains the copyright. He can sell the
commission, the person who so commissioned the work shall have ownership
copyright but the canvas where it is painted remains with you. You
of work, but the copyright thereto shall remain with the creator, unless there is
a written stipulation to the contrary; can sell the canvas but the copyright remains with him. Hence, you
cannot go about reproducing the portrait on the canvas without the
178.5. In the case of audiovisual work, the copyright shall belong to the consent of the painter.
producer, the author of the scenario, the composer of the music, the film o If you hire an architect to draw architecture plans for your residence.
director, and the author of the work so adapted. However, subject to contrary You cannot lend such plans to a friend of yours without the consent
or other stipulations among the creators, the producers shall exercise the of the architect who drew it.
copyright to an extent required for the exhibition of the work in any manner,
except for the right to collect performing license fees for the performance of
musical compositions, with or without words, which are incorporated into the TRANSFER OR ASSIGNMENT OF COPYRIGHT
work; and
Sec. 180. Rights of Assignee.
178.6. In respect of letters, the copyright shall belong to the writer subject to 180.1. The copyright may be assigned in whole or in part. Within the scope of
the provisions of Article 723 of the Civil Code. the assignment, the assignee is entitled to all the rights and remedies which
Sec. 179. Anonymous and Pseudonymous Works. - For purposes of this Act, the assignor had with respect to the copyright.
the publishers shall be deemed to represent the authors of articles and other
writings published without the names of the authors or under pseudonyms, 180.2. The copyright is not deemed assigned inter vivos in whole or in part
unless the contrary appears, or the pseudonyms or adopted name leaves no unless there is a written indication of such intention.
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180.3. The submission of a literary, photographic or artistic work to a 193.2. To make any alterations of his work prior to, or to withhold it from
newspaper, magazine or periodical for publication shall constitute only a publication;
license to make a single publication unless a greater right is expressly
granted. If two (2) or more persons jointly own a copyright or any part thereof, If somebody wrote a book on the Rules of Court and he discussed a principle
neither of the owners shall be entitled to grant licenses without the prior of law. But before this could be published, the Supreme Court reversed that
written consent of the other owner or owners.
doctrine. The author can say that he wants to revise the book in accordance
Sec. 181. Copyright and Material Object. - The copyright is distinct from the with the reversal of the SC of the doctrine.
property in the material object subject to it. Consequently, the transfer or
assignment of the copyright shall not itself constitute a transfer of the material 193.3. To object to any distortion, mutilation or other modification of, or other
object. Nor shall a transfer or assignment of the sole copy or of one or several derogatory action in relation to, his work which would be prejudicial to his
copies of the work imply transfer or assignment of the copyright. honor or reputation; and
Sec. 182. Filing of Assignment of License. - An assignment or exclusive 193.4. To restrain the use of his name with respect to any work not of his own
license may be filed in duplicate with the National Library upon payment of the creation or in a distorted version of his work.
prescribed fee for registration in books and records kept for the purpose.
Upon recording, a copy of the instrument shall be, returned to the sender with Sec. 194. Breach of Contract. - An author cannot be compelled to perform his
a notation of the fact of record. Notice of the record shall be published in the contract to create a work or for the publication of his work already in
IPO Gazette. existence. However, he may be held liable for damages for breach of such
contract.
Sec. 183. Designation of Society. - The copyright owners or their heirs may
designate a society of artists, writers or composers to enforce their economic Sec. 195. Waiver of Moral Rights. - An author may waive his rights mentioned
rights and moral rights on their behalf. in Section 193 by a written instrument, but no such waiver shall be valid where
its effects is to permit another:
The assignment is valid between the parties even if it is not registered with the national
195.1. To use the name of the author, or the title of his work, or otherwise to
library. But, if the author sold it again, the second buyer checks and sees that it is still
make use of his reputation with respect to any version or adaptation of his
registered with the author, the first buyer is still protected (just like in the torrens title work which, because of alterations therein, would substantially tend to injure
system). the literary or artistic reputation of another author; or
MORAL RIGHTS are called as such because they are not economic rights. 195.2. To use the name of the author with respect to a work he did not create.
Sec. 193. Scope of Moral Rights. - The author of a work shall, independently of (He never finished his discussion on the waiver of moral rights. He got caught up telling the real
the economic rights in Section 177 or the grant of an assignment or license story behind the adaptations Sound of Music, Anne Boleyn, etc. so I opted not to transcribe that
with respect to such right, have the right: part. Its not relevant to the topic. J)
193.1. To require that the authorship of the works be attributed to him, in Sec. 196. Contribution to Collective Work. - When an author contributes to a
particular, the right that his name, as far as practicable, be indicated in a collective work, his right to have his contribution attributed to him is deemed
prominent way on the copies, and in connection with the public use of his waived unless he expressly reserves it.
work;
Sec. 197. Editing, Arranging and Adaptation of Work. - In the absence of a
Somebody made a software. The company, who is his employer, markets the contrary stipulation at the time an author licenses or permits another to use
software. The employer must tell the public the name of the employee who his work, the necessary editing, arranging or adaptation of such work, for
made the software. publication, broadcast, use in a motion picture, dramatization, or mechanical
or electrical reproduction in accordance with the reasonable and customary
standards or requirements of the medium in which the work is to be used,
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shall not be deemed to contravene the author's rights secured by this chapter. 177.5. Public display of the original or a copy of the work;
Nor shall complete destruction of a work unconditionally transferred by the
author be deemed to violate such rights. The CA held a TV network liable for producing a play without the consent of
the author of the play.
Sec. 198. Term of Moral Rights. -
198.1. The right of an author under Section 193.1 shall last during of the 177.6. Public performance of the work; and
lifetime of the author and in perpetuity after his death while the rights under 177.7. Other communication to the public of the work
Section 193.2. 193.3 and 193.4 shall be coterminous with the economics rights,
the moral rights shall not be assignable or subject to license. The person or
persons to be charge with the posthumous enforcement of these rights shall March 3, 2015 (RC)
be named in a written instrument which shall be filed with the National Library.
In default of such person or persons, such enforcement shall devolve upon REPRODUCTION BY LIBRARIES
either the authors heirs, and in default of the heirs, the Director of the
National Library. Sec. 188. Reprographic Reproduction by Libraries. -
188.1. Notwithstanding the provisions of Subsection 177.1., any library or
This was an amendment. Before, it was only for 50 years. But now, it is archive whose activities are not for profit may, without the authorization of the
perpetual. author or copyright owner, make a limited number of copies of the work, as
may be necessary for such institutions to fulfill their mandate, by reprographic
198.2. For purposes of this Section, "Person" shall mean any individual, reproduction:
partnership, corporation, association, or society. The Director of the National (a) Where the work by reason of its fragile character or rarity cannot be
Library may prescribe reasonable fees to be charged for his services in the lent to user in its original form;
application of provisions of this Section. (b) Where the works are isolated articles contained in composite works
or brief portions of other published works and the reproduction is
Sec. 199. Enforcement Remedies. - Violation of any of the rights conferred by necessary to supply them; when this is considered expedient, to
this Chapter shall entitle those charged with their enforcement to the same person requesting their loan for purposes of research or study
rights and remedies available to a copyright owner. In addition, damages instead of lending the volumes or booklets which contain them; and
which may be availed of under the Civil Code may also be recovered. Any (c) Where the making of such limited copies is in order to preserve and, if
damage recovered after the creator's death shall be held in trust for and necessary in the event that it is lost, destroyed or rendered unusable,
remitted to his heirs, and in default of the heirs, shall belong to the replace a copy, or to replace, in the permanent collection of another
government. similar library or archive, a copy which has been lost, destroyed or
rendered unusable and copies are not available with the publisher
COPYRIGHT OR ECONOMIC RIGHTS you make money out of this.
188.2. Notwithstanding the above provisions, it shall not be permissible to
Sec. 177. Copy or Economic Rights. - Subject to the provisions of Chapter VIII, produce a volume of a work published in several volumes or to produce
copyright or economic rights shall consist of the exclusive right to carry out, missing tomes or pages of magazines or similar works, unless the volume,
authorize or prevent the following acts: tome or part is out of stock; Provided, That every library which, by law, is
177.1. Reproduction of the work or substantial portion of the work; entitled to receive copies of a printed work, shall be entitled, when special
177.2 Dramatization, translation, adaptation, abridgment, arrangement or reasons so require, to reproduce a copy of a published work which is
other transformation of the work; considered necessary for the collection of the library but which is out of stock.
177.3. The first public distribution of the original and each copy of the
work by sale or other forms of transfer of ownership; A library can reproduce books by photocopying copies of a book in several instances:
177.4. Rental of the original or a copy of an audiovisual or First, because of the fragile character of a book, the original cannot be loaned
cinematographic work, a work embodied in a sound recording, a o Ex. UST has the original editions of Noli Me Tangere and El
computer program, a compilation of data and other materials or a
Filibusterismo, if someone wants to borrow these copies for research,
musical work in graphic form, irrespective of the ownership of the
original or the copy which is the subject of the rental; (n)
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they wont loan you the original because the pages are very brittle 213.3. In case of anonymous or pseudonymous works, the copyright
and will disintegrate. shall be protected for fifty (50) years from the date on which the work
was first lawfully published: Provided, That where, before the
Second, when you are doing research, you just need a few pages. Instead of
expiration of the said period, the author's identity is revealed or is no
checking out the book, you can photocopy these pages. longer in doubt, the provisions of Subsections 213.1 and 213.2 shall
Third, the library has a set of books on remedial law and one of the volumes is apply, as the case may be: Provided, further, That such works if not
missing and is out-of-stock at the stores; they can ask another library to published before shall be protected for fifty (50) years counted from
provide them with a photocopy. the making of the work.
213.4. In case of works of applied art the protection shall be for a
period of twenty-five (25) years from the date of making.
You can import a copy of a book for your personal use. You can also import a copy for
213.5. In case of photographic works, the protection shall be for fifty
the use of the government. You can also import not more than 3 copies, not for sale, but (50) years from publication of the work and, if unpublished, fifty (50)
for the use only of any religious, charitable, or educational society or institution duly years from the making.
incorporated or registered, or is for the encouragement of the fine arts, or for any state 213.6. In case of audio-visual works including those produced by
school, college, university, or free public library in the Philippines. process analogous to photography or any process for making audio-
N.B. This is pursuant to ART. 190 of IP Code. However, this was amended by RA visual recordings, the term shall be fifty (50) years from date of
publication and, if unpublished, from the date of making.
10372, which now reads: SEC 190. Importation and Exportation of
Infringing Materials. Subject to the approval of the Secretary of Sec. 214. Calculation of Term. - The term of protection subsequent to the
Finance, the Commissioner of Customs is hereby empowered to make death of the author provided in the preceding Section shall run from the date
rules and regulations for preventing the importation or exportation of of his death or of publication, but such terms shall always be deemed to begin
infringing articles prohibited under Part IV of this Act and under on the first day of January of the year following the event which gave rise to
relevant treaties and conventions to which the Philippines may be a them.
party and for seizing and condemning and disposing of the same in
case they are discovered after they have been imported or before they General rule is that copyright is good until the lifetime of the author and up to 50 years
are exported.
after his death
SEC. 198. Term of Moral Rights. If there are co-authors: count the 50 years from the death of the last surviving
198.1. The right of an author under Section 193.1. shall last during the lifetime author
of the author and in perpetuity after his death while the rights under Sections If name is unknown, anonymous or under a pen name: 50 years from
193.2. 193.3. and 193.4. shall be coterminous with the economic rights, the publication
moral rights shall not be assignable or subject to license. the person or o Unless, identity is established: count 50 from his death
persons to be charged with the posthumous enforcement of these rights shall
be named in a written instrument which shall be filed with the National Library. Unpublished works: 50 years from the making
In default of such person or persons, such enforcement shall devolve upon Photograph: 50 years from publication
either the authors heirs, and in default of the heirs, the Director of the Visual Works: 50 year from publication or from making if unpublished
National Library. Applied art: 25 years (sec. 213.4)
Sec. 213. Term of Protection.
213.1. Subject to the provisions of Subsections 213.2 to 213.5, the EXAMPLES OF COPYRIGHT PROTECTION
copyright in works under Sections 172 and 173 shall be protected The characters of the Peanuts comic strip are copyrighted. If somebody used
during the life of the author and for fifty (50 years after his death. This Charlie Brown as a trademark for clothes, then this is not allowed. You are
rule also applies to posthumous works. exploiting a copyright for commercial purpose and this is not allowed.
213.2. In case of works of joint authorship, the economic rights shall
There used to be a baked goods shop with the name Cookie Monster. Now
be protected during the life of the last surviving author and for fifty
(50) years after his death. that is a name of a character in Sesame Street, which is also copyrighted. It was
told it could not use that name. So now its called Cookie Corner.
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Now, Winnie the Pooh, which is copyrighted by Disney. You cannot also use LIMITATIONS ON COPYRIGHT
that as a trademark.
Sec. 184. Limitations on Copyright. -
ROYALTIES #LORDE 184.1. Notwithstanding the provisions of Chapter V, the following acts shall
not constitute infringement of copyright:
There are some unknown painters. Rich people would buy their paintings for cheap.
Then later on, their paintings would become priceless. So the rich people would resell (a) the recitation or performance of a work, once it has been lawfully
their works for a much higher price. made accessible to the public, if done privately and free of charge or
The painters should get 5% of the escalated selling price. if made strictly for a charitable or religious institution or society;
Or if the statue (no idea where this came from) was leased, the sculptor should If the performance is done privately and free of charge or if made strictly for a
get 5% charitable or religious institution or society, this will not be infringement.
In the case of Millie (not sure if right name), rich people bought his paintings. Example, a choreographer hosts a private party and teaches dance moves for
Then he died. Usually, when a painter dies his works get more expensive free, that is allowed
because there will be no more paintings coming from him. Example, a young
man, Aguilar, went to law school because his father said he should. But he (b) The making of quotations from a published work if they are
didnt take the bar exam. But the Jesuits at the time saw that he was very compatible with fair use and only to the extent justified for the
purpose, including quotations from newspaper articles and
talented so they got him a scholarship in Spain for painting. Before that, he periodicals in the form of press summaries: Provided, That the source
lived in Padre Faura and painted a painting of St. Thomas Moore, which he and the name of the author, if appearing on the work, are mentioned;
sold for P20. When he got to Spain, there were two others who also used Example, you are making a book review, so will quote portions of book. Or
Aguilar. So to distinguish himself he started using his mothers maiden name, you are writing a thesis. A memorandum, a term paper you quote portions
Alcuas. He has won awards internationally. For example, if that P20 painting of a book.
was resold, his heirs would get 5% of the selling price.
(c) The reproduction or communication to the public by mass media of
PERFORMERS articles on current political, social, economic, scientific or religious
202.1. "Performers" are actors, singers, musicians, dancers, and other topic, lectures, addresses and other works of the same nature, which
persons who act, sing, declaim, play in, interpret, or otherwise perform literary are delivered in public if such use is for information purposes and has
and artistic work; not been expressly reserved: Provided, That the source is clearly
indicated;
Performers, producers of record and broadcasting organizations are granted
neighboring rights. Example, Pres. Aquino is at the inauguration of a new hospital. They show a
These are somewhat similar to the rights given to owners of copyright but clipping of him clipping the ribbon, but there was a mural on the wall of the
hospital foyer and this also appeared on the news. The painter said, why are
they are not exactly the same. So they coined the term neighboring rights to
you reproducing my work without my consent? Well, this was just part of the
cover the situation.
news coverage. So allowed.
PERFORMERS: they have exclusive rights to broadcast their performances
o Ex. Bucelli has a concert, you cant broadcast that w/o his consent (d) The reproduction and communication to the public of literary,
o They also have the right to fixation of the performance. You cannot scientific or artistic works as part of reports of current events by
record the concert and sell the recordings without his performance. means of photography, cinematography or broadcasting to the extent
o If you rent out copies, you will also need consent. necessary for the purpose;
(e) The inclusion of a work in a publication, broadcast, or other
communication to the public, sound recording or film, if such
Limitations on Copyright are also applicable to performers.
inclusion is made by way of illustration for teaching purposes and is
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compatible with fair use: Provided, That the source and of the name of FAIR USE
the author, if appearing in the work, are mentioned;
(f) The recording made in schools, universities, or educational Sec. 185. Fair Use of a Copyrighted Work. -
institutions of a work included in a broadcast for the use of such 185.1. the fair use of a copyrighted work for criticism, comment, news
schools, universities or educational institutions: Provided, That such reporting, teaching including limited number of copies for classroom use,
recording must be deleted within a reasonable period after they were scholarship, research, and similar purposes is not an infringement of
first broadcast: Provided, further, That such recording may not be copyright. Decompilation, which is understood here to be the reproduction of
made from audiovisual works which are part of the general cinema the code and translation of the forms of a computer program to achieve the
repertoire of feature films except for brief excerpts of the work; interoperability of an independently created computer program with other
(g) The making of ephemeral recordings by a broadcasting organization programs may also constitute fair use under the criteria established by this
by means of its own facilities and for use in its own broadcast; section, to the extent that such decompilation is done for the purpose of
(h) The use made of a work by or under the direction or control of the obtaining the information necessary to achieve such interoperability (as
Government, by the National Library or by educational, scientific or amended by RA 10372)
professional institutions where such use is in the public interest and
is compatible with fair use; In determining whether the use made of a work in any particular case is fair
(i) The public performance or the communication to the public of a work, use, the factors to be considered shall include:
in a place where no admission fee is charged in respect of such (a) The purpose and character of the use, including whether such use is
public performance or communication, by a club or institution for of a commercial nature or is for non-profit education purposes;
charitable or educational purpose only, whose aim is not profit (b) The nature of the copyrighted work;
making, subject to such other limitations as may be provided in the (c) The amount and substantiality of the portion used in relation to the
Regulations; copyrighted work as a whole; and
(j) Public display of the original or a copy of the work not made by (d) The effect of the use upon the potential market for or value of the
means of a film, slide, television image or otherwise on screen or by copyrighted work.
means of any other device or process: Provided, That either the work
has been published, or, that original or the copy displayed has been 185.2 The fact that a work is unpublished shall not by itself bar a finding of fair
sold, given away or otherwise transferred to another person by the use if such finding is made upon consideration of all the above factors.
author or his successor in title; and
(k) Any use made of a work for the purpose of any judicial proceedings
or for the giving of professional advice by a legal practitioner.
In determining whether the use is fair there are four factors, based on US jurisprudence:
1. Purpose and Character of the use
184.2. The provisions of this section shall be interpreted in such a way as to If being reproduced for commercial profit, then you could be held liable
allow the work to be used in a manner which does not conflict with the normal for infringement
exploitation of the work and does not unreasonably prejudice the right Ex. TV station, which produced a play based on play written by an
holder's legitimate interest.
author without his consent, then that isnt fair use.
RA 10372, Section 11. Section 184.1. of Republic Act No. 8293 is hereby If used for non-profit educational purposes. Then ok (N.B. Jack doesnt
amended to read as follows: say this, he just moves on)
"SEC. 184. Limitations on Copyright. x x x
"(1) the reproduction or distribution of published articles or materials 2. Nature of the Copyrighted Work
in a specialized format exclusively for the use of the blind, visually-
and reading-impaired persons: Provided, That such copies and 3. Amount of the work copied
distribution shall be made on a nonprofit basis and shall indicate the
copyright owner and the date of the original publication."
In order for there to be infringement, the copying must be substantial.
US case, where 6 notes of a musical composition were copied. Court
ruled that that wasnt substantial.
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In the Philippines, PHILSCAP wanted to collect royalties for the use of a sound recordings or audiovisual works or fixations through sale or rental of
song in a laundry detergent ad. The ad company decided to pay the other forms of transfer of ownership;
royalties to avoid litigation. Another time, the ad company used
203.4. the right of authorizing the commercial rental to the public of the
Wagners music. Jacks advice, its ok to use this because PHILSCAP original and copies of their performances fixed in sound recordings or
doesnt own the rights to that and Wagner composed this long ago. audiovisual works or fixations, even after distribution of them by, or pursuant
Another case involving de la Cruz who was abducted in Afghanistan. to the authorization by the performer; and
GMA withdrew our troops there so he was returned. GMA filmed him
coming home in the airport. Now GMA aired this and it was 203.5. the right of authorizing the making available to the public of their
performances fixed in sound recordings or audiovisual works or fixations, by
automatically transmitted to CNN and Reuters database because of a tie-
wire or wireless means, in such a way that members of the public may access
up that allowed for sharing of coverage. ABS-CBN also has tie-ups with them from a place and time individually chosen by them.
CNN and Reuters, so when the coverage was found on the database,
ABS-CBN started airing it. But then they realized this was coming from Sec. 204. Moral Rights of Performers. -
GMA so they stopped airing the footage. There was no infringement in 204.1. Independently of a performers economic rights, the performer shall, as
this case, because ABS-CBN only aired 5 seconds of footage, not regards his live aural performances or performances fixed in sound
recordings or in audiovisual works or fixations, have the right to claim to be
substantial.
identified as the performer of his performances, except where the omission is
dictated by the manner of the use of the performance, and to object to any
4. Effect on the Market of the Copyrighted work distortion, mutilation or other modification of his performances that would be
US case, somebody made a satirical version of the song, Pretty Woman. prejudicial to his reputation.
The composer sued. Court said that a satire to be effective must copy
substantially the work to be satirized. The person hearing the satire must 204.2. The rights granted to a performer in accordance with Subsection 203.1
shall be maintained and exercised fifty (50) years after his death, by his heirs,
be able to identify what is being satirized, so necessarily the copying will and in default of heirs, the government, where protection is claimed.
be substantial. Second, the court said, a person who collects musical
compositions as hobby wants Pretty Woman to be part of his collection, Sec. 205. Limitation on Right.-
he will not buy the satirical version. So the satirical version will not 205.1. Subject to the provisions of Section 206, once the performer has
adversely affect the market of the original version. So you cannot sue for authorized the broadcasting or fixation of his performance, the provisions of
infringement. Sections 203 shall have no further application.
205.2. The provisions of Section 184 and Section 185 shall apply mutatis
Sec. 203. Scope of Performers' Rights. - Subject to the provisions of Section mutandis to performers.
212, performers shall enjoy the following exclusive rights:
Sec. 206. Additional Remuneration for Subsequent Communications or
203.1. As regards their performances, the right of authorizing:
Broadcasts. - Unless otherwise provided in the contract, in every
(a) The broadcasting and other communication to the public of their communication to the public or broadcast of a performance subsequent to the
performance; and first communication or broadcast thereof by the broadcasting organization,
(b) The fixation of their unfixed performance. the performer shall be entitled to an additional remuneration equivalent to at
least five percent (5%) of the original compensation he or she received for the
203.2. the right of authorizing the direct or indirect reproduction of their first communication or broadcast.
performances fixed in sound recordings or audiovisual works or fixations in
any manner or form; Sec. 207. Contract Terms. - Nothing in this Chapter shall be construed to
deprive performers of the right to agree by contracts on terms and conditions
203.3. Subject to the provisions of Section 206, the right of authorizing the first more favorable for them in respect of any use of their performance.
public distribution of the original and copies of their performance fixed in
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MORAL RIGHTS OF PERFORMERS PHILSCAP and Makati Shang case: TV sets in rooms could play FM radio in
Performers also have moral rights. So in order to reproduce their record or the rooms. This was a TV and not a radio station. The radio station would be
performance, their name should be identified. And they also get 5% if you sell or transmitted to the TV so that the guest could listen to the music on the TV via a
rent their discs modulator. The arbitrator said Shang is transmitting the FM radio to the TV.
Shang is the one personally transmitting the music from the radio, so you have
SOUND RECORDINGS pay royalties.
Sec. 208. Scope of Right. - Subject to the provisions of Section 212, producers Limitations on copyright (sec. 184) also apply to the producers of sound recordings.
of sound recordings shall enjoy the following exclusive rights: A certain artist, would play in Carnegie hall, they would need to pay the artist
208.1. The right to authorize the direct or indirect reproduction of their
and get his consent into to sell the records.
sound recordings, in any manner or form; the placing of these
reproductions in the market and the right of rental or lending;
208.2. The right to authorize the first public distribution of the original BROADCASTING STATION
and copies of their sound recordings through sale or rental or other
forms of transferring ownership; and Sec. 211. Scope of Right. - Subject to the provisions of Section 212,
208.3. The right to authorize the commercial rental to the public of the broadcasting organizations shall enjoy the exclusive right to carry out,
original and copies of their sound recordings, even after distribution by authorize or prevent any of the following acts:
them by or pursuant to authorization by the producer. The rebroadcasting of their broadcasts;
208.4. the right to authorize the making available to the public of their The recording in any manner, including the making of films or the use of
sound recordings in such a way that members of the public may access video tape, of their broadcasts for the purpose of communication to the
the sound recording from a place and at a time individually chosen or public of television broadcasts of the same; and
selected by them, as well as other transmissions of a sound recording The use of such records for fresh transmissions or for fresh recording.
with like effect. (208.4 was added by RA 10372) Also have exclusive rights to rebroadcast. Thats why ABS-CBN was
found guilty of violating the copyright of GMA when they broadcast
Sec. 209. Communication to the Public. - If a sound recording published for
portions of an interview without the consent of GMA.
commercial purposes, or a reproduction of such sound recording, is used
directly for broadcasting or for other communication to the public, or is Earlier decisions of SC involving a guy who rebroadcast transmissions via
publicly performed with the intention of making and enhancing profit, a single satellite (Dream Satellite case). Previously, this wasnt considered re-
equitable remuneration for the performer or performers, and the producer of broadcasting, so not infringement
the sound recording shall be paid by the user to both the performers and the But in the law NOW, that will now be transmission. And if done without
producer, who, in the absence of any agreement shall share equally.
consent, that will be infringement.
Sec. 210. Limitation of Right. - Sections 184 and 185 shall apply mutatis
mutandis to the producer of sound recordings. Sec. 212. Limitations on Rights. - Sections 203, 208 and 209 shall not apply
where the acts referred to in those Sections are related to:
The use by a natural person exclusively for his own personal purposes;
Now PHILSCAP, would get assigned the works of composers and they would write Using short excerpts for reporting current events;
radio stations, airlines, restaurants who played the music and would charge them a Use solely for the purpose of teaching or for scientific research; and
percentage for playing such music. The court would sustain this because the work was Fair use of the broadcast subject to the conditions under section 185.
being exploited for commercial gain saying that they played the music and would get
more customers. INFRINGMENT
If youre not playing live music, but a disc, the producer of that disc should also
get royalties. So you have to pay both PHILSCAP and the producer. SEC. 216. Infringement. A person infringes a right protected under this Act
when one:
(a) Directly commits an infringement;
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(b) Benefits from the infringing activity of another person who commits o Ex. If the object isnt original like an ornament copied from a
an infringement if the person benefiting has been given notice of the magazine picture, the person who made the copy cant have a valid
infringing activity and has the right and ability to control the activities copyright over it.
of the other person;
(c) With knowledge of infringing activity, induces, causes or materially
contributes to the infringing conduct of another. (RA 10372) March 4, 2015 (VG)
Old law: Infringement meant the doing of any person without the consent of REMEDIES
the copyright owner anything the sole right of which belongs to the copyright
owner. 216.1. Any person infringing a right protected under this law shall be liable:
(a) To an injunction restraining such infringement. The court may also
NOW: Law mentions DIRECT and CONTRIBUTORY infringement.
order the defendant to desist from an infringement, among others, to
o DIRECT INFRINGEMENT: the person directly commits prevent the entry into the channels of commerce of imported goods
infringement or he benefits from the infringing activity knowing that involve an infringement, immediately after customs clearance of
that he was engaging in infringement. such goods.
Ex. He contributes to the infringement by providing him (b) To pay to the copyright proprietor or his assigns or heirs such actual
space in the shopping mall where he can sell the infringing damages, including legal costs and other expenses, as he may have
materials. incurred due to the infringement as well as the profits the infringer
may have made due to such infringement, and in proving profits the
o CONTRIBUTORY INFRINGEMENT: for this to exist there plaintiff shall be required to prove sales only and the defendant shall
must be direct infringement. be required to prove every element of cost which he claims, or, in lieu
Ex. He provides the equipment used to produce the of actual damages and profits, such damages which to the court shall
infringing materials. appear to be just and shall not be regarded as penalty: Provided, That
the amount of damages to be awarded shall be doubled against any
It is not a defense that you didnt know the work was copyrighted. You should know person who:
(i) Circumvents effective technological measures; or
because you are copying something that doesnt belong to you. (ii) Having reasonable grounds to know that it will induce,
However, good faith was accepted in the GMA case (the one with dela Cruz). enable, facilitate or conceal the infringement, remove or alter
Sanrio Case, Sanrio Japan appointed a distributor here of its animated any electronic rights management information from a copy of
characters here in the Philippines. And that distributor made imitation copies. a work, sound recording, or fixation of a performance, or
A customer went there and he bought imitation copies, now the buyer was distribute, import for distribution, broadcast, or communicate
being sued by the Japanese company. SC said, the buyer acted in good faith to the public works or copies of works without authority,
knowing that electronic rights management information has
because bought those characters from the official distributor. So he thought in
been removed or altered without authority. (as amended by
good faith that it as the genuine thing. RA 10372)
(c) Deliver under oath, for impounding during the pendency of the action,
PRESCRIPTIVE PERIODS upon such terms and conditions as the court may prescribe, sales
invoices and other documents evidencing sales, all articles and their
Sec. 226. Damages. - No damages may be recovered under this Act after four packaging alleged to infringe a copyright and implements for making
(4) years from the time the cause of action arose. them.
(d) Deliver under oath for destruction without any compensation all
You can only sue within 4 years, after that the action will have prescribed. infringing copies or devices, as well as all plates, molds, or other
means for making such infringing copies as the court may order.
o Recent case, he only sued after 9 years. SC said thats barred.
(e) Such other terms and conditions, including the payment of moral and
If the copyright is invalid, then you cannot sue for infringement of that invalid exemplary damages, which the court may deem proper, wise and
copyright.
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equitable and the destruction of infringing copies of the work even in thats why Nokia become insolvent, they were left behind. After black and white
the event of acquittal in a criminal case. television you have colored television - theres an improvement.
Court said that the process for making tiles which are more durable and doesnt
The remedies for infringement is first, issuance of an injunction, then the payment easily flake is an improvement. Or when we came out with a new medicine for
of actual damages, (usually these people will not keep books of accounts or issue ulcer which gives the medicine a longer shelf life - that can be patented.
receipts), the impounding of infringing products, invoices, documents of sales, Also, micro-organisms. If an oil tanker spills oil into the ocean they would compact
implements for making infringing articles, plates, molds and other tools for making that by dumping into the ocean these micro-organisms and that was considered an
infringing copies. invention and that is now included in the Budapest Treaty and we a signatory to
Then the court may award moral and exemplary damages. Now in the criminal the Budapest treaty.
prosecution, somebody who sells or offers for sale the infringing article - the
penalty will be imposed in the maximum if for example, the owner of the infringed Sec. 22. Non-Patentable Inventions. - The following shall be excluded from
thing adopted technological procedures, and the offender circumvents those patent protection:
technological measures.
(a) Discoveries, scientific theories and mathematical methods;
The Cyber Crime Prevention law provided that all offenses penalized in their
(b) Schemes, rules and methods of performing mental acts, playing
provisions are also penalized under this law. Of course prosecution can only games or doing business, and programs for computers;
convict the offender on either crimes to prevent double jeopardy. (The prosecution (c) Methods for treatment of the human or animal body by surgery or
under the Cybercrime Prevention Law, the penalty shall be one degree higher but therapy and diagnostic methods practiced on the human or animal
you see the Cyber Crime covers both the revised penal code and special law and in body. This provision shall not apply to products and composition for
the special laws wala naman degree; it is Senator Angara who inserted that law) use in any of these methods;
Then, Anti Money Laundering Law made violations in the intellectual property as (d) Plant varieties or animal breeds or essentially biological process for
the production of plants or animals. This provision shall not apply to
one of the predicate crimes for which prosecution under the law can be initiated. micro-organisms and non-biological and microbiological processes.
Provisions under this subsection shall not preclude
LAW ON PATENTS Congress to consider the enactment of a law providing sui
generis protection of plant varieties and animal breeds and a
Sec. 21. Patentable Inventions. - Any technical solution of a problem in any system of community intellectual rights protection:
field of human activity which is new, involves an inventive step and is (e) Aesthetic creations; and
industrially applicable shall be patentable. It may be, or may relate to, a (f) Anything which is contrary to public order or morality.
product, or process, or an improvement of any of the foregoing
NON-PATENTABLE INVENTIONS
PATENTABLE SUBJECT MATTER There are things which could not be patented: discoveries. You cannot pa liketent
What can be patented? A machine, computer, cell phone, facebook, product, the law of gravity, you cant patent an invention based on the law of gravity -
medicines, process. parachute. Or scientific theories the theory of relativity of Einstein. Mathematical
If you fire a gun it will overheat and the bullet will jump. Alcohol was used to methods, the root of a number, Pythagorean theorem, trigonometry, sin-co-sin,
reduce the temperature of the gun. England ran out of wood alcohol and a tanget,cotangent.
chemistry professor from Manchester University named Chaim Weizmann (he Theres also an amendment which says that a new form of medicine does not
became the first President of Israel) a Jew and he told the prime minister about a qualify as an invention. There was a case where there was this formulation; a
formula to making a synthetic alcohol and he wanted to turn it over for free medicine combined with other products, a formulation made for pediatric patients
(then somewhat droned into some history stuff) children. Somebody came up with a liquid form of that, well the court said thats
Then an improvement of a machine can also be patented, the development in just changing from solid to liquid that fact is obvious.
technology are very fast, sometimes, products become obsolete after one year Or you discover that the medicine can also cure another ailment. When they were
discussing this, they mentioned Viagra. I dont know if they are right but they said
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Viagra is a pharmaceutically made for heart ailments, it was by chance discovered with this Act, filed or effective in the Philippines, with a filing or
for erectile dysfunction. So in all of these new innovations, you must at least use priority date that is earlier than the filing or priority date of the
one new chemical substance. If you did not use any new chemical substance, that application: Provided, That the application which has validly
claimed the filing date of an earlier application under Section 31 of
will not qualify as an invention. this Act, shall be prior art with effect as of the filing date of such
The names of the medicines are usually taken from the Latin term or Greek word earlier application: Provided further, That the applicant or the
for the ailment cured. The Latin for cough is tussis, thats why medicines are named inventor identified in both applications are not one and the same.
robitussin atussin atussin atussin tosseran. In the case of Viagra they said that it
came from vigor and Niagara. It is in the border of New York and Canada. The Sec. 25. Non-Prejudicial Disclosure. -
Niagara falls is the largest waterfalls in the world. 10 million of gallons of water o 25.1. The disclosure of information contained in the application
during the twelve (12) months preceding the filing date or the
pour from the waterfalls everyday lakas ng pagbuhos!
priority date of the application shall not prejudice the applicant on
There was a medical journal which made a comparison of Viagra and Cialis. They the ground of lack of novelty if such disclosure was made by:
said that Viagra is effective up to 6 hours, sialis is effective up to 36 hours. a) The inventor;
However the quality of erection is better in Viagre than in Sialis. So you see there is b) A patent office and the information was contained (a) in
no hard and fast rule. another application filed by the inventor and should not
Also, non-patentable are rules and methods in performing mental acts, of mental have been disclosed by the office, or (b) in an application
filed without the knowledge or consent of the inventor by
arithmetic, how do you multiply something by 19? You multiply it by 20 and then
a third party which obtained the information directly or
you deduct the number. How do you multiply 17 by 15? You multiply it by 10 indirectly from the inventor; or
and add 85. You cannot patent that. Or such rules of golf, rules of chess. Computer c) A third party which obtained the information directly or
programs they should be copy righted instead. indirectly from the inventor.
Methods of treatment of the human or animal body cannot be patented for
humanitarian considerations because if this could be patented, what if every patient It must not form part of a prior art. It is part of a prior art if that has been
who will be treated by a physician would pay royalty? Also anything that is against published. For that to constitute prior art, all the elements must be found in that
law and public policy. Like when someone invented a device to help people publication. If one element is missing, that is not prior art. Or it has been sold or
commit suicide. has been used.
In that case of Vargas v. Yaptico, the court said they could not patent a plow - that is
CONDITIONS OF PATENTABILITY not new, that has been used for more than 2 years. In Frank v. Kosuyama, they
1. It must be new. tried to patent a machine for stripping abaca, here the court said that is not new.
2. It must involve an inventive step.
3. It must be industrially applicable. 25.2. For the purposes of Subsection 25.1, "inventor" also means any person
who, at the filing date of application, had the right to the patent.
It must be new.
Sec. 26. Inventive Step. - An invention involves an inventive step if, having
regard to prior art, it is not obvious to a person skilled in the art at the time of
Sec. 23. Novelty. - An invention shall not be considered new if it forms the filing date or priority date of the application claiming the invention.
part of a prior art.
Sec. 24. Prior Art. - Prior art shall consist of:

It must involve an inventive step.
o 24.1. Everything which has been made available to the public There must be a spark of genius - like a computer, cellphone, television.
anywhere in the world, before the filing date or the priority date of If the thing can be made by someone skilled in art that is not invention. It has
the application claiming the invention; and been published and well known that theres this pharmaceutical preparation for
o 24.2. The whole contents of an application for a patent, utility pediatric patients children who used the formulation of amoxicillin and other
model, or industrial design registration, published in accordance medicines and in the ratio of 1:1:1:7. And this other fellow applied to patent a
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formulation which combined them within this range. The court said that is not Sec. 31. Right of Priority. - An application for patent filed by any person who
invention, you cant make the mixture within that range or make a liquid has previously applied for the same invention in another country which by
formulation of that. Thats nothing new, thats obvious. You make a tablet into a 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,
liquid. That:
When personal computers were made in 1983, we have an office manager who got (a) the local application expressly claims priority;
a block of wood and mounted 2 rollers on that block of wood and you can use such (b) it is filed within twelve (12) months from the date the earliest foreign
to rewind the ribbon of a printer of a computer. Its useful but it doesnt qualify as application was filed; and (c) a certified copy of the foreign application
an invention because it something that a person skilled in art can make. An abrasive together with an English translation is filed within six (6) months from the
compound of cleaning was made more effective by increasing the abrasive element date of filing in the Philippines
that is not an invention.
The right of patent will belong to the inventor. Those who made in jointly can
Sec. 27. Industrial Applicability. - An invention that can be produced and used patent jointly like the airplane which was made by the Wright brothers in
in any industry shall be industrially applicable. Washington DC.
When the work is commissioned by someone, the patent will belong to someone
It must be industrially applicable. who commissioned it. When IBM asks a computer programmer to create a device
It can be used to produce something. Theres a case where somebody went to the that will speed up the processing of computer data, the patent will belong to IBM.
office of patents in the US in a vacuum tube. He said that he wanted to apply for If that is part of the job of the employee, the patent is with the employer. If that is
patent the tube where there is pulley inside that is spinning - perpetual motion. It is not part of the job of the employee, he will own the patent. There was a case
spinning indefinitely. The court said it has no industrial use. decided, an employee of the national food authority. Someone invented a device
that can salvage infected rice, the court said that is not part of his duties. So the
OWNERSHIP patent belongs to him.
The application is published in the gazette of the Intellectual Property Office
Sec. 28. Right to a Patent. - The right to a patent belongs to the inventor, his (IPO). In case of industrial designs, within 60 days, anyone can write the
heirs, or assigns. When two (2) or more persons have jointly made an
intellectual property office to say that this cannot be patented, it does not meet the
invention, the right to a patent shall belong to them jointly.
qualifications.
Sec. 29. First to File Rule. - If two (2) or more persons have made the invention The general rule is the patent belongs to the inventor. If two or more persons
separately and independently of each other, the right to the patent shall invented them separately, the patent belongs to the one who first applied. there
belong to the person who filed an application for such invention, or where two are a shift from the first to invent to the first to file. If someone invented it earlier,
or more applications are filed for the same invention, to the applicant who has the first to apply first will be the one to own the patent.
the earliest filing date or, the earliest priority date.
Now the rule is if two people applied on the same date, the one who applied earlier
Sec. 30. Inventions Created Pursuant to a Commission. - that day would get the patent. If someone applied at 9:00 am and another at 3:00
30.1. The person who commissions the work shall own the patent, unless pm, the one who applied at 9:00pm would get the patent.
otherwise provided in the contract. Suppose here is somebody who made an invention, the sketch of that invention is
30.2. In case the employee made the invention in the course of his on his desk, and then he decided to explain what his invention is all about and how
employment contract, the patent shall belong to: it works, and a visitor went by and stole the sketch on his desk and ran to the IPO
(a) The employee, if the inventive activity is not a part of his regular and he was given the patent. The person who invented can sue and if he can prove
duties even if the employee uses the time, facilities and materials of
the employer. that he was actually the inventor, then he can ask the court to cancel the patent the
(b) The employer, if the invention is the result of the performance of in the person of that fake person and or transfer it to the name of the inventor. In
his regularly-assigned duties, unless there is an agreement, express either case damages can be awarded.
or implied, to the contrary.
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ASSIGNMENT MANDATORY PROVISIONS
Sec. 88. Mandatory Provisions. - The following provisions shall be included in
Sec. 103. Transmission of Rights. - voluntary license contracts:
103.1 Patents or applications for patents and invention to which they relate, (a) That the laws of the Philippines shall govern the interpretation of the
shall be protected in the same way as the rights of other property under the same and in the event of litigation, the venue shall be the proper court
Civil Code. in the place where the licensee has its principal office;
(b) Continued access to improvements in techniques and processes
103.2. Inventions and any right, title or interest in and to patents and related to the technology shall be made available during the period of
inventions covered thereby, may be assigned or transmitted by inheritance or the technology transfer arrangement;
bequest or may be the subject of a license contract. (c) In the event the technology transfer arrangement shall provide for
arbitration, the Procedure of Arbitration of the Arbitration Law of the
Sec. 104. Assignment of Inventions. - An assignment may be of the entire Philippines or the Arbitration Rules of the United Nations Commission
right, title or interest in and to the patent and the invention covered thereby, or on International Trade Law (UNCITRAL) or the Rules of Conciliation
of an undivided share of the entire patent and invention, in which event the and Arbitration of the International Chamber of Commerce (ICC) shall
parties become joint owners thereof. An assignment may be limited to a apply and the venue of arbitration shall be the Philippines or any
specified territory. neutral country; and
(d) The Philippine taxes on all payments relating to the technology
Sec. 105. Form of Assignment. - The assignment must be in writing, transfer arrangement shall be borne by the licensor.
acknowledged before a notary public or other officer authorized to administer
oath or perform notarial acts, and certified under the hand and official seal of In the licensing agreements, it must be indicated that that Philippine laws shall
the notary or such other officer. govern in case of litigation.
And it provides that in case of arbitration, it will be governed by Philippine Law or
Sec. 106. Recording. by the United Nationals Commission on International Trade Law (UNCITRAL
106.1. The Office shall record assignments, licenses and other instruments
relating to the transmission of any right, title or interest in and to inventions,
Law) or that of the international Chamber of Commerce. Thats the standard
and patents or application for patents or inventions to which they relate, which provision they put on license agreements.
are presented in due form to the Office for registration, in books and records
kept for the purpose. The original documents together with a signed duplicate SCOPE OF EXCLUSIVE RIGHTS
thereof shall be filed, and the contents thereof should be kept confidential. If
the original is not available, an authenticated copy thereof in duplicate may be Sec. 71. Rights Conferred by Patent. -
filed. Upon recording, the Office shall retain the duplicate, return the original 71.1. A patent shall confer on its owner the following exclusive rights:
or the authenticated copy to the party who filed the same and notice of the
recording shall be published in the IPO Gazette. (a) Where the subject matter of a patent is a product, to restrain, prohibit
and prevent any unauthorized person or entity from making, using,
106.2. Such instruments shall be void as against any subsequent purchaser or offering for sale, selling or importing that product;
mortgagee for valuable consideration and without notice, unless, it is so (b) Where the subject matter of a patent is a process, to restrain, prevent or
recorded in the Office, within three (3) months from the date of said prohibit any unauthorized person or entity from using the process, and
instrument, or prior to the subsequent purchase or mortgage. from manufacturing, dealing in, using, selling or offering for sale, or
importing any product obtained directly or indirectly from such process.
If the patent will be assigned but is not registered in the IPO, it will not bind third
parties. So if somebody assigned the patent, and he did not register that, and then it 71.2. Patent owners shall also have the right to assign, or transfer by
succession the patent, and to conclude licensing contracts for the same.
was assigned to another person who checked that it was in the name of the one
Sec. 72. Limitations of Patent Rights. - The owner of a patent has no right to
offering to assign it and on that basis he bought it, his later registration is valid. prevent third parties from performing, without his authorization, the acts
referred to in Section 71 hereof in the following circumstances:
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o Using a patented product which has been put on the market in the If somebody has already doing the thing being applied to patenting but he was
Philippines by the owner of the product, or with his express consent, doing that in good faith before the application was filed - the law provides that he
insofar as such use is performed after that product has been so put can continue. He was in good faith and he started before the application.
on the said market;
o Where the act is done privately and on a non-commercial scale or for
USE BY GOVERNMENT
a non-commercial purpose: Provided, That it does not significantly
prejudice the economic interests of the owner of the patent; Sec. 74. Use of Invention by Government. -
o Where the act consists of making or using exclusively for the purpose 74.1. A Government agency or third person authorized by the Government
of experiments that relate to the subject matter of the patented may exploit the invention even without agreement of the patent owner where:
invention; (a) the public interest, in particular, national security, nutrition, health or
o Where the act consists of the preparation for individual cases, in a the development of other sectors, as determined by the appropriate
pharmacy or by a medical professional, of a medicine in accordance agency of the government, so requires; or
with a medical prescription or acts concerning the medicine so (b) A judicial or administrative body has determined that the manner of
prepared; exploitation, by the owner of the patent or his licensee, is anti-
o Where the invention is used in any ship, vessel, aircraft, or land competitive.
vehicle of any other country entering the territory of the Philippines 74.2. The use by the Government, or third person authorized by the
temporarily or accidentally: Provided, That such invention is used Government shall be subject, mutatis mutandis, to the conditions set forth in
exclusively for the needs of the ship, vessel, aircraft, or land vehicle Sections 95 to 97 and 100 to 102.
and not used for the manufacturing of anything to be sold within the
Philippines. The government or a third person authorized by the government may use the
Patent gives the owner the exclusive rights pertaining to it, he can authorize to invention patented if public interest or national security demands.
make it, offer it for sale or importing of that product. If before, Phyzer patented a For example, someone invented a cure of ebola, the government can say that there
medicine and you bought that in the US and you brought it here, you will be liable is an epidemic of ebola.
to infringement. But the Cheaper Medicine Act excluded medicines from the
prohibition. So now parallel importation of medicines is allowed. After this law COMPULSORY LICENSING
was passed, they said that after Japan the Philippines has the most expensive
medicines. Thats why many people are dying because they cannot afford the cost Sec. 93. Grounds for Compulsory Licensing. - The Director of Legal Affairs
may grant a license to exploit a patented invention, even without the
of medicines.
agreement of the patent owner, in favor of any person who has shown his
capability to exploit the invention, under any of the following circumstances:
EXCLUSION OF PRIOR USE 1. National emergency or other circumstances of extreme urgency;
Sec. 73. Prior User. - 2. Where the public interest, in particular, national security, nutrition,
health or the development of other vital sectors of the national
73.1. Notwithstanding Section 72 hereof, any prior user, who, in good faith was economy as determined by the appropriate agency of the
using the invention or has undertaken serious preparations to use the Government, so requires; or
invention in his enterprise or business, before the filing date or priority date of 3. Where a judicial or administrative body has determined that the
the application on which a patent is granted, shall have the right to continue manner of exploitation by the owner of the patent or his licensee is
the use thereof as envisaged in such preparations within the territory where anti-competitive; or
the patent produces its effect. 4. In case of public non-commercial use of the patent by the patentee,
73.2. The right of the prior user may only be transferred or assigned together without satisfactory reason;
with his enterprise or business, or with that part of his enterprise or business 5. If the patented invention is not being worked in the Philippines on a
in which the use or preparations for use have been made. commercial scale, although capable of being worked, without
satisfactory reason: Provided, That the importation of the patented
article shall constitute working or using the patent
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Or the court or an administrative agency, in the finding that this patent is trying to Sec. 77. Infringement Action by a Foreign National. - Any foreign national or
monolize the product and crush the competition or the demand in the market is juridical entity who meets the requirements of Section 3 and not engaged in
not being met - the compulsory license can be granted. Even when the voluntary business in the Philippines, to which a patent has been granted or assigned
under this Act, may bring an action for infringement of patent, whether or not
license is given, still an application can be granted because the court says that will it is licensed to do business in the Philippines under existing law.
create competition and that will bring down the price when there is national
emergency or when it involves national security. So far the only encounter we Sec. 78. Process Patents; Burden of Proof. - If the subject matter of a patent is
have here is in the case of medicines. It is the United Laboratories that is aggressive a process for obtaining a product, any identical product shall be presumed to
in filing petitions for compulsory licensing. have been obtained through the use of the patented process if the product is
new or there is substantial likelihood that the identical product was made by
the process and the owner of the patent has been unable despite reasonable
March 2, 2015 (KF) efforts, to determine the process actually used. In ordering the defendant to
prove that the process to obtain the identical product is different from the
patented process, the court shall adopt measures to protect, as far as
Sec. 76. Civil Action for Infringement. practicable, his manufacturing and business secrets. (n)
76.1. The making, using, offering for sale, selling, or importing a patented Sec. 79. Limitation of Action for Damages. - No damages can be recovered for
product or a product obtained directly or indirectly from a patented process, acts of infringement committed more than four (4) years before the institution
or the use of a patented process without the authorization of the patentee of the action for infringement. (Sec. 43, R. A. No. 165)
constitutes patent infringement.
Sec. 80. Damages; Requirement of Notice. - Damages cannot be recovered for
76.2. Any patentee, or anyone possessing any right, title or interest in and to acts of infringement committed before the infringer had known; or had
the patented invention, whose rights have been infringed, may bring a civil reasonable grounds to know of the patent. It is presumed that the infringer
action before a court of competent jurisdiction, to recover from the infringer had known of the patent if on the patented product, or on the container or
such damages sustained thereby, plus attorneys fees and other expenses of package in which the article is supplied to the public, or on the advertising
litigation, and to secure an injunction for the protection of his rights. material relating to the patented product or process, are placed the
76.3. If the damages are inadequate or cannot be readily ascertained with words "Philippine Patent" with the number of the patent.
reasonable certainty, the court may award by way of damages a sum
equivalent to reasonable royalty. Sec. 81. Defenses in Action for Infringement. - In an action for infringement,
the defendant, in addition to other defenses available to him, may show the
76.4. The court may, according to the circumstances of the case, award invalidity of the patent, or any claim thereof, on any of the grounds on which a
damages in a sum above the amount found as actual damages petition of cancellation can be brought under Section 61 hereof.
sustained:Provided, That the award does not exceed three (3) times the
amount of such actual damages. Sec. 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
76.5. The court may, in its discretion, order that the infringing goods, materials same, and the Director of Legal Affairs upon receipt of the final judgment of
and implements predominantly used in the infringement be disposed of cancellation by the court, shall record that fact in the register of the Office and
outside the channels of commerce or destroyed, without compensation. shall publish a notice to that effect in the IPO Gazette.
76.6. Anyone who actively induces the infringement of a patent or provides the Sec. 83. Assessor in Infringement Action. -
infringer with a component of a patented product or of a product produced 83.1. Two (2) or more assessors may be appointed by the court. The assessors
because of a patented process knowing it to be especially adopted for shall be possessed of the necessary scientific and technical knowledge
infringing the patented invention and not suitable for substantial non- required by the subject matter in litigation. Either party may challenge the
infringing use shall be liable as a contributory infringer and shall be jointly fitness of any assessor proposed for appointment.
and severally liable with the infringer.
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83.2. Each assessor shall receive a compensation in an amount to be fixed by alcohol for the oil is still infringement (Gsell v. Yap-Jue [1906] 6 Phil. 143,
the court and advanced by the complaining party, which shall be awarded as 149).
part of his costs should he prevail in the action. a. In the case of Smith Kleine (?), it was manufacturing a
Sec. 84. Criminal Action for Repetition of Infringement. - If infringement is
pharmaceutical product to combat parasites in the intestine of
repeated by the infringer or by anyone in connivance with him after finality of animals, another company was also manufacturing a pharmaceutical
the judgment of the court against the infringer, the offenders shall, without products to combat parasites in the intestine of animals, Smith Kleine
prejudice to the institution of a civil action for damages, be criminally liable sued, the Court said that all you proved is that both product combat
therefor and, upon conviction, shall suffer imprisonment for the period of not parasites in the intestine of animals, but you failed to prove that the
less than six (6) months but not more than three (3) years and/or a fine of not questioned pharmaceutical product is achieving the same results in
less than One hundred thousand pesos (P100,000) but not more than Three
the same means. Its not enough that the result is the same.
hundred thousand pesos (P300,000), at the discretion of the court. The
criminal action herein provided shall prescribed in three (3) years from date of b. Recent case decided by Director General a Japanese company sued
the commission of the crime. Philippine Sea Foods (?), both of them were spewing (?) tuna meat,
but the Director General said, the means used were different. So that
INFRINGEMENT OF A PATENT is not doctrine of equivalence.
The making, using, offering for sale, selling, or importing of a patented
product or a product obtained directly or indirectly from a patented process, REMEDIES
or the use of a patented process without the authorization of the owner of the The plaintiff can recover damages, but this is hard to prove damages because
patent constitutes infringement of a patent. (IP Code, Subsection 76.1) the Court may award reasonable royalty.
However, medicines were excluded from that rule that importation is The Court award actual damages. The Court may treble the damages that
infringement. Before, that was infringement. Phyzer invented a medicine and places exemplary damages.
brought it here, it will be infringement. So now, the importation of medicine Other remedies of plaintiff: Issuance of injunction, destruction of the
is now allowed. infringing materials, and criminal prosecution
Transcript: There can be no infringement of a patent if the application is still
pending and the patent has not yet been granted. (Creser Precision Systems, JURISDICTION
Inc. v. CA) An action for infringement of patent falls within the jurisdiction of the
Regional Trial Courts. Even if theres a pending a petition to cancel the
TWO TESTS patent, the action for infringement may be filed.
Two tests to determine the existence of infringement of a patent: A contributory infringement is also liable. For example, he supplied the
1. Literal you compare the challenged product with the description of the infringer with the components to produce the product. But what he submitted
claim(?), if they match, thats literal infringement. In the case of Gsell v. Yap- must be special adopted of infringement (?), for example, it cannot be used in any
Jue [1906] 6 Phil. 143, 149, Gsell had a patent for manufacture of the handled way except in a way that it will infringe.
umbrella and walking sticks by exposing a rattan, Yap-Jue is manufacturing o Sony before sold video cassette recorders. Walt Disney sued Sony for
walking sticks in the same way, that was literal infringement. manufacturing video cassette recorders which are used by the owners
to watch pirated video tapes and said thats contributory
2. Doctrine of Equivalence even if you make some changes, but it performs infringement.
performs substantially the same function in substantially the same way to SC: No, because the video cassette can be used lawfully if
achieve substantially the same result, thats infringement. Thus, the use of a the owner bought or lease a genuine videotape then theres
patented process for curving walking sticks and umbrella handles by exposing no infringement.
canes to the flames from a lamp or blowpipe fueled by oil, by substituting
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DEFENSES o Thus, selecta, the Spanish translation of the English word selected
Prescription: only 4 years (from commission) to sue can be adopted as a trademark for food products, as it is a fanciful
Other defenses: word.
o What is claimed as the invention is not new or patentable; o Adagio, meaning slow musical composition, for brassieres
o The patent does not disclose the invention in a manner sufficiently o Cosmopolite for fish
clear and complete for it to be carried out by any person skilled in the
art; or Sec. 123. Registrability. -
The patent will be void, because otherwise if what he 123.1. A mark cannot be registered if it:
(a) Consists of immoral, deceptive or scandalous matter, or matter which
disclosed is not sufficient to enable someone who skilled to may disparage or falsely suggest a connection with persons, living or
make it, in effect he will be prolonging his patent dead, institutions, beliefs, or national symbols, or bring them into
indefinitely, thats why what is disclosed must be sufficient contempt or disrepute;
to enable other people to produce the invention once the (b) Consists of the flag or coat of arms or other insignia of the
patent expires. Philippines or any of its political subdivisions, or of any foreign
o The patent is contrary to public order or morality nation, or any simulation thereof;
(c) Consists of a name, portrait or signature identifying a particular living
individual except by his written consent, or the name, signature, or
CANCELLATION OF PATENTS (I cant find the 4 grounds in the codal JT) portrait of a deceased President of the Philippines, during the life of
Any interested party may petition to cancel any patent or any claim or parts of a claim his widow, if any, except by written consent of the widow;
on any of the following grounds: (d) Is identical with a registered mark belonging to a different proprietor
a) What is claimed as the invention is not new or patentable; or a mark with an earlier filing or priority date, in respect of:
b) The patent does not disclose the invention in a manner sufficiently clear and (i) The same goods or services, or
(ii) Closely related goods or services, or
complete for it to be carried out by any person skilled in the art;
(iii) If it nearly resembles such a mark as to be likely to
c) The patent is contrary to law and morality; and deceive or cause confusion;
d) Transcript: The patent includes matters outside the scope of the disclosure (e) Is identical with, or confusingly similar to, or constitutes a translation
contained in the application of a mark which is considered by the competent authority of the
Philippines to be well-known internationally and in the Philippines,
Utility models and industrial designs are NOT included in the exam. whether or not it is registered here, as being already the mark of a
person other than the applicant for registration, and used for identical
or similar goods or services: Provided, That in determining whether a
March 9, 2015 (JG) Summary of Atty. Jacks outline mark is well-known, account shall be taken of the knowledge of the
relevant sector of the public, rather than of the public at large,
LAW ON TRADEMARKS including knowledge in the Philippines which has been obtained as a
result of the promotion of the mark;
121.1. "Mark" means any visible sign capable of distinguishing the goods (trademark) (f) Is identical with, or confusingly similar to, or constitutes a translation
or services (service mark) of an enterprise and shall include a stamped or marked of a mark considered well-known in accordance with the preceding
container of goods; paragraph, which is registered in the Philippines with respect to
goods or services which are not similar to those with respect to which
SIGNS WHICH MAY OR MAY NOT SERVE AS TRADE MARKS registration is applied for: Provided, That use of the mark in relation
to those goods or services would indicate a connection between
Any visible sign capable of distinguishing the goods or services of an those goods or services, and the owner of the registered mark:
enterprise, including a stamped or marked container of goods, can be Provided further, That the interests of the owner of the registered
registered as a trademark mark are likely to be damaged by such use;
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(g) Is likely to mislead the public, particularly as to the nature, quality, briefs; (5) paint/chemical produces/toner/dye and sandals; (6) shoes
characteristics or geographical origin of the goods or services; and socks; (7) motor vehicles, and shoes/sandals/slippers
(h) Consists exclusively of signs that are generic for the goods or
In determining whether goods are closely related, the purposes they serve and
services that they seek to identify;
(i) Consists exclusively of signs or of indications that have become the channels of commerce through which they are sold should also be
customary or usual to designate the goods or services in everyday considered.
language or in bona fide and established trade practice; o Thus, camia can be used as trademark for ham and cooking oil,
(j) Consists exclusively of signs or of indications that may serve in trade because although both fall under the classification of foods and food
to designate the kind, quality, quantity, intended purpose, value, ingredients, they do not move through the same channels of
geographical origin, time or production of the goods or rendering of
commerce. (Sa ABS-CBN ang oil, tas sa GMA7 ang ham)
the services, or other characteristics of the goods or services;
(k) Consists of shapes that may be necessitated by technical factors or Confusion
by the nature of the goods themselves or factors that affect their Two types:
intrinsic value; o Confusion of goods the ordinarily prudent purchaser is induced to
(l) Consists of color alone, unless defined by a given form; or purchase one product in the belief that he is purchasing the other
(m) Is contrary to public order or morality. product
o Confusion of origin the goods are different, but the challenged
RA 226, Section 1. It shall be unlawful for any person, association or
product might reasonably be assumed to originate from another
corporation to use, directly or indirectly, the emblem, official seal and name of
the United Nations, both in its full and in its abbreviated form, for commercial manufacturer and the public would then be deceived to believe that
or business purposes. there is some connection between the manufacturers of the two
products
The emblem, official seal, or name of the UN cannot be registered.
Names of deceased wives of former presidents are registrable. Shipping Colorable Imitation
companies may name their vessels after them In determining if two trademarks are confusingly similar, it is sufficient if one
The letters YKK cannot be registered as a trademark for zippers, since it has is a colorable imitation of the other.
been previously registered in the name of a foreign corporation as a trademark Colorable imitation means such a close or ingenious imitation as to be
for zippers. calculated to deceive ordinary persons, or such a resemblance to the original as
The word apple cannot be registered as a trademark for pad paper, bond to deceive an ordinary purchaser giving such attention as a purchaser usually
paper, mimeographing paper, carbon paper and notebooks, since there is a gives, and to cause to purchase the one supposing it to be the other.
prior application for registration of it as a trademark for computer paper and o It does not mean identity. It does not require that all the details be
stationeries. copied literally.
Goods are closely related when they belong to the same class or have the same o It means such similarity in form, content, words, sound, meaning,
descriptive properties or when they possess the same physical attributes or special arrangement, or general appearance of the trademark with
essential characteristics with reference to their form, composition, texture or that of another trademark in their over-all presentation or in their
quality. essential, substantive and distinctive parts as would likely mislead or
o Closely related: (1) shoes and slippers, and pants and shirts; (2) soap confuse the purchaser in the ordinary course of purchasing the
and hair pomade; (3) perfume/lipstick/nail polish, and hair pomade; genuine article.
(4) beauty soap and laundry soap; (5) zippers and thread
o Not closely related: (1) medicines and chemicals; (2) edible oil and Two tests to determine colorable imitation
toyo; (3) petroleum products and cigarettes; (4) toilet articles and Dominancy test if the competing trademark contains the main or essential or
dominant features of another trademark by reason of which confusion and
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deception are likely to result, infringement takes place. Duplication or consumption of the article, and the conditions under which the
imitation is not necessary. The dominancy test focuses on the similarity of the product is usually purchased should be considered.
prevalent features of the competing trademarks. o The class of the ordinary purchaser of the product, i.e., children,
Holistic test In determining whether or not two trademarks are confusingly domestic helpers, and skilled persons, should also be considered.
similar, a comparison of the words is not the only determining factor. The The test of confusing similarity is the likelihood of the deception of the
trademarks in their entirety as they appear in their respective labels are ordinary purchaser who has some measure of acquaintance with the
considered in relation to the goods to which they are attached. The holistic trademarks of the product he wishes to purchase. If he knows nothing about
test does not focus only on the predominant words but considers also the other the trademark which was imitated, it cannot be said that he was deceived.
features appearing in the labels. However, the holistic test should not be If the ordinary purchaser is especially familiar with the product he is buying,
applied to competing products which are common and inexpensive household the likelihood of deception is remote.
products, because the ordinary purchase is not inclined to notice their specific o This is true in the case of drinkers who order beer, shoppers who buy
features, similarities or dissimilarities. blue jeans, sewers who purchase threads, and loggers who acquire
wire rope.
Confusing Similarity The likelihood of confusion among the purchasing public is great when the
Factors to consider: sound, appearance; form, style, shape, size or format; colour; goods with similar trademarks are low-priced commodities which are
ideas connoted by the trademarks, the meaning, spelling and pronunciation of consumed every day, since they are purchased without great care.
the words used; and the setting in which the words appear may be considered; o food seasoning, soy sauce, peanuts, candies, ketchup, soap, coffee,
class of products; the quality of the products, quantity, designs and emblems chocolate
used, nature of the package, wrapper or container; the character of the The likelihood of deception is remote in the case of valuable and expensive
purchaser; and location of the business articles, like
If the differences between two trademarks outweigh their similarities and the o radios, TV sets, aircon units, watches
differences are distinctive, it is not likely that the purchasers will be confused. o also, medicines, which are dispensed only upon prescription or sold
For a challenged trademark to be considered confusingly similar to another, it via a pharmacist
is not necessary that the challenged trademark actually cause confusion or
deception of the purchasers. It is sufficient that the use will likely cause Real Life Application
confusion or mistake on the part of the purchaser. On the basis of the dominancy test, the following trademarks have been held to
o Neither is it necessary that the two competing products be placed be confusingly similar:
alongside each other and compared by viewing them together. The Prior trademark Later trademark Product or service
purchaser does not usually make such scrutiny. He often just relies Ginebra de la Campana Ginebra de Dos Campanas Gin
on his recollection of the product he intends to purchase. and Ginebra de Tres
The standard for determining whether or not deception of the purchasing Campanas
public is likely is the average person exercising the care that is ordinary under Illustration: rooster in Two roosters in fighting Candy
the circumstances to whom the product is sold in the normally prevailing fighting stance stance
conditions of trade. Illus: 3 British solders 5 British soldiers (3 Khaki cloth
o Thus, the standard is not a purchaser who has special knowledge (2 kneeling, 1 kneeling, 2 standing)
which is not possessed by the ordinary purchaser of the product and standing)
who can avoid any mistake by the use of his special knowledge. Palatol Pai Li To Pharmaceutical product
o In this regard, the age, training and education of the average buyer, Sapolin Lusolin Paint
the nature and cost of the product, the immediacy of the Freeman Freedom Shirt
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Illustration of a hen Two roosters Food seasoning Using the holistic test, various trademarks have been adjudged dissimilar.
Illustration of a carp Milkfish Native sauce
Big 5 Big 3 Veggie lard Gin products Local gin had a black Imported gin had a long, stone
Nabisco Ambisco Bakery products quadrangular bottle, and was cylindrical bottle
Salonpas Lionpas Medicated plaster smaller at the bottom
Flormann Flormen Shoes Lingerie Fruit of the Looms label was Fruit of Eves label was
Duraflex Dynaflex Electrical wires circular and was written in a rectangular and was written
Race Sun Rays Undershirts semicircle; logo had an apple in a straight line; logo had an
Planters Cocktail Philippine Planters Peanuts (duhhh) surrounded by grapes apple only
Peanuts Cordial Peanuts Liquor Don Carlos gin buyers are Carlos I, II, III, IV, and V for
Gold Toe Gold Top Socks wine lovers who buy the Spanish brandy. The
1. Master Roast Flavor Master Coffee product from retail stores at purchasers are
2. Master Blend low prices discriminating customers
Alexander Advancer Thread who buy the brandy form
Vino Anti-Kabuki Anti-Kabuki Meds for stomach exclusive restaurants and
ailment wine stores
Illustration: black cat Black dog dressed in Tea Hamburger Big Mac sold in plushy Big Mak sold from parked
dressed in white, white, holding a cup sandwiches restaurants snack vans to the low-income
holding a cup group
Lorenzana Loring Native sauce
Fruit of the Loom Beauty in the Bloom Lingerie
Well-Known Trademarks
FAB FAS Detergent
In determining whether a trademark is well-known, the following factors or a
Dipterex Diphenex Agricultural chemicals
combination of them may be considered:
Hotel Esperanza Hotel Esperana Hotel
1. the duration, extent and geographical area of any use of the trademark, in
particular, the duration, extent and geographical area of any promotion of the
Examples of dissimilar trademarks under the dominancy test trademark, including advertising or publicity and the presentation, at fairs or
Prior trademark Later trademark Product or service exhibitions, of the goods or services to which the trademark applies;
Victorias Valentino Refined sugar 2. the market share, in the Philippines and in other countries, of the goods or
Alexander (na naman!) Aloha Thread services to which the trademark applies;
Coconut Co Co Co (Joco Militante) Thread 3. the degree of the inherent or acquired distinction of the trademark;
Green Dragon Double Peacock Canned salmon 4. the quality-image or reputation acquired by the trademark;
Lipton Calton Tea 5. the extent to which the trademark has been registered in the world;
Campbells Capitols Soup 6. the exclusivity of registration attained by the trademark in the world;
Transpulmin Pulmin Cough syrup 7. the extent to which the trademark has been used in the world;
Jordache Rawhire Jeans 8. the exclusivity of use attained by the trademark in the world;
Dacron Licron Textile fibers 9. the commercial value attributed to the trademark in the world;
Pediamox Diamox Medicine 10. the record of successful protection of the rights in the trademark;
11. the outcome of litigations dealing with the issue of whether the trademark is a
well-known trademark; and
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12. the presence or absence of identical or similar trademarks validly registered for medicine for cough, the manufacturer of a cough syrup cannot have
or used on identical or similar goods or services and owned by persons other a monopoly over it.
than the person claiming that his trademark is a well-known trademark. o Likewise, since pas means plaster, it may be used by any manufacturer
The following applications for registration of internationally known of medicated plaster.
trademarks were rejected: Lacoste, Jordache, Vanderbilt, Sasson, Fila, Pierre o The phrase pale pilsen is generic. It refers to a light Bohemian beer
Cardin, Gucci, Christian Dior, Oscar de la Renta, Calvin Klein, Givenchy, with a strong hops flavor which originated in the City of Pilsen in
Ralph Lauren, Geoffrey Beene, Lanvin and Ted Lapidus. Czechoslovakia. No brewery can have a monopoly over it.
o The word Barbizon, a well-known trademark for lingerie, cannot
be registered as a trademark for lingerie by somebody else. Geometrical Shapes
o Since the trademark Lacoste and Crocodile Device is owned by La Geometrical shapes like a diamond or a pair of concentric circles may not be
Chemise Lacoste, S.A., it cannot be registered by somebody else. appropriated exclusively as a trademark:
o The trademark Nipa House for flour is confusingly similar to the
trademark Casa Nipa also for flour, since the former is just the Descriptive Terms
English translation of the latter. A descriptive term conveys the characteristics, functions, qualities or
ingredients of a product to one who has never seen it and does not know what
Deceptive Trademarks it is, or conveys an immediate idea of the ingredients, qualities or
kananga, the name of a flower, cannot be used as a trademark for toilet water characteristics of the goods, or denotes what goods or services provided in
when it had nothing to do with the toilet water, because the trademark would such a way that the consumer does not have to exercise powers of perception
be deceptive. or imagination.
verbena, the name of a fragrant flower, cannot be used as a trademark for Examples of descriptive terms:
cosmetic products if no extracts of it are being used in their preparation.2 o Corona, especiales, perfectos and chorritos refer to shapes/forms of
The word nylon cannot be used as part of the trademark of shirts which are cigars
not made of nylon.3 o Nylon shirts
o Orbic refers to the tip of ballpens
Generic Terms o Omni-beta descriptive of Vitamin B complex
Generic terms are those which constitute the common descriptive name of an o Aquatogs raincoats
article or substance, comprise the genus of which the particular product is a o Super-Bee for vitamins
species, are commonly used as the name or description of a kind of goods,
imply reference to every member of a genus and the exclusion of Geographical Names
individuating characters, or refer to the basic nature of wares or services Isabela is the name of a province in the Philippines which grows tobacco. Since it is
provided rather than to the more idiosyncratic characteristics of a particular merely a geographical name, no cigarette manufacturer can use it as a trademark.
product.
The denomination generally used in commerce for designating a class of goods Method of Packaging
or services cannot be appropriated exclusively as a trademark by a business No manufacturer may appropriate exclusively to himself the method of labeling or
enterprise. packing his merchandise and prohibit others from using a common manner of labeling a
o For instance, the words funeral parlor, leather shoes, and bubble particular class of goods such as spools of thread, cakes of soap, and cartons for
gum are generic. cigarettes. The same holds true for tea bags. Since a steinie bottle is a standard type of
o Since the suffix tussin, which is derived from tussis, the Latin word bottle used by breweries, no brewery may exclude others from using it. It is also
for cough, is merely generic when used as part of the trademark of a common practice in the yarn industry to market thread in the form of balls and in
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cylindrical cardboard bobbins. Moreover, no manufacturer can prevent his competitors Sec. 3. International Conventions and Reciprocity. - Any person who is a
from using the same sizes of packages. national or who is domiciled or has a real and effective industrial
establishment in a country which is a party to any convention, treaty or
agreement relating to intellectual property rights or the repression of unfair
Color competition, to which the Philippines is also a party, or extends reciprocal
No cigarette manufacturer can have a monopoly over the use of brown in its labels. rights to nationals of the Philippines by law, shall be entitled to benefits to the
Likewise, a brewery cannot prevent a competitor from using white also in its labels. extent necessary to give effect to any provision of such convention, treaty or
Neither can a brewery prevent a competitor from using amber-coloured bottles. Amber reciprocal law, in addition to the rights to which any owner of an intellectual
is commonly used to prevent the transmission of light and to provide maximum property right is otherwise entitled by this Act.
protection to the beer.
The rights in a trademark are acquired through a valid registration. Actual
Secondary Meaning prior use in commerce in the Philippines has been abolished as a condition for
The signs or devices mentioned in paragraphs (j) (k) and (l) of Subsection 123 the registration of a trademark.
of the Intellectual Property Code may be registered if they have become A mere importer or distributor cannot register the trademark of the products
distinctive in relation to the goods for which registration is requested as a he is importing or distributing, because an agent cannot acquire the property
result of their use in commerce in the Philippines. of his principal.
This is pursuant to the doctrine of secondary meaning, which states that a Any person who is a national or who is domiciled or has a real and effective
word or phrase originally incapable of exclusive appropriation with reference industrial establishment in a foreign country which is a party to any
to an article in the market might nevertheless have been used so long and convention, treaty or agreement relating to intellectual property rights or the
exclusively by one manufacturer with reference to his article that in that trade repression of unfair competition to which the Philippines is also a party or
and to that branch of the purchasing public, the word or phrase has come to which extends reciprocal rights to nationals of the Philippines may apply for
mean that the article is his product. the registration of a trademark.
For this doctrine to apply, the use must have been exclusive. If it has been
used exclusively and continuously in commerce in the Philippines for at least REQUIREMENTS OF APPLICATION
five years, it may be presumed to have become distinctive as used in The application for the registration of a trademark should be in the Filipino or English
connection with the goods or services of the applicant for registration. language and should contain the following:
o Thus, since the family name Rogers had been used as a trademark a) A request for registration;
for flatware being sold in the Philippines for twenty years, it b) The name and address of the applicant;
acquired a secondary meaning to refer to wares in which the c) The name of a State of which the applicant is a national or where he has his
manufacturer was dealing. domicile; and the name of a State in which the applicant has a real and
o Likewise, since the word Wigan, the name of a small town in effective industrial or commercial establishment, if any;
England, had been used for six years to describe a certain quality of d) If the applicant is a juridical entity, the law under which it is organized and
khaki textile being sold in the Philippines, it had become identified existing;
with that product and was entitled to protection. e) The appointment of an agent or representative, if the applicant is not
domiciled in the Philippines
CONDITIONS OF PROTECTION f) If the applicant claims the priority of an earlier application, a declaration
claiming the priority of that earlier application, together with an indication of
Sec. 122. How Marks are Acquired. - The rights in a mark shall be acquired the following:
through registration made validly in accordance with the provisions of this law i) The name of the state with whose national office the earlier
application was filed or if filed with an office other than a national
office, the name of that office;
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ii) the date in which the earlier application was filed; and filed application in the same foreign country: Provided, That any foreign
iii) If available, the application number of the earlier application; application filed prior to such subsequent application has been withdrawn,
g) If the applicant wishes to claim colour as a distinctive feature of the trademark, abandoned, or otherwise disposed of, without having been laid open to public
inspection and without leaving any rights outstanding, and has not served,
a statement to that effect as well as the name or names of the colour or colours nor thereafter shall serve, as a basis for claiming a right of priority.
claimed and an indication, in respect of each colour, of the principal parts of
the trademark which are in that colour; An application for registration of a trademark filed by a foreign national who
h) if the trademark is a three-dimensional trademark, a statement to that effect; previously filed an application for registration of the same trademark in a
i) A reproduction of the trademark and facsimiles; foreign country which grants nationals of the Philippine reciprocal rights is
j) A transliteration or translation of the trademark or of some parts of the considered filed as of the day the application was first filed in the foreign
trademark; country.
k) The names of the goods or services for which the registration is sought,
An application claiming priority right must be filed within six months from
grouped according to the classes of the Nice Classification, together with the
the date the earliest foreign application was filed. A certified copy of the
number of the class of the classification to which each group of goods or
foreign application with an English translation must be filed within three
services belongs;
months from the date of filing in the Philippines.
l) if the application is for a collective trademark, a designation to that effect;
The application for registration of the trademark will not be granted until it
m) A signature by, or other self identification of, the applicant or his
has been registered in the country of origin of the applicant.
representative;
n) Power of attorney if the filing is through a representative; and
If the Intellectual Property Office examines and finds that the application
o) Sworn statement that the applicant is a small entity if such be the fact.
meets the filing requirements and that the trademark is registrable, the
Priority Right application will be published in the Intellectual Property Office Gazette.
Sec. 131. Priority Right. -
131.1. An application for registration of a mark filed in the Philippines by a Opposition
person referred to in Section 3, and who previously duly filed an application Sec. 134. Opposition. - Any person who believes that he would be damaged by
for registration of the same mark in one of those countries, shall be the registration of a mark may, upon payment of the required fee and within
considered as filed as of the day the application was first filed in the foreign thirty (30) days after the publication referred to in Subsection 133.2, file with
country. the Office an opposition to the application. Such opposition shall be in writing
and verified by the oppositor or by any person on his behalf who knows the
131.2. No registration of a mark in the Philippines by a person described in facts, and shall specify the grounds on which it is based and include a
this section shall be granted until such mark has been registered in the statement of the facts relied upon. Copies of certificates of registration of
country of origin of the applicant. marks registered in other countries or other supporting documents mentioned
in the opposition shall be filed therewith, together with the translation in
131.3. Nothing in this section shall entitle the owner of a registration granted English, if not in the English language. For good cause shown and upon
under this section to sue for acts committed prior to the date on which his payment of the required surcharge, the time for filing an opposition may be
mark was registered in this country: Provided, That, notwithstanding the extended by the Director of Legal Affairs, who shall notify the applicant of
foregoing, the owner of a well-known mark as defined in Section 123.1(e) of such extension. The Regulations shall fix the maximum period of time within
this Act, that is not registered in the Philippines, may, against an identical or which to file the opposition.
confusingly similar mark, oppose its registration, or petition the cancellation
of its registration or sue for unfair competition, without prejudice to availing Sec. 135. Notice and Hearing. - Upon the filing of an opposition, the Office
himself of other remedies provided for under the law. shall serve notice of the filing on the applicant, and of the date of the hearing
thereof upon the applicant and the oppositor and all other persons having any
131.4. In like manner and subject to the same conditions and requirements, right, title or interest in the mark covered by the application, as appear of
the right provided in this section may be based upon a subsequent regularly record in the Office.
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Any person who believes that he will be damaged by the registration of a Upon request of an assignee of record and upon payment of the required fee, a
trademark may within thirty days after the publication of the application file new certificate of registration for the unexpired period of the registration will
an opposition to the application. be issued to the assignee.
The opposition should be in writing and should be verified by the oppositor or
any person on his behalf who knows the facts and should specify the grounds Licensing Agreements
for the opposition. Any trademark licensing agreement must be applied for clearance with the
Copies of certification of registration of the trademark in other countries or Documentation Information and Technology Transfer Bureau of the Intellectual
other supporting documents should be filed with the opposition. Property Office and will be recorded only upon certification by its Director that the
The Director of Legal Affairs may extend the period for filing an opposition. agreement does not contain the prohibited provisions and contains the mandatory
provisions for licensing agreements involving patents.
Sec. 136. Issuance and Publication of Certificate. - When the period for filing
the opposition has expired, or when the Director of Legal Affairs shall have SCOPE OF EXCLUSIVE RIGHTS; LIMITATIONS
denied the opposition, the Office upon payment of the required fee, shall issue
the certificate of registration. Upon issuance of a certificate of registration, Sec. 147. Rights Conferred. -
notice thereof making reference to the publication of the application shall be 147.1. The owner of a registered mark shall have the exclusive right to prevent
published in the IPO Gazette. all third parties not having the owners consent from using in the course of
trade identical or similar signs or containers for goods or services which are
When the period for filing an opposition has expired or if the Director of identical or similar to those in respect of which the trademark is registered
Legal Affairs denies the opposition, the Intellectual Property Office will issue where such use would result in a likelihood of confusion. In case of the use, of
an identical sign for identical goods or services, a likelihood of confusion
the certificate of registration.
shall be presumed.
Notice of the issuance of the certificate of registration will be published in the
Intellectual Property Office Gazette. 147.2. The exclusive right of the owner of a well-known mark defined in
Subsection 123.1(e) which is registered in the Philippines, shall extend to
OWNERSHIP AND TRANSFER goods and services which are not similar to those in respect of which the
Atty. Jimenez used the Rules and Regulations on Trademarks, Service Marks, Trade Names, mark is registered: Provided, That use of that mark in relation to those goods
or services would indicate a connection between those goods or services and
and Marked or Stamped Containers as sources for the following points
the owner of the registered mark: Provided, further, That the interests of the
An application for registration of a trademark, or its registration, may be owner of the registered mark are likely to be damaged by such use.
assigned or transferred with or without the transfer of the business using the
trademark. Sec. 148. Use of Indications by Third Parties for Purposes Other than those for
The assignment or transfer is null and void if it is liable to mislead the public which the Mark is Used. - Registration of the mark shall not confer on the
registered owner the right to preclude third parties from using bona fide their
particularly as regards the nature, source, manufacturing process,
names, addresses, pseudonyms, a geographical name, or exact indications
characteristics, or suitability for their purpose, of the goods or services to concerning the kind, quality, quantity, destination, value, place of origin, or
which the trademark is applied. time of production or of supply, of their goods or services: Provided, That
The assignment of the application for registration of a mark, or of its such use is confined to the purposes of mere identification or information and
registration, should be notarized and should contain the signature of the cannot mislead the public as to the source of the goods or services.
applicant, registrant or the assignee of record in case of subsequent assignment.
Transfers by mergers or other forms of succession may be evidenced by the The owner of a registered trademark has the exclusive right to prevent all
deed of merger or by any document supporting such transfer. third parties who do not have his consent from using in the course of trade
Assignments and transfers have no effect against third parties until they are identical or similar signs or containers for goods or services which are identical
recorded at the Intellectual Property Office
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or similar in respect of which the trademark is registered if use will result in a 152.3. The use of a mark in connection with one or more of the goods or
likelihood of confusion. services belonging to the class in respect of which the mark is registered shall
prevent its cancellation or removal in respect of all other goods or services of
The exclusive right of the owner of a trademark which is well-known
the same class.
internationally and in the Philippines and which is registered in the Philippines
extends to goods and services which are not similar to those in respect of 152.4. The use of a mark by a company related with the registrant or applicant
which the trademark is registered if the use of the trademark in relation to shall inure to the latters benefit, and such use shall not affect the validity of
those goods and services will indicate a connection between those goods and such mark or of its registration: Provided, That such mark is not used in such
services and the owner of the registered trademark and the interests of the manner as to deceive the public. If use of a mark by a person is controlled by
the registrant or applicant with respect to the nature and quality of the goods
owner of the registered trademark are likely to be damaged by such use.
or services, such use shall inure to the benefit of the registrant or applicant.
The registration of a trademark does not confer on the registered owner the
right to prevent third parties from using bona fide their names, addresses, Declaration of actual use: The applicant or the owner of a registered
pseudonyms, a geographical name, or exact indications concerning the kind,
trademark must file a declaration of actual use of the trademark with evidence
quality, quantity, destination, value, place of origin, or time of production or
of the use within three years from the filing date of the application.
of supply, of their goods or services, if such use is confined to the purposes of
Otherwise, the application will be denied or the trademark will be removed
mere identification or information and cannot mislead the public as to the
from the register.
source of the goods or services.
o If the only deficiency in an application based on foreign application
claiming priority right is the submission of a certified copy of the
USE REQUIREMENTS
foreign registration, the application may be provisionally allowed
and the submission of the certified copy of the foreign registration
124.2. The applicant or the registrant shall file a declaration of actual use of
the mark with evidence to that effect, as prescribed by the Regulations within
allowed within twelve months from the date of the provisional
three (3) years from the filing date of the application. Otherwise, the allowance. The period may be extended for not more than twelve
application shall be refused or the mark shall be removed from the Register by months. Should the applicant fail to submit the certified copy of the
the Director. foreign registration within the maximum period of twenty-four
months, the applicant may waive his claim to priority right and
Sec. 145. Duration. - A certificate of registration shall remain in force for ten request that the application be considered as based on intent to use.
(10) years: Provided, That the registrant shall file a declaration of actual use
A declaration of actual use must be filed within twelve months,
and evidence to that effect, or shall show valid reasons based on the
existence of obstacles to such use, as prescribed by the Regulations, within without extension and without need of notice, counted from the
one (1) year from the fifth anniversary of the date of the registration of the expiration of the twenty-four month period. (from Rules and
mark. Otherwise, the mark shall be removed from the Register by the Office. Regulations)
Within one year from the fifth anniversary of the date of the registration of a
Sec. 152. Non-use of a Mark When Excused. - trademark, the owner must file a declaration of actual use. Otherwise, the
152.1. Non-use of a mark may be excused if caused by circumstances arising
independently of the will of the trademark owner. Lack of funds shall not
trademark will be removed from the register.
excuse non-use of a mark. The following uses constitute compliance with the requirement of actual use
of a trademark:
152.2. The use of the mark in a form different from the form in which it is 1. Use in a form different from the form in which the trademark is
registered, which does not alter its distinctive character, shall not be ground registered which does not alter its distinctive character
for cancellation or removal of the mark and shall not diminish the protection 2. Use in connection with one or more of the goods or services belonging to
granted to the mark.
the class in respect of which the trademark is registered
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3. Use by a company related with the applicant or the owner of the misrepresent the source of the goods or services on or in connection
registered trademark, in such a manner which will not deceive the public with which the mark is used. If the registered mark becomes the
4. Use by a person controlled by the applicant or the registered owner of the generic name for less than all of the goods or services for which it is
registered, a petition to cancel the registration for only those goods or
trademark with respect to the nature and quality of goods or services. services may be filed. A registered mark shall not be deemed to be the
However, the distribution of samples does not constitute use, since they are generic name of goods or services solely because such mark is also
not for sale. used as a name of or to identify a unique product or service. The
primary significance of the registered mark to the relevant public
Non-Use rather than purchaser motivation shall be the test for determining
whether the registered mark has become the generic name of goods
Non-use of a trademark may be excused if caused by circumstances arising
or services on or in connection with which it has been used.
independently of the will of the owner of the trademark. (c) At any time, if the registered owner of the mark without legitimate
o The special circumstances must be clearly beyond the control of the reason fails to use the mark within the Philippines, or to cause it to be
owner of the trademark, such as prohibition of sale imposed by used in the Philippines by virtue of a license during an uninterrupted
government regulation. period of three (3) years or longer.
o The owner of the trademark should submit supporting documents
and an affidavit setting forth the steps being undertaken to comply A certificate of registration of a trademark remains in force for ten years
with the government regulation and the reasonable period within A certificate of registration may be renewed for periods of ten years at its
which the trademark is expected to be used.3 expiration.
Lack of funds will not excuse the non-use of a trademark.
Cancellation
DURATION OF PROTECTION Any person who believes that he is or will be damaged by the registration of a
trademark may file a petition to cancel the registration.
Sec. 145. Duration. - A certificate of registration shall remain in force for ten A party who failed to oppose an application for the registration of a trademark
(10) years: Provided, That the registrant shall file a declaration of actual use may file a petition for its cancellation.
and evidence to that effect, or shall show valid reasons based on the
These are alternative remedies granted by the law.
existence of obstacles to such use, as prescribed by the Regulations, within
one (1) year from the fifth anniversary of the date of the registration of the A petition to cancel the registration of a trademark may be filed under the
mark. Otherwise, the mark shall be removed from the Register by the Office. following circumstances:
1. within five years from the date of registration of the trademark;
Sec. 146. Renewal. - A certificate of registration may be renewed for periods of 2. at any time on any of the following grounds:
ten (10) years at its expiration upon payment of the prescribed fee and upon i) The trademark has become the generic name for the goods or
filing of a request. xxx services or a portion of them for which it is registered
Sec. 151. Cancellation. - A trademark shall not be deemed to have become a
151.1. A petition to cancel a registration of a mark under this Act may be filed generic name of goods or services solely because it is
with the Bureau of Legal Affairs by any person who believes that he is or will also used as a name of a unique product or service. The
be damaged by the registration of a mark under this Act as follows: test is the primary significance of the trademark to the
(a) Within five (5) years from the date of the registration of the mark relevant public rather than purchaser motivation.
under this Act.
ii) The trademark has been abandoned;
(b) At any time, if the registered mark becomes the generic name for the
goods or services, or a portion thereof, for which it is registered, or iii) The registration of the trademark was obtained fraudulently or
has been abandoned, or its registration was obtained fraudulently or contrary to the provisions of the Intellectual Property Code.
contrary to the provisions of this Act, or if the registered mark is
being used by, or with the permission of, the registrant so as to
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Thus, the erroneous registration of the trademark a) Use in commerce of any reproduction, counterfeit, copy, or
YKK for zippers in favor of another company when colourable imitation of a registered trademark or the same container
it had been previously registered in favor of a foreign or a dominant feature of it in connection with the sale, offering for
corporation should be cancelled. Likewise, the sale, distribution, advertising of any goods or services including
registration of the trademark Barbizon for lingerie, other preparatory steps necessary to carry out the sale of any goods
which had been first used internationally by a foreign or services on or in connection with which such use is likely to cause
corporation, should be cancelled. confusion, or to cause mistake, or to deceive; or
iv) The trademark is being used by or with the permission of the b) Reproducing, counterfeiting, copying or colourably imitating a
owner so as to misrepresent the service of the goods or services registered trademark or a dominant feature of it and applying such
in connection with which the trademark is being used reproduction, counterfeit, copy or colourable imitation to labels,
v) The owner of the trademark without any legitimate reason signs, prints, packages, wrappers, receptacles or advertisements
failed to use it within the Philippines or to license its use in the intended to be used in commerce upon or in connection with the
Philippines for an uninterrupted period of at least three years. sale, offering for sale, distribution, or advertising of goods or services
on or in connection with which such use is likely to cause confusion,
INFRINGEMENT AND REMEDIES or to cause mistake, or to deceive.
Infringement takes place at the moment any of those acts is committed even if
Sec. 155. Remedies; Infringement. - Any person who shall, without the consent there is no actual sale of the goods or services using the infringing material
of the owner of the registered mark: The law has adopted the dominancy test for determining whether or not a
trademark infringes a registered trademark.
155.1. Use in commerce any reproduction, counterfeit, copy, or colorable
imitation of a registered mark or the same container or a dominant feature There can be no infringement of trademark if the trademark is not registered.
thereof in connection with the sale, offering for sale, distribution, advertising o However, intent to defraud is not necessary, because the action is
of any goods or services including other preparatory steps necessary to carry based on invasion of the rights of the owner in the trademark.
out the sale of any goods or services on or in connection with which such use An advertisement showing cans of milk made by a manufacturer together with
is likely to cause confusion, or to cause mistake, or to deceive; or
cans of milk produced by its competitor with a statement that it was the first
155.2. Reproduce, counterfeit, copy or colorably imitate a registered mark or a processor of canned milk infringes the trademark of the competitor. The
dominant feature thereof and apply such reproduction, counterfeit, copy or readers could be misled into believing that it was also manufacturing the other
colorable imitation to labels, signs, prints, packages, wrappers, receptacles or brand.
advertisements intended to be used in commerce upon or in connection with A dealer of spare parts of motor vehicles who uses the trademark of a motor
the sale, offering for sale, distribution, or advertising of goods or services on vehicle is guilty of infringement of the trademark, because he has no authority
or in connection with which such use is likely to cause confusion, or to cause
to use it.
mistake, or to deceive, shall be liable in a civil action for infringement by the
registrant for the remedies hereinafter set forth: Provided, That the
infringement takes place at the moment any of the acts stated in Subsection RIGHTS OF FOREIGN CORPORATIONS
155.1 or this subsection are committed regardless of whether there is actual Sec. 160. Right of Foreign Corporation to Sue in Trademark or Service Mark
sale of goods or services using the infringing material Enforcement Action.- Any foreign national or juridical person who meets the
requirements of Section 3 of this Act and does not engage in business in the
Infringement Philippines may bring a civil or administrative action hereunder for opposition,
Any person who, without the consent of the owner of the registered cancellation, infringement, unfair competition, or false designation of origin
and false description, whether or not it is licensed to do business in the
trademark, performs any of the following acts is liable for infringement:
Philippines under existing laws.
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A foreign corporation whose country grants Filipino corporations reciprocal 2. Statute of Limitations
rights may bring an action for infringement of trademark, unfair competition,
false designation of origin and false description, whether or not it is licensed to Sec. 226. Damages. - No damages may be recovered under this Act after four
do business in the Philippines. (4) years from the time the cause of action arose
The complaint must allege that the country of the foreign corporation grants
3. Equitable Principles
Filipino corporations reciprocal rights.
o Otherwise, the complaint may be dismissed for failure to allege that
Sec. 230. Equitable Principles to Govern Proceedings. - In all inter partes
the foreign corporation has legal capacity to sue. proceedings in the Office under this Act, the equitable principles of laches,
However, if the country of the foreign corporation is a signatory to the Paris estoppel, and acquiescence where applicable, may be considered and applied.
Convention for the Protection of Industrial Property, grant of reciprocal
rights to Filipino corporations need not be alleged. The equitable principles of laches, estoppel, and acquiescence may be applied
o The courts may take judicial notice of this. in an action for infringement of trademark.
A party who has imitated the trademark of another cannot bring an action for
DEFENSES imitation of his own trademark, because he would be coming to court with
1. Non-registrability of trademark unclean hands.
2. Statute of limitations A party cannot invoke the equitable principles of laches, estoppel and
3. Equitable principles acquiescence if he usurped the trademark of another. Equity will not lend its
aid to someone who is guilty of unlawful or inequitable conduct
1. Non-Registrability of Trademark To give rise to laches, the delay must be lengthy.
o The delay should be counted from the time the owner of the
Sec. 138. Certificates of Registration. - A certificate of registration of a mark
shall be prima facie evidence of the validity of the registration, the registrants
trademark first acquired knowledge of the infringement.
ownership of the mark, and of the registrants exclusive right to use the same o A delay of eight years before the filing of an action for infringement
in connection with the goods or services and those that are related thereto of trademark was considered insufficient.
specified in the certificate. o However, a delay of twelve years was deemed unreasonable.
In one case, the owner of a trademark for shoes was able to register it despite
Sec. 161. Authority to Determine Right to Registration. - In any action the objection of somebody else who had registered it earlier as a trademark for
involving a registered mark, the court may determine the right to registration,
order the cancellation of a registration, in whole or in part, and otherwise socks, because of its contention that shoes and socks are unrelated products.
rectify the register with respect to the registration of any party to the action in Later on, the owner of the trademark for socks abandoned it and somebody
the exercise of this. Judgment and orders shall be certified by the court to the else applied to register it as a trademark for socks. The owner of the
Director, who shall make appropriate entry upon the records of the Bureau, trademark for shoes was estopped to oppose the application on the ground that
and shall be controlled thereby there would be confusion as to the origin of the socks.
The failure to object for more than thirty years to the use of the trademark of
A certificate of registration of a trademark is merely prima facie evidence of the a registered owner by somebody else constitutes acquiescence.
validity of the registration, the ownership of the trademark, and of the
exclusive right of the registered owner to use it in connection with the goods
The owner of a registered trademark cannot recover damages if he consented
to its use by somebody else.
or services and those related to them which are specified in the certificate.
Hence, in an action for infringement of a trademark, the right of the plaintiff
to its registration may be raised as an issue; and the court may order the
cancellation of the registration.
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March 5, 2015 (MR) 168.3. In particular, and without in any way limiting the scope of protection
against unfair competition, the following shall be deemed guilty of unfair
(Continuing from the remedies available for infringement of trademark) competition:
(a) Any person, who is selling his goods and gives them the general
appearance of goods of another manufacturer or dealer, either as to
RIGHT TO RECOVER DAMAGES the goods themselves or in the wrapping of the packages in which
they are contained, or the devices or words thereon, or in any other
Sec. 156. Actions, and Damages and Injunction for Infringement. - feature of their appearance, which would be likely to influence
156.1. The owner of a registered mark may recover damages from any person purchasers to believe that the goods offered are those of a
who infringes his rights, and the measure of the damages suffered shall be manufacturer or dealer, other than the actual manufacturer or dealer,
either the reasonable profit which the complaining party would have made, or who otherwise clothes the goods with such appearance as shall
had the defendant not infringed his rights, or the profit which the defendant deceive the public and defraud another of his legitimate trade, or any
actually made out of the infringement, or in the event such measure of subsequent vendor of such goods or any agent of any vendor
damages cannot be readily ascertained with reasonable certainty, then the engaged in selling such goods with a like purpose;
court may award as damages a reasonable percentage based upon the (b) Any person who by any artifice, or device, or who employs any other
amount of gross sales of the defendant or the value of the services in means calculated to induce the false belief that such person is
connection with which the mark or trade name was used in the infringement of offering the services of another who has identified such services in
the rights of the complaining party. the mind of the public; or
(c) Any person who shall make any false statement in the course of trade
The court may award just temperate damages and the court may double the or who shall commit any other act contrary to good faith of a nature
calculated to discredit the goods, business or services of another.
amount of damages if the defendant acted to defraud the plaintiff.
But the plaintiff cannot recover damages unless the acts were committed with 168.4. The remedies provided by Sections 156, 157 and 161 shall apply mutatis
knowledge that the imitation was likely to cause confusion. Thats why its mutandis
important that the trademark owner should indicate: registered trademark
or . Without that, you cannot recover damages. Elements of unfair competition:
And the infringing materials may be ordered to be condemned and destroyed. 1. confusing similarity in the general appearance of the goods
2. intent to deceive the public
UNFAIR COMPETITION
Differences between infringement of trademark and unfair competition:
Sec. 168. Unfair Competition, Rights, Regulation and Remedies. - Infringement of trademark Unfair competition
168.1. A person who has identified in the mind of the public the goods he The trademark must be registered Not required
manufactures or deals in, his business or services from those of others,
Not required Fraudulent intent is required
whether or not a registered mark is employed, has a property right in the
goodwill of the said goods, business or services so identified, which will be
protected in the same manner as other property rights. *So its easier to prosecute infringement
than unfair competition
168.2. Any person who shall employ deception or any other means contrary to Unauthorized use of a trademark Passing off ones goods for the goods of
good faith by which he shall pass off the goods manufactured by him or in another
which he deals, or his business, or services for those of the one having
established such goodwill, or who shall commit any acts calculated to
produce said result, shall be guilty of unfair competition, and shall be subject Acts that make a person liable for unfair competition:
to an action therefor.
1. A person who sells his goods and gives them the general appearance of the goods of
another manufacturer
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2. A person who sells his services and induces the belief that he is offering the services of manufacturer. And he made a misrepresentation. He said I am importing
another those goods but I will not sell them in the Philippines. I will sell them in
Case: Funeraria Paz closed its parlor and transferred. Somebody else opened a another countryKorea! So the manufacturer agreed. It was because of that
new funeral parlor in that old site and named it Nueva Funeraria Paz. The bad faith and misrepresentation that the court ruled that the importation was
Court said that would mislead the public that this parlor is connected with the actionable. However, that special circumstance was not present in this case. So
first funeral parlor. Thats unfair competition. you cannot sue for unfair competition.
3. Makes any false statement or omits good faith in order to discredit the goods of
another TRADEMARK DILUTION
Many years ago somebody spread a rumor that a cadaver had fallen into one of
the tanks of Pepsi Cola so people stopped buying it. It is lessening the capacity of a famous trademark to distinguish its goods and
There was also this rumor that some guy roams around a particular shopping services, regardless of the absence of competition between the owner of the
mall injecting costumers with the HIV virus trademark and the people who are alleged to be causing the dilution.
When manufacturers deliver soft drinks to sari-sari stores, employees used to Example: There was a woman who set up a restaurant in Washington DC.
have this device where they could open the crown and stick in any foreign Her nickname was Sony. So she named her restaurant Sony Restaurant.
substance they want, like a cigarette butt. And then they will return the And the Japanese company manufacturing these appliances wrote her a letter
crown. No customer who ever filed a case won, because when they test it in to change the name of the restaurant or they would sue her. And she consulted
the laboratory, Wala na hong ispiritu to, nabuksan na! a lawyer and the lawyer said yes, it would fall under trademark dilution
More examples: SMC acquired bottles of Asia Brewery to prevent AB from The idea is that a famous trademark is entitled to be protected because the use
using those bottles; before, some manufacturers would buy bottles of their of the same trademark may result in the erosion of the distinctiveness of the
competitors and dump them in the Manila Bay trademark. It becomes a common trademark.
Elements of trademark dilution:
4. There was this fellow that copied a racing program and the court said that that was o The trademark sought to be protected is famous and distinctive
unfair competition because he was appropriating something that was prepared by o Another person is using it after it became famous
another through his own efforts o And the use diminishes the fame of that trademark
5. Violation of exclusive distributorship Thats why confusion of trademark is different from dilution
Yu v. CASomebody had an exclusive distributorship with a manufacturer. o In confusion of trademarkthe effect of loss of sales is immediate
Somebody else wrote the manufacturer and imported the same goods. Now o In trademark dilutionit spreads over a long period of time;
the court said that is unfair competition because that is violating the exclusive gradually, the distinctiveness of the trademark is being eroded
rights granted to the distributor.
Solid Triangle caseSomebody filed a criminal case this time, saying I have
exclusive distributorship! But the court said thats not mentioned in the law, (He didnt say it but I think he went back to unfair competition)
so that cannot give rise to criminal prosecution.
Latest case (did not mention title)This involved somebody who held an 6. A false designation of origin
exclusive distributorship and sued for damages (civil case) invoking the case of o like selling kerosene and placing there that it is from Portugal
Yu. The court said no. There are special circumstances present in the Yu case. o A manufacturer of salmon cannot adopt as a trademark Alaska.
Unfortunately the facts in that case do not obtain here. In Yu, it was an Alaska is the largest manufacturer of salmon in the world and that
employee of the exclusive distributor that imported the goods from the will make buyers believe that the salmon came from Alaska
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o Someone was manufacturing watches and it adopted the word Example: Theres a bus company given a franchise to transport passengers
Swiss in the trademark. It could make people believe that this is a from Bulacan to Montalban. And he operates instead along Edsa. He is
Swiss watch. encroaching upon the franchise of other bus companies.
o Someone was manufacturing clothes and he adopted Roberto de
Milano. The court said Milan is the fashion capital of Italy (Of the Case: Somebody enticed the employees of another company, which was
world! says Clau passionately). People will be misled into believing producing automotive parts. He pirated the employees and they brought
that these clothes came from Milan, Italy. along the plans for the automotive parts and then started manufacturing the
But a trademark, even though it is geographical, is not misdescriptive, if it same parts using those plans. And then he was selling them at cutthroat prices.
does not identify the place where the goods came and it does not suggest that Justice Peralta said that is unfair competition falling under the Civil Code.
the goods came from that place.
o Britannia can be adopted because people who read that will not
think that the product came from Britain because thats not the name Trade names
of Britain in Latin. The Roma Empire collapsed in the year 5000 so
that Britannia will not make people think of Great Britain. You use The Corporation Code prohibits the adoption of a corporate name, which is
the English name Great Britain identical or confusingly similar to the name of another corporation
o The yacht of Queen Elizabeth is named Britannia. Atty. Jack made o But Lyceum of the Philippines cannot prevent other schools from
it a point to urinate in the lavatory of that yacht. He can now boast, using lyceum because that is generic
I urinated in the yacht of Queen Elizabeth! SEC issues this memorandum where they list the names, which are not
o Likewise St. Francis Condominium in Pasigeven though St. allowed to be adopted as corporate name. They periodically revise this. The
Francis was mentioned there, it was not intended to be geographical. latest revision was made in 2013.
It was intended to identify the location of the condominium, which In deciding cases regarding this, the SEC applies two elements:
is along St. Francis street. 1. that the questioned name contains a dominant word in the trade name of
an existing corporation
7. Or a false statement that will deceive the public into believing theres a connection 2. in the same line of business
between the person and the product
o Somebody was selling a walkie talkie or a microphone and the Examples:
picture of Manny Pacquiao appeared there. So Manny Pacquiao sued 1. Funeraria Paz and Nueva Paz case
under this and the court said that it is actionable because it is making 2. There is a textile mill in Marikina, Universal Textile Mills. Somebody set up a
the public believe that Pacquiao is endorsing this product. corporation using Universal Mills. The court said universal is the dominant
word in the trademark
Unfair competition in the Civil Code 3. There was a publisher of books, Malaya Books. Somebody set up a publishing
company called Malaya Publishing. The court said that that is confusingly
CIVIL CODE, Art. 28. Unfair competition in agricultural, commercial or
similar
industrial enterprises or in labor through the use of force, intimidation, deceit,
machination or any other unjust, oppressive or highhanded method shall give 4. In another case the court said that Rolex (watches) cannot complain against
rise to a right of action by the person who thereby suffers damage. Rolex Music Lounge in QC. The services are different.
5. Milestone Tile Company was questioning Milestone Ceramic. The court said
Unfair competition in the Civil Code is broader than in the IP Code the former manufactures tiles, the latter manufactures ceramic products. end
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TRANSPORTATION LAW 3. He must undertake to carry by the method by which his business is
conducted, and over his established roads

I suggest watching Titanic before and after reading this part. Buy white cheese popcorn from Plant first. (If you see me
4. The transportation must be for hire
around, please give me some popcorn.) Then be all emotional when Rose says, Ill never let go. I promise. Tears are
optional. Its a useful study break. JT CARRIAGE OF GOODS
PS. Pardon the seemingly random order of topics under this part. Thats the order of discussion we had with Atty. Jack.
Article 1733. Common carriers, from the nature of their business and for
reasons of public policy, are bound to observe extraordinary diligence in the
January 7, 2015 (RL) vigilance over the goods and for the safety of the passengers transported by
them, according to all the circumstances of each case.
Article 1732 (Civil Code). Common carriers are persons, corporations, firms or
associations engaged in the business of carrying or transporting passengers Such extraordinary diligence in the vigilance over the goods is further
or goods or both, by land, water, or air, for compensation, offering their expressed in articles 1734, 1735, and 1745, Nos. 5, 6, and 7, while the
services to the public. extraordinary diligence for the safety of the passengers is further set forth in
articles 1755 and 1756.
The Civil Code principally governs common carriers (CC). There are other
applicable laws such as the COGSA and the Code of Commerce. A company, which transports petroleum products from a refinery to a
terminal by means of a pipeline, is a common carrier because it is transporting
To be considered as a common carrier, one must be habitually engaged in this business. goods.
The court said that where somebody leased a vessel and chartered it for an Case: X is based in Baguio. He would come down to Manila to bring his goods
isolated transaction, it is NOT a CC. on a truck. He would offer his services to other businesses in Baguio, telling
CC call themselves out as available to all persons who want to employ them. them that if they would want their goods to be brought to Manila, he could
Thats why CC cannot refuse their services to people, unlike private carriers, transport them. His truck got hijacked. Owners of the goods sued. Was the
who enter into private contracts. man engaged in the business of a CC?
o CC exercises extraordinary diligence whereas private carriers are o Held: YES. He was offering his services to transport goods with a
required to exercise only the diligence of a good father of a family. consideration. The mere facts that there was no fixed and regular
o CC are regulted by the government such as the Maritime Industry schedule, and that he was only rendering his services to a limited
Authority, the CAB, but there is no law that specifically regulates number of people, do not detract from the truck being a CC.
private carriers. o Even though he had no certificate of public convenience, it was a CC
o Loadstar v. Pioneer Asia: A public carrier shall remain as such, and must exercise extraordinary diligence. Those operating illegally
notwithstanding the charter of the vessel, provided the charter is will force the courts to apply stricter standards than to those
limited to the vessel only. If its a bareboat charter, then the public operating legally.
carrier becomes private. Case: A school bus service is a CC, and although it does not cater to the general
First Phil. Industrial v. CA: The test for determing w/n a party is a CC: public, but to a limited clientele, and the school bus was hired for a special trip
1. He must be engaged in the business of carrying goods [or persons] as to the province, the Supreme Court said that it is still a CC.
a public employment, and must hold himself out as ready to engage o Court further held that it is still a CC although it usually caters only
in transportation of goods or persons, generally as a business, and not to a limited segment of society and that the trip to the province was
as a casual occupation not a regular trip but an unscheduled and special trip.
2. He must undertake to carry goods of the kind to which his business is Some customs broker, after the Customs Office released the goods of their
confined clients, transported the goods from the piers. The Court said that that the
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bringing of the goods from the piers to the premises involves a Contract of Case: Aiza shipped sacks of rice. Some bags had holes, while some were loosely
Carriage. tied. Thus, there was spillage in the course of the voyage. When Aiza sued, the
shipping company claimed defects in the packing.
CC are required to exercise extraordinary diligence. The Civil Code mentions that CC o Held: The shipping company saw that the packing was defective but
will be exempted from liability in vigilance over goods if the loss or destruction was still accepted the same. It should have repacked the goods. The Court
exclusively due to the causes mentioned therein. minimized the liability of the shipper.
Case: Arkaye brought some equipment, which was placed inside a wooden
Article 1734. Common carriers are responsible for the loss, destruction, or crate. The flooring of the crate was defective. When the crate was lifted, the
deterioration of the goods, unless the same is due to any of the following
causes only:
planks underneath gave way, and the equipment fell in the sea. Now
Spongebob no longer lives in a pineapple.
(1) Flood, storm, earthquake, lightning, or other natural disaster or o Held: The Court, in this case, excused the shipping company, as it
calamity; could not have discovered that the plank on the bottom of the crate
Requisites for natural calamity to be exempting: was defective.
o It must be the proximate and sole cause of the loss.
Concurring negligence will remove a CC from being (5) Order or act of competent public authority.
exempted. Case: Nat, a buyer of charcoal, chartered a vessel to make delivery. The
Ex: There was a typhoon but the vessel was not sealed captain of the vessel was Captain OTaly. So the Shipping Company took the
tightly, so water entered. There is concurring negligence. charcoal and loaded it on the vessel. The Mayor found out about this and
o There must be no delay on the part of the obligor. ordered the shipping company to dump the charcoal in Manila Bay. Captain
o The CC must exercise due diligence to prevent or minimize the loss OTaly obeyed the order. So, who chartered the vessel sued the shipping
before, during, or after the occurrence of a fortuitous event. company. It said that it acted in compliance with the order of the mayor.
Fire is not a fortuitous event, unless lightning causes it. Fire is always man- o SC said that it was not a lawful order. Hence, shipping company is
made and is a result of negligence. liable.
(2) Act of the public enemy in war, whether international or civil; Article 1735. In all cases other than those mentioned in Nos. 1, 2, 3, 4, and 5 of
the preceding article, if the goods are lost, destroyed or deteriorated, common
(3) Act or omission of the shipper or owner of the goods; carriers are presumed to have been at fault or to have acted negligently,
Case: Quito, owner of goods, underdeclared the weight of the goods to cheat unless they prove that they observed extraordinary diligence as required in
article 1733.
on the freight. When it was being unloaded, it weighed too much. The crane
broke down and fell to the sea, just like how Jack went to the bottom of the Article 1736. The extraordinary responsibility of the common carrier lasts from
ocean after Rose told him shell never let go. Quito sued the shipping the time the goods are unconditionally placed in the possession of, and
company. The shipping company alleged that it was the Quitos fault for received by the carrier for transportation until the same are delivered, actually
underdeclaring the weight of the goods. or constructively, by the carrier to the consignee, or to the person who has a
o Held: The shipping company should have exercised extraordinary right to receive them, without prejudice to the provisions of article 1738.
diligence. It should not have taken the declaration by Quito in blind
PAL v. CA: There is no absolute obligation on the part of the CC to accept a
faith made, since it was obvious that it weighed much more. So the
cargo. It is only when the CC accepts cargo for shipment for valuable
CC remained liable, but it was reduced due to the fault of Quito, the
consideration does it assume the risk of delivering it in good condition as when
owner, for underdeclaring the weight.
it was loaded.
(4) The character of the goods or defects in the packing or in the A common carrier is liable from the time the goods are delivered to it
containers; unconditionally.
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o Case: There was a case where hemp was to be delivered. The waters After a delay of reasonable period, and consignee still fails to deliver, the
in the dock were shallow, so the vessel could not approach it. contract of carriage will be terminated. It will become a contract of deposit.
Lighters were used to transport the hemp to the vessel. The lighters The liability of the CC will be reduced from extraordinary diligence to
capsized and the hemp was lost. The owners of the hemp sued. diligence of a good father of a family.
Held: Although the hemp was supposed to be transported Case: Quito Shipping Co. (QSC) was hired by Sheena to deliver boxes of
on the vessel and that the hemp was loaded on the two copra to her in Manila. QSC mistakenly sent the boxes to Cebu. After two
lighters which were supposed to bring them to the vessel, months, QSC realized the mistake, so it repossessed the boxes of copra, and
the loading in the lighters still forms part of the contract of gave it to Sheena. Sheena refused to accept the delivery, and asked for
carriage. Therefore the CC was liable for the loss. damages. QSC said that Sheena cannot refuse, as there was no stipulation in
The CC is liable until the goods are delivered to the consignee, or if there was the bill of lading as to the date of delivery.
already actual or constructive delivery. o Held: The Court said that this was not a reasonable interpretation so
The best evidence [#weddingcake] of the contract of carriage of cargo is the as to allow the carrier to deliver the goods whenever it wanted to.
bill of lading or waybill, but cargo can be transported even without it. Delivery of the goods must be made within a reasonable period. The
Macam v. CA: The extraordinary responsibility of the CC lasts until actual or consignee was correct to ask for damages.
constructive delivery of the cargoes to the consignee, or to the person who has a
right to receive them. Article 1739. In order that the common carrier may be exempted from
responsibility, the natural disaster must have been the proximate and only
o Samar Mining v. Nordeutcher Lloyd: When the carrier under the
cause of the loss. However, the common carrier must exercise due diligence
terms of the bill of lading had delivered the goods at the port of to prevent or minimize loss before, during and after the occurrence of flood,
destination, at that point he merely becomes the agent of the consignee, and storm or other natural disaster in order that the common carrier may be
ceases to be liable as carrier for loss or damage of the goods exempted from liability for the loss, destruction, or deterioration of the goods.
transported. Thereafter, loss of goods in its hand for causes beyond The same duty is incumbent upon the common carrier in case of an act of the
its control, and without negligence being proved, cannot sustain a public enemy referred to in article 1734, No. 2.
claim for damage against the carrier.
Article 1740. If the common carrier negligently incurs in delay in transporting
o Lu Do v. Lu Ym Corp: Delivery of cargo to Customs authorities is the goods, a natural disaster shall not free such carrier from responsibility.
not delivery to consignee. However, the parties may agree to limit
the liability of the carrier, considering the goods have still to go Article 1741. If the shipper or owner merely contributed to the loss,
through inspection of the customs authorities before they are destruction or deterioration of the goods, the proximate cause thereof being
actually turned over to the consignee. the negligence of the common carrier, the latter shall be liable in damages,
which however, shall be equitably reduced.
Article 1737. The common carriers duty to observe extraordinary diligence
over the goods remains in full force and effect even when they are temporarily Article 1742. Even if the loss, destruction, or deterioration of the goods should
unloaded or stored in transit, unless the shipper or owner has made use of the be caused by the character of the goods, or the faulty nature of the packing or
right of stoppage in transitu. of the containers, the common carrier must exercise due diligence to forestall
or lessen the loss.
Article 1738. The extraordinary liability of the common carrier continues to be
operative even during the time the goods are stored in a warehouse of the Article 1743. If through the order of public authority the goods are seized or
carrier at the place of destination, until the consignee has been advised of the destroyed, the common carrier is not responsible, provided said public
arrival of the goods and has had reasonable opportunity thereafter to remove authority had power to issue the order.
them or otherwise dispose of them.
Article 1744. A stipulation between the common carrier and the shipper or
owner limiting the liability of the former for the loss, destruction, or
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deterioration of the goods to a degree less than extraordinary diligence shall (5) That the common carrier shall not be responsible for the acts or
be valid, provided it be: omission of his or its employees;
(6) That the common carriers liability for acts committed by thieves, or of
(1) In writing, signed by the shipper or owner; robbers who do not act with grave or irresistible threat, violence or
(2) Supported by a valuable consideration other than the service force, is dispensed with or diminished;
rendered by the common carrier; and
(3) Reasonable, just and not contrary to public policy. Guzman Case: From the tenor of this provision you can infer that if the
robbers acted with irresistible force, the CC will not be liable. That is beyond
Article 1748. An agreement limiting the common carriers liability for delay on
what could be expected of the CC. Thus, in this case, the CC could not be
account of strikes or riots is valid.
held liable because armed robbers hijacked the truck.
Article 1749. A stipulation that the common carriers liability is limited to the Another Case: But in another case, the owner said that the truck was hijacked.
value of the goods appearing in the bill of lading, unless the shipper or owner He only gave a one sentence testimony of the hijacking.
declares a greater value, is binding. o Held: The Court said that the testimony did not elaborate nor did it
show that there was irresistible force on the part of the robbers.
Article 1750. A contract fixing the sum that may be recovered by the owner or Hence, CC is still responsible.
shipper for the loss, destruction, or deterioration of the goods is valid, if it is
reasonable and just under the circumstances, and has been fairly and freely
(7) That the common carrier is not responsible for the loss, destruction,
agreed upon.
or deterioration of goods on account of the defective condition of the
car, vehicle, ship, airplane or other equipment used in the contract of
Limited Liability for Shipment of Goods carriage.
This provision refers to limited liability for shipment of goods. A stipulation limiting SC settled that this is not a fortuitous event. It will not exculpate the CC.
the liability of the CC will be valid depending on the circumstances. Case: A bus company installed brand new tires, which exploded. Passengers
Heacock v. Macondray dwelled on the different kinds of stipulations: were injured.
o Complete exemption of CC from liability is VOID. o Held: CC is liable. It cannot assume that just because the tires were
o Limiting liability to a certain fixed amount is VOID. brand new, there will be no factory defect. It should have inspected
o Limiting liability to a certain amount, unless owner declares a higher the tires thoroughly.
value and pays the corresponding freight, is VALID and reasonable.
Valenzuela Hardwood (hehehe) v. CA: In a contract of private carriage, the Article 1746. An agreement limiting the common carriers liability may be
parties may validly stipulate that responsibility for the cargo rests solely on the annulled by the shipper or owner if the common carrier refused to carry the
charterer, exempting the shipowner from liability for loss of or damage to the goods unless the former agreed to such stipulation.
cargo caused even by the negligence of the ship captain.
Under the COGSA, liability of CC is $500. This is the maximum. The parties
Article 1745. Any of the following or similar stipulations shall be considered are not prohibited to stipulate otherwise.
unreasonable, unjust and contrary to public policy:
Article 1747. If the common carrier, without just cause, delays the
(1) That the goods are transported at the risk of the owner or shipper; transportation of the goods or changes the stipulated or usual route, the
(2) That the common carrier will not be liable for any loss, destruction, or contract limiting the common carriers liability cannot be availed of in case of
deterioration of the goods; the loss, destruction, or deterioration of the goods.
(3) That the common carrier need not observe any diligence in the
custody of the goods; Article 1751. The fact that the common carrier has no competitor along the line
(4) That the common carrier shall exercise a degree of diligence less than or route, or a part thereof, to which the contract refers shall be taken into
that of a good father of a family, or of a man of ordinary prudence in consideration on the question of whether or not a stipulation limiting the
the vigilance over the movables transported;
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common carriers liability is reasonable, just and in consonance with public For example, hand carried baggage of a passenger. CC is required only to
policy. observe the due diligence of a good father of a family. BUT, for check-in
luggage, the carrier will have to exercise extraordinary diligence.
Article 1752. Even when there is an agreement limiting the liability of the
common carrier in the vigilance over the goods, the common carrier is
January 8, 2015 (RC)
disputably presumed to have been negligent in case of their loss, destruction
or deterioration.
If cargo is lost or damaged, immediately, a presumption arises, that the damage CARRIAGE OF PASSENGERS
or loss of the cargo was due to the negligence of the CC. All that the shipper
proves is that the goods arrived in a damaged condition, or that they did not Article 1755. A common carrier is bound to carry the passengers safely as far
arrive at all. as human care and foresight can provide, using the utmost diligence of very
cautious persons, with a due regard for all the circumstances.
Article 1753. The law of the country to which the goods are to be transported Article 1756. In the case of death or injury to passengers, it is presumed that
shall govern the liability of the common carrier for their loss, destruction or the carrier is at fault, unless they prove they exercised extraordinary diligence.
deterioration.
Article 1757. The responsibility of a common carrier for the safety of
passengers as required in articles 1733 and 1755 cannot be dispensed with or
Rule of conflict of laws: The law of country of destination shall govern the
lessened by stipulation, by the posting of notices, by statements on tickets, or
liability of the common carrier. otherwise.
Lorenzo Shipping Case: Goods were to be transported from Manila to Davao
by Lorenzo Shipping. The goods got wet and became rusty. From Davao, the Article 1758. If the passenger is carried gratuitously, the liability of the
goods were to be transported to San Francisco by American President Lines, common carrier may be limited by stipulation to only due diligence of a good
which brought the goods across the Pacific Ocean to SF. The consignee father of a family. But, it cannot exempt it from gross negligence.
refused to take the goods after seeing that the goods were damaged and filed a Limited Liability for Carriage of Passengers
claim with the insurance company. The insurer paid, and sued Lorenzo Article 1758 provides that the liability of the common carrier may be limited
Shipping on the ground that it was subrogated. Lorenzo argued that the when it carries passengers. Limited liability may be stipulated if the passenger
destination is SF so the case must be decided based on the law of California. is carried gratuitously, but the carrier will not be exempted from gross
o Held: The Supreme Court said no. The responsibility of Lorenzo negligence.
Shipping ended when it delivered the goods to Davao. So insofar as Compare with the rule on limited liability on shipment of goods (Art. 1744).
Lorenzo is concerned, the destination is Davao. As such, its liability
can be adjudged applying the Civil Code. Article 1759. Common carriers are liable for the death of or injuries to
NDC v. CA: Philippine laws will still apply even when the collision actually passengers through the negligence or willful acts of the formers employees,
occurred in foreign waters, so long as the port of destination was in the although such employees may have acted beyond the scope of their authority
or in violation of the orders of the common carriers.
Philippines.
Santos v. Northwest Airlines: The ultimate destination, and not an agreed This liability of the common carriers does not cease upon proof that they
stopping place, determines the laws of the country applicable in a suit against exercised all the diligence of a good father of a family in the selection and
an international carrier. supervision of its employees.
Article 1754. The provisions of articles 1733 to 1753 shall apply to the For culpa contractual, the carrier-employer cannot raise the defense of
passengers baggage which is not in his personal custody or in that of his diligence of a good father in the selection and supervision of its employees.
employee. As to other baggage, the rules in articles 1998 and 2000 to 2003 Such defense may only be raised in culpa aquiliana.
concerning the responsibility of hotel-keepers shall be applicable.
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Article 1760. The common carriers responsibility prescribed in the preceding o Held: The contract of carriage had not yet been terminated since
article cannot be eliminated or limited by stipulation, by the posting of notices, they could not leave until they had gathered their luggage.
by statements on the tickets or otherwise.
Aboitiz Case: This was reiterated in the Aboitiz Case, where a family took the
Article 1761. The passenger must observe the diligence of a good father of a vessel of Aboitiz. The destination was North Harbor. Aboitiz Shipping put a
family to avoid injury to himself. rope and drums to prevent people from rushing to get their luggage. But a
father entered the gap between the drums and he was hit by a crate on the head
Article 1762. The contributory negligence of the passenger does not bar and died.
recovery of damages for his death or injuries, if the proximate cause thereof is o Held: The SC said the carrier should exercise extraordinary
the negligence of the common carrier, but the amount of damages shall be
diligence. The putting of the drums was not sufficient. It did not
equitably reduced.
prevent the father from entering the gap. The father was negligent,
Article 1763. A common carrier is responsible for injuries suffered by a but that did not exculpate the shipping company. The fathers acts
passenger on account of the willful acts or negligence of other passengers or only mitigated its liability.
of strangers, if the common carriers employees through the exercise of the o Further, the contract of carriage had not yet been terminated because
diligence of a good father of a family could have prevented or stopped the act naturally the family would not have left without claiming their
or omission. luggage.
A common carrier is supposed to exercise extraordinary diligence for the safety of its
In an action for breach of contract of carriage by a passenger, the common carrier cannot
passengers. In case of death or injury, it is presumed that the common carrier was
invoke the defense of last clear chance.
negligent.
That is a defense in a quasi-delict case where several buses collide with each
Zamboanga Transit v. CA: The defenses that can be used by the common
and it has to be determined who is at fault.
carrier are
But, with respect to liability to passengers, that cannot be invoked.
o Exercise of extraordinary diligence
o Fortuitous event (provided there was no concurring negligence)
PAL Case: There was a time when a Philippine Airlines plane could not reach its final
o Contributory negligence of the passenger (the amount of damages
destination because of horrendous weather and had to land. So the passengers were
shall be equitably reduced)
deplaned. Some passengers sued because they were not provided with hotel
Dangwa Case: Dangwa was a bus company in Benguet. There was a bus
accommodations and meals.
passenger along the road that signaled that he wanted to board the bus. So the
Held: The SC said the contract of carriage is operative until the final
bus slowed down and the passenger was able to put his foot on the boarding
destination and they only had a stopover due to inclement weather. So, the
platform; but before he was able to steady his foothold, the driver stepped on
contract was not yet terminated. PAL was still liable, and it should have
the gas. So the passenger stumbled and fell down and was injured.
provided them with hotel accommodations and steak meals. Not really steak.
o Held: There was already a perfected contract of carriage the moment
Im just hungry.
he put his foot on the boarding platform.
That case with Mt. Pinatubo: In contrast, when Mt. Pinatubo erupted, the ash reached
The contract of carriage is not automatically terminated when the passenger reaches his
as far as Vietnam. For two weeks, the airport was closed because the runway was
destination. He must have had a reasonable opportunity to leave the premises.
covered in ash. Planes were unable to take off. Now here is this passenger who was
Majorca (?) Case: A family was travelling by bus and the terminal was in QC.
stuck in Narita for 2 weeks because his JAL flight was cancelled. JAL did not answer for
They had pieces of baggage with them, and the father was waiting for the
his accommodations because it was a fortuitous event. The passenger invoked the PAL
conductor to take out the baggage from the compartment. While waiting, the
case (above) because of the similar circumstances.
daughter was running around the terminal and was run over by another bus.
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Held: What happened in the PAL case and why damages were awarded was o But the rule is different for airline companies. The law provides that
because it was actually proven that PAL gave some passengers hotel the airline is allowed to search passengers.
accommodations and meals. PAL committed discrimination when it didnt Maranaw Case: There was a little girl who belonged to the Maranaws. She
give the same to all the passengers. Yung iba may steak, yung iba wala. Hassle. L was run over by a bus and died. The police warned the bus company that they
received intelligence reports that the family would avenge the death of the
INJURY TO PASSENGERS child and they should take precautions. But the bus company ignored the
warning. Thereafter, some Maranaws boarded a bus and then at some point
Common carriers are liable for the death and injuries of passengers caused by the willful ordered the driver to stop the bus and they told the passengers to get out.
acts of negligence of their employees even if they acted against the orders of the They poured gasoline over the bus and set it on fire and they shot the driver in
common carrier. the arm. One of the passengers was a lawyer and he interceded for the driver
Ex: Leon, a taxi driver, robbed Quito, his passenger. Here, the common and said the driver was not at fault, that he was just an innocent person trying
carrier cannot invoke selection of employees with due diligence of a good to earn a living. So they shot the lawyer.
father of the family. That is a defense for quasi-delict, but not for breach of o Held: The bus company was liable because they were given
contract. warnings about the possible reprisal and that they should have taken
Golatco Case: There was a passenger who took the train. There was a security the proper precautions. But they ignored the warnings. The bus
guard there who was off-duty and he killed this passenger. company should have frisked passengers while they were boarding or
o Held: The passenger could not sue the common carrier because the could have installed a metal detector.
killing had nothing to do with the contract of carriage. It turned out Amok Case: In another case, there was a passenger who was running amok and
that the guard and the passenger had a long-standing personal carrying a knife. The passengers were trying to escape but they fell and were
grudge. So the guard did not kill him because he was a passenger. injured.
There was a grudge and the guard was off-duty. o Held: The driver and the conductor did nothing. The driver had just
LRT Case: This was asked in Bar Exam. The passenger had a token and kept on driving regardless of what was happening. They should have
dropped it in the turnstile and waited for the train at the platform. There was stopped the bus when that was happening.
an altercation with the security guard. The passenger was punched and fell on Umbrella Case: There was a PAL plane. Somebody with mental problems
the railroad tracks just as the train arrived. He was decapitated. Ouch. boarded the plane carrying an umbrella, which he tried to convert to an
o Held: SC said that the train was liable for breach of contract. There improvised parachute. He was threatening the passengers and asking for the
was a perfected contract. He already bought a token, dropped it in doors to be opened so he could jump. They were afraid that he would attack
the turnstile and he went to the place where he would board where the other passengers. Now pilots report every hour to the air tower with a
the train would transport him. It was the duty of the train to secure password thats changed periodically. So when he gave the password, the
his safety while he was waiting transport. ambulances and SWAT were immediately sent to the runway.
o The train company argued that the guard wasnt its employee. That Pilapil Case: A bystander threw a stone at a bus cruising along the highway
is irrelevant. and a passenger was injured by the stone.
Woman with Fireworks Case: There was a woman who boarded a provincial o Held: A common carrier is not an absolute insurer of the safety of
bus. She was bringing a box of fireworks. The fireworks exploded and passenger. This was beyond the control of bus company.
passengers were injured. There is no contract of carriage with a stowaway.
o Held: The bus compamy couldnt be held liable because it had no Robbers boarded the bus, pretending to be passengers. There was accident and
right to inspect the box and open the box. This would violate the they were injured. These robbers filed for damages.
right to privacy of the woman. o Held: Now these robbers did not board the bus to be transported.
Thus, it would be absurd to hold the bus company liable.
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o It is settled that robbers who board did not intend to be passengers to In quasi-delict, the common carrier can invoke
be transported. defense of due diligence but you can get moral
Necesito v. Paras: While the Phil. Rabbit bus was traveling fast, its driver damages.
sensed that the wheels did not respond to the movement of the steering wheel. In breach of contract, no such defense.
The bus hit a rut and turn-turtled, killing a passenger. Phil. Rabbit proved o In Air France v. Carrascoso, the Supreme Court cited American
that the defect in the steering wheel was attributed to GM USA, the jurisprudence. But under the Civil Code, there must be no contract
manufacturer, and that the defect was a factory defect which could not have in torts. Justic Vitug tried to reverse this in the next caseabangan.
been discovered by expert mechanics. Could the bus company be liable? FEB Case: You can sue on quasi-delict even if there is a contract, if the quasi-
o Held: Yes, Phil. Rabbit is liable. When a bus company places its bus delict can exist without the contract.
for the use of the riding public, it must be in good condition. If it o But if you cannot sue for quasi-delict without the existence of
was really the fault of GM, then the bus companys remedy would be contract, then you can only sue on breach of contract. This would be
to go to GM. While the carrier is not an insurer of the safety of the reiterated in the GSIS Case.
passengers, it should nevertheless be held to answer for the flaws of Fernando Lopez Case: Fernando Lopez was a senator and he was travelling
its equipment, if such flaws were at all discoverable. In such case, the with his family to the United States of America in first class. They were
manufacturer of the defective appliance is considered in law the downgraded. Again the court awarded moral damages.
agent of the carrier, and the good repute of the manufacturer will not o Held: The SC again considered downgrading per se as bad faith. The
relieve the carrier from liability. lawyer for the airline tried to belittle the difference between first
class and economy. But the difference is obvious (seats, food, service,
AIRLINES CASES leg room).
Zulueta Case: Zulueta wrote the poem Like the Molave. He and his family
Theres a long line of cases of damages awarded to passengers (he talks about first when to the United States of America. In those days, there were no non-stop
class/business class/economy class): flights
Cuenca Case: This was in 1965. Cuenca was travelling to Tokyo in first class, o Sidestepping a bit Jack also explains that when passengers cannot be
but was downgraded. He was awarded 25,000. found during boarding, they will not take off because theres a
o The trend of jurisprudence over the years holds that downgrading security threat. The baggage of the passenger is already in the plane,
per se constitutes bad faith; therefore, moral damages should be so if the passenger doesnt show up, they think its because theres a
awarded. bomb in the bag. He gives an example of a Chinese passenger who
Air France v. Carrascoso: Carrascoso had a first class ticket travelling from claimed asylum, so they had to stop the plane, let him out and then
Manila to Bangkok, and then to Paris because he wanted to have a very good time. they had to locate his bags. This caused the delay of Jacks flight in
In Bangkok, he was ordered to give up his seat to somebody else and move to Jerusalem.
economy class. He refused but was downgraded. He sued. o Back to Zulueta! In Wake Island (one of the stops), they had to clean
o Held: SC said the common carriers are not only obliged to transport the plane so everyone got off the plane. Zulueta couldn't be found
passengers safely, but also courteously. Therefore, they could sue for during the boarding, so the employees looked for him. He was found
damages. The court said the act, which constitutes breach of leisurely walking along the beach. When he got back to the plane,
contract, can also constitute a tort. the pilot demanded that his bags be checked again, but Zulueta
Remember that under the Civil Code, under breach of refused. The pilot threatened to leave him behind. Zulueta now
contract, moral damages cannot awarded except in two claims damages. He explained that what happened was that he
cases: (1) death or (2) bad faith/fraud. needed to go to the bathroom but all the lavatories in the airport
But in quasi-delict, you can always recover moral damages. were occupied so he went to the beach to answer the call of nature.
There are pros and cons for invoking one or the other.
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Now he only refused the second check because of a bad experience in proceed to Manila, so she was flown directly to Malaysia and she just
Chicago where he was mugged. Anyway, he explained that the pilot instructed her mother to follow her in KL to bring her costume. So she was
had shouted get these three monkeys out of here. not able to rehearse her repertoire and so her performance was not as self-
Held: Moral damages were awarded by the Court. satisfactory as she would have wanted it to be. She now sued Singapore
A different and completely irrelevant, yet kinda funny, Zulueta Case: Now, Airlines and they said it was a fortuitous event; inclement weather the flight
Zulueta would frame a photocopy of the check and he got the idea that you was delayed.
could really make money off of this. There was meeting of the San Lorenzo o Held: But then the court said they should have tried alternative
Village. One member asked about the problem of garbage collection. The routes. There might be another airline company with a different
President explained that since Zulueta did not pay the fees, they would not schedule that would have allowed her to still proceed to Malaysia. Or
collect his garbage. So Zulueta sued in court. He argued that this is privileged there might be flights of Singapore airlines from Frankfurt to other
information. Jack handled the case for the village. The meeting was called to places aside Manila directly and still have allowed her to practice.
discuss the problems of the village and naturally the president had to answer o Court here did not identify whether there are any alternative routes
the question and give an explanation. Court dismissed the case and order available. It awarded damages.
Zulueta to pay damages for malicious prosecution. CA affirmed and SC denied Sabellana case: Sabellana and his family boarded a flight from Seattle. No, not
his appeal. For the settlement, Zulueta did not issue a personal check because the coffee shop. Then, the pilot (lets name him Jag) said, We had to return, the
he was afraid that someone would frame that too. (lol) engine caught fire. The flight was aborted. The passengers were transferred
Vasquez Case: Mr. Vasquez and Mrs. Vasquez had roundtrip business class to other flights. Some passengers were accommodated in other flights but
tickets to Hong Kong. When they were returning, they were informed that Sabellanas family was transferred to another flight which was roundabout
the business class was overbooked. The airline tried to give him an upgrade, the itinerary was longer, and they passed by L.A. (Useless na naman yung pag-
but Mr. Vasquez didnt want to, because they were travelling with friends and name.)
it would be rude. So he sued. So the argument was he was a business class o Held: Sabellana could sue for breach of contract because the airline
passenger and over his objections he was upgraded to first class company put them into a roundabout route without their consent
o Held: There was a breach of contract and should be awarded while the other passengers who were accommodated in a later flight
damages. following the same itinerary. So it is possible to be accommodated in
a flight with the same itinerary.
January 12, 2015 (VG) o But, you see, when a flight is aborted, you have to accommodate the
passengers in other flights. Naturally, you can only accommodate
United States started with this overbooking of passengers. Experience shows them for whatever vacant seats available in other flights. You could
that not all passengers show up and if there is a vacant seat, thats lost income not have accommodated all of them at a later flight. That is what the
forever, so overbooking was allowed up to 10%. court is trying to say.
o What happens if everybody shows up? Airline companies would ask When I went to HongKong, I have a final exam for UST the next day, and
for volunteers who would give up their seats and they will be they said the flight was cancelled because there was a spare part (I bet there was
provided with hotel accommodations and even some money. If no left phalange!) to be replaced and theres no spare part in HK and they have
nobody is willing to give up his seat, then those who checked in last to bring it from Manila. They were supposed to use a 727, but used instead a
are the ones that will be left behind. 747 to accommodate those who were supposed to go to Manila and those who
Fernandez case: Miss Fernandez was an internationally known Filipina were left because of that aborted flight. All were accommodated in one plane.
soprano. She was supposed to sing at the birthday of the King of Malaysia and Humiliated Physician Case: Dr. Laya was supposed to go to US. When he was
she arranged to fly from Frankfurt to Manila to pick up her costume and to entering the pre-departure area, the last inspection of your hand-carry items,
rehearse her repertoire. Then, she would fly to Kuala Lumpur. But because of he was carrying a brief case which was opened and searched and then he sued
the inclement weather the flight was delayed. There was no more time to for damages. He said he was humiliated by the airlines company, who claimed
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that it received a report from AA that somebody would try to board the flight for physical injuries but it said if it is based on quasi-delict! So I dont
and would carry the bomb in a Samsonite briefcase, colored cordova, so that know.
no briefcases should be allowed hand-carried, and they should all be checked You can recover attorneys fees if the common carrier unreasonably refused
in. But in the case of Dr. Laya, the airline allowed him to hand carry but then to pay his claim.
they searched the case they ransacked it. Exemplary damages could be recovered based on bad faith but then the court
o Held: The Supreme Court said, Okay, the airline company was said exemplary damages are imposed to penalize the wrongdoer. So it is only
justified in the inspection but they said that the manner in which it imposed to the one who committed the misconduct.
was done is tainted with public humiliation. They could have done o So that in the Lara and Dacer cases, the court said that if the driver is
it discreetly. The way they ransacked gave the public an impression guilty of misconduct, he should be penalized with exemplary
that he might have been involved in drugs. damages. But, you cannot impose that on the employer except where
The off loaded luggage: A plane of PAL, while returning to the mainland, made there is a nexus that would the employer liable for his misconduct.
a stopover at Honolulu, Hawaii. It offloaded all the pieces of luggage of a For example, when the employer knows that the driver is
passenger so it could take in additional cargoes and earn more freight. habitually a reckless driver and tolerated it, or they hired
o Held: This was bad faith. PAL offloaded the pieces of luggage so him without checking his character, requiring him to get
that it accommodate more and earn more freight. It should be held police clearance, NBI clearance, test his driving skills. What
liable for damages. is happening is that the court is imposing exemplary
Northwest Airlines; Overload: Some of the accompanying baggage was left damages automatically to the employer, if the driver is also
behind for reasons of weight and balance. The plane would be overloaded. held liable for exemplary damages.
o Held: It was for safety. The airline could not have been held liable. Death: The law awards automatically 50,000 pesos.
Confiscated passport: There was a passenger stuck in Narita, who wanted to go o Davila Case: A plane of PAL crashed in Mindoro. Now the family of
on shoreline. But when he went to immigration his passport was confiscated a steward filed a suit also and the court awarded damages. The court
and he was detained. He sued Japan Airlines. said that a common carrier must exercise extraordinary diligence and
o Held: The confiscation of passport was a sovereign act of the Justice Caguioa lambasted that decision. He said there is no contract
government of Japan. That is not the fault of the airline company of carriage between the steward and the PAL. It was a contract of
because they have nothing to do with that. It is not the obligation of employment and why is the Supreme Court applying the liability of
the airline company to see to it that the passports of the passengers a common carrier to a passenger in adjudicating the claim of a
are in order. It is the passenger who should look out for that. steward when thats a contract of employment? Could the family of
the pilot sue PAL for damages?
DAMAGES Hospitalization: If the passenger was hospitalized before he died, the medical
expenses will also be recoverable. Death and funeral expenses are recoverable.
Damages first, in case of injuries, the cover of damages would be medical Before they said, it had to be documented so when there are no receipts
expenses, payment for medicines, hospitalization, professional fees of presented, no funeral expenses can be granted. But then later on they changed
physicians, tests like x-ray and ultra sound and then if he was incapacitated for they said no, if no receipts were presented 25,000 pesos will be awarded as
work, then lost income would also be recoverable. temperate damages for funeral expenses. Then there was another variation,
Moral damages are not recoverable in cases of breach of contract, except in two even if receipts were presented to prove funeral expenses but it falls short of
instances: (1) Death and (2) bad faith or fraud. 25,000 pesos, it will still award 25,000 pesos.
o But theres a recent decision wherein the court awarded moral Exemplary damages may be awarded in gross negligence.
damages even though the passenger was claiming based on breach of o Rainy Case: There was a case, it was raining, and the driver is
contract. According to Article 2219, moral damages can be awarded speeding. The passengers were asking him to slow down but he just
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ignored them now that is definitely gross negligence. Exemplary court denied that. After that, I resigned, and I didnt know what
damages should be awarded. happened to the case.
Held: Even if the employer has no responsibility on the o Later on I read the decision in the SCRA. Apparently, the Court of
gross negligence, they will award exemplary damages. Appeals did not sustain that argument and the lawyer who took over
Death: Moral damages should be awarded. But you have conflicting reiterated it. The court said that the cases cited were from English
decisions. Some decisions say when nobody testified to prove moral damages, and American courts, but our Civil Code expressly provides the life
one cannot be awarded. Others said, no, it should be automatically awarded expectancy of the deceased that should be used in determining lost
and I think that is the correct one because remember in the rules of evidence it income.
is presumed that things have happened in the ordinary course of nature. Governor Case: There was a case before where Pope Paul VI is coming to
Three month rule case: In the ordinary course of events, the family would Manila and he would celebrate mass at Luneta. Many people from the
grieve when somebody died. Before, there were people who joined a tour in provinces wanted to come here. One of them was the Governor of
Corregidor. But, the boat sank and the plaintiff was testifying that his wife Catanduanes. He took the plane of PAL in Legazpi City. Then, PAL said, We
died and he claimed damages. are going to make a stop-over in Naga, but we are fully-booked in Naga. We
o Held: The Court asked, how did you feel when your wife died? He could fly you up to Naga only, you will have to get off there. We cannot fly
said, well I dont want to live anymore. Would you consider you all the way to Manila. When they arrived in Naga, the Governor of
500,000 pesos as adequate compensation? And he said, you could Catanduanes refused to give up his seat. PAL had to bump off that passenger
keep the money if you could just give my wife back to me. L But with the confirmed reservation and the passenger cited that Governor who
then, he was married after one month. K Jack then said: That is refused to give up the seat.
frowned upon in Philippine culture. Maghintay ka naman ng isang o Held: The court said that the Governor the Governor has no right
taon para magbabang luksa! C Di niya alam yung three month rule! to that seat and that PAL had no right as well to bump off that
Para siyang si Basha! Kawawa naman si Popoy! She chose to break his heart! passenger with the confirmed reservation.
But going back more or less, moral damages should be
automatically awarded.
Now, lost income From the Davila Case: 2/3 [(80age) x annual income] WARSAW CONVENTION
The Court would require before that if you are claiming for lost income, that
The Warsaw Convention has been modified in Montreal and in Guadalajara.
should be supported by documents. The best evidence, of course, is the income
This was adopted in the French language because it was France who was
tax return. But when you talk of low-income people, yung mga side-walk
pushing for this and it was signed in Warsaw, Poland.
vendors, maglalako the court has allowed testimonial evidence to prove the
The main idea behind this is to lay down rules governing International
income in those cases.
Commercial Aviation. I mentioned that because in some cases, the Supreme
Padilla case: One of the passengers who died in that Davila case is Padilla. I
Court said that when claims are precluded in the Warsaw Convention, they
handled the appeal with the Siguion-Reyna office. I said we cannot re-litigate
can still claim under the Civil Code thats wrong. The idea was to lay down
w/n PAL was at fault because that was already resolved in the Davila. Padilla
uniform rules for international commercial aviation; otherwise, we become a
was a chance passenger, it so happened that he was rushing to return to Manila
nightmare of more than a hundred and sixty countries now. If the airline
as soon as possible for his wedding. The passenger who confirmed did not
companies will have to comply with the municipal law, it will be a nightmare.
show up, so Padilla was accommodated. The mother was the one who sued.
We are a peculiar country to award enormous damages to passengers when
o Now, I argued that even if Padilla had not died, the mother would
bumped off. I think the biggest award given was 3,500 dollars.
not have received income at the age of 80, because the mother would
have died ahead of him. In fact, the mother died when the case is still
pending, so I said it has to be computed until her age 80. But the
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Lost luggage cases: here. KLM said that that is not part of our itinerary; we are only
o There was a case where the passenger did not make the claim for lost selling tickets for the other airlines.
luggage within 40 days as stated in the Warsaw Convention, then he The court said: No. Under the Warsaw Convention, the
sued. voyage covered by the ticket is considered a single
SC said that he can invoke the Civil Code thats wrong! operation and the airline who issued it is liable for the entire
United Airlines v. Uy: The limtation to file an action for itinerary Jack says thats wrong!
recovery under the Warsaw Convention is an absolute bar to First, for this [single operation] to apply the airline must be
suit and not to be made subject to the various tolling incorporated in a country that is signatory to the Warsaw
provisions of the laws of the forum. convention. What it means is that if the Warsaw
o In another case, the veterinary vials were not refrigerated, so they Convention applies to a portion of your itinerary, it will
were lost and the claim was not filed within 40 days from delivery. apply all throughout.
The Court said that the action is barred under the Warsaw For example, you are going to Spain. You bought
Convention. a ticket of KLM and you landed in Amsterdam.
Okay, thats covered by the Warsaw Convention.
REQUISITES for the application of Warsaw Convention And then you transfer to Iberia Airlines and flew
to Madrid. Again thats covered by the Warsaw
1) It must be an international flight.
Convention. But then you decided to fly also to
If the ticket was bought in Bangkok for a flight in the US,
Barcelona, with a domestic flight in Spain. You
from LA to Chicago, that is domestic flight.
are flying from Madrid to Barcelona, but that will
2) Two countries must both be signatories.
be covered by the Warsaw Convention. That is
Singapore is not a signatory.
the meaning of a single operation.
SINGLE OPERATION: Then the issue of a single operation
LOST LUGGAGE LIABILITY LIMITATION (4L): Theres the limitation
o KLM is the only European airline that flies here given our
on the liability for lost luggage, the court has applied that. But the court said
outrageous taxes. Future BIR Commissioner C.T. Gonzales, paayos
that that will not apply that if the passenger was not given a claim stub.
please. They were taxing the foreign airline companies on the entire
o Also the Warsaw Convention was adopted in French the provision
payment for the ticket and if you are going to Europe, you will be
says that the limited liability provision will not apply in case of dol.
flying different airline companies. If you take KLM up to
And the English text which is the translation made by England
Amsterdam and you want to go to France, you will probably take
translated dol as wilful misconduct. According to that book I have of
Air France. And you will proceed to Italy through Alitalia and you
the Warsaw Convention, the most acceptable equivalent of dol that is
go to Germany, you take Lufthansa, and if you are going to London,
applied with the courts outside France is gross negligence.
you take British Airways. The government will be taxing the entire
Hence, the Warsaw Convention will not apply in case of dol
route even if the service was done outside the Philippines. So what
or gross negligence.
the KLM does is that they will give the passengers a ticket saying
o Lost Paper case: There was a UP professor who was invited to attend
Manila-Taipei and they will give the rest of the ticket in Taiwan.
an international conference in Rome and deliver a paper. This was
o Now there was a passenger (lets name him Arkaye) who bought a
during the pre-fax and pre-e-mail (and pre-Facebook, pre-Viber,
ticket from KLM and wanted to go to Paris. The airline that was
pre-Whatsapp, pre-mIRC, but post-carrier-pigeon) days, and so he
supposed to transport Arkaye was Sabena Airlines, and he was not
only had one copy of the paper. He placed it in a suitcase. The
accommodated. Arkaye sued KLM because Sabena had no office
suitcase was lost, and the professor was not able to attend and deliver
his paper. This is Alitalia, and they invoked the limited liability.
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Held: Court said no. Alitalia was reckless. Thus, it cannot dismiss and they said that under, the Warsaw Convention you can sue only at
invoke that limitation of liability. four places:
o Ignored Follow-ups case: Then theres this former lawmaker (lets 1. Where it is incorporated incorporated in Minnesota
name him Drew) and he was going to attend international conference 2. Where its principal office is located in Minnesota
of parliamentarians in Budapest, Hungary. Drew took a flight from 3. Where you bought the ticket in San Francisco
Manila to Amsterdam. From there, Drew was going to take a flight 4. Your destination this is a roundtrip ticket and your place of
by Air France to Budapest. But then, he found out in the airport that departure is also you destination. But, that is true if the return is also
there was an earlier flight where he could be accommodated. So mentioned in the ticket. If the date of return is left open, the decision
Drew asked Air France to be accommodated at that earlier flight and is different.
he was. Drews luggage was not delivered. Now all throughout his o In the old transcript, Jack said that since the Warsaw
stay, he was buying clothes! (puro cardigans siguro hehe) Now when Convention was adopted in the French language, French
Drew returned to Manila, he kept on following up what happened to jurisprudence should be consulted in interpreting the
his suitcase and according to him, Air France never answered him. Warsaw Convention. In French jurisprudence, the principal
He would follow up by phone or letter, and after two years they said office is any place where a corporation has a branch office.
that they already recovered his suitcase. o Northwest Orient Airlines has a branch office in Manila;
Held: Court said here that Air France could not invoke the thus, it can be sued here.
limited liability rule because for two years, they did not But in my recording, he repeated the discussion on
locate the suitcase, and they could have just ignore the French jurisdiction but he said that the Court did
follow-ups made. not say anything about this. So, they ruled that
o In another case, a family claims that they had things worth 300,000 the case should be filed in the U.S.
pesos hand-carried. A Canadian bought a ticket from Montreal-LA-Montreal. the plane crashed.
Held: If you do not file a claim within 3 days as required Date of the return was left open. The family sues in LA. Air Canada moved to
by the Warsaw Convention, and you made those dismiss, saying that the destination is also Montreal.
allegations for the first time when you filed the complaint, o Held: No, because the date of the return was left open. What the
thats time-barred. passenger has is an option. That is not yet a contract to be
transported but the court did not discuss that decision.
Humiliation cases: The court said that if the passenger is suing for humiliation,
the prescriptive period of 2 years in the Warsaw Convention will not apply; January 13, 2015 (KF)
there you apply the Civil Code.
BILL OF LADING
WHERE TO FILE A CASE:
The Bill of Lading has a three-fold character:
Santos case: Santos was a young student in San Francisco, WHO wanted to go
1. it is a contract
home for Christmas. He bought a ticket from Northwest Orient Airlines with
2. a receipt for goods
itinerary San Francisco-Narita-Manila, return: Manila-Narita-San Francisco.
3. it is a symbol of the goods.
The date of the return was left open. He confirmed his ticket twice and on the
The person whos selling the goods covered by a Bill of Lading will
day of the departure, he was told in the check-in counter that he was not
comply with the duty to deliver the goods by delivering the Bill of
assured to be accommodated in Narita. He backed out. He wanted a flight
Lading...in the provisions of the Civil Code on sale. A provision
where he would surely be accommodated from Narita to Manila. So he said,
copied from the uniform Sales Act provides that the Bill of Lading
my ticket was confirmed twice and the only explanation is that the seat was
should be considered a document of title.
given to another person. They filed the case here. Northwest invoked to
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Theres a case where the buyers refused to take delivery on the ground that they did not Should a part of the goods transported be delivered, the consignee may refuse
comply with the specifications in the contract. The court said, the contract of sale and to receive it, when he proves that he cannot make use of it without the others.
the contract of carriage are two separate existing contracts. So that if theres a breach in
obligation for contract of sale, the buyer cannot use that as a reason for not taking The consignee which abandoned the goods and refused to take delivery can claim
delivery of goods. Take the delivery and sue the seller for breaching the contract. But damages instead. Article 363. Say the company imported a waste water treatment plant
because of the delay, the buyers are liable for demurrage. (I think what Sir means here is which had several components. If some of the components are missing so that the
that the buyer cannot refuse to take the goods delivered on the ground of breach in the contract of sale, components that were delivered are useless without the missing components, the
because the contract of sale and contract of carriage are different.) consignee may refuse delivery and he can claim damages. While if the several
components are delivered but some of the components arrived in a damaged condition,
Now an important classification of bills is a clean bill of lading so that, since it does not because of that the other components are useless because some of these parts are
indicate that there are any defects in the goods and the goods arrived in a good damaged, then again consignee can refuse to delivery and claim damages.
condition, then that will be sufficient basis for claiming that the shipping company is
liable because it took delivery of goods in good condition. Art. 356. Carriers may refuse to accept the packages which may appear unfit
for transportation; and if the conveyance is to be made by railway and the
shipment is insisted on, the company shall carry them, being exempt from all
GOODS responsibility if its objection is so stated in the bill of lading.
Art. 357. If by well-founded suspicions of the falsity in the declaration of the Art. 366. Within the twenty-four hours following the receipt of the
contents of a package, the carrier decides to examine it, he shall make his merchandise, a claim may be brought against the carrier on account of
investigation in the presence of witnesses, with the assistance of the shipper damage or average found therein on opening the packages, provided that the
or consignee. signs of the damage or average giving rise to the claim may not be known
from the exterior part of the packages, and in case that they may be so
Should the shipper or consignee who had to be notified to not appear, the ascertained, said claim shall only be admitted at the time of the receipt of the
examination shall be made before a notary who shall write the memorandum packages.
of the result of the examination, for such purposes which may be proper.
After the periods mentioned have elapsed, or after the transportation charges
Should the declaration of the shipper appear to be true, the expenses have been paid, no claim whatsoever shall be admitted against the carrier with
occasioned by the examination and by the careful repacking of the said regard to the condition in which the goods transported were delivered.
package shall be paid by the carrier, and, in a a contrary case, by the shipper.
Now If the common carrier is suspicious as to the actual content of the package, that it Article 366: According to this, if it is evident from the external appearance of the
might contain shabu, it can order an inspection. If it turns out it was correct, then the package that the goods were damaged, then a claim should be filed upon delivery,
owner will pay for expenses. If it turns out he was wrong, then he (common carrier) otherwise the action will be barred. Now but if it is not apparent from the external
will shoulder the expenses for the inspection. Now if the cargoes were shipped to appearance of the packages, then after 24 hours from receipt you should file a claim. If
several vessels, they arrived in damaged condition, the last vessel would be liable but you do not file the claim, that claim will be barred.
without prejudice to the right to go after the vessel actually responsible for the damages
to the goods. Now what the Supreme Court did in its decision in Santiago(?) was that it applied
Article 366 to international shipping of cargoes, even if the COGSA expressly provides
Art. 363. xxx The carrier shall be obliged to deliver the goods transported in that it isnt required. Now thats why I think that the article and the COGSA could be
the same condition in which, according to the bill of lading, they were found at
the time they were received, without any damage or impairment, and should reconciled, and the way to do it would be to apply the COGSA to international
he not do so, he shall be obliged to pay the goods not delivered at the point shipping of goods and to apply Article 366 to domestic or interisland shipping of goods.
where they should have been delivered and at the time the delibery should See table below for comparison between Article 366 and COGSA.
have been made.
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Now operators are now registered in the Maritime Industry Authority. There was a Where the shipowner fails to overcome the presumption of
case, somebody entered a deed of sale selling a hanker(?) to the buyer. Now the buyer negligence, the doctrine cannot be applied.
does not get to pay in full. Therefore, they had an agreement that the buyer will not Philamgen v. CA: In such case, the Civil Code provisions
register in his name until he completed payment. In violation of that, he registered on common carries will apply.
under his name. He failed to pay, so that the mortgagee was going to foreclose, so the Manila Steamship v. Abdulhaman: The hypothecary nature
seller now couldnt get it back. But the court said that though it was registered in the will not apply when the shipowner is personally at fault due
name of the buyer, the mortgagee had the right to rely in good faith in the certificate of to lack of proper equipment, or lack of proper technical
registration so he foreclosed the mortgage. training of the officers and crew.
o Repairs of vessels
Government v. Insular Maritime: The rule does not apply in
SHIP OWNER & SHIPPING AGENT cases where the liability was for repairs on the vessel which
were completed before her loss.
Art. 586. The shipowner and the ship agent shall be civilly liable for the acts of o Vessel was made a collateral
the captain and for the obligations contracted by the latter to repair, equip, Allied Bank v. Cheng Yong: When the vessel sank before
and provision the vessel, provided the creditor proves that the amount the chattel mortgage could be foreclosed, uninsured as it is,
claimed was invested therein.
the loss must be borne by the mortgagors.
o To the extent covered by insurance
By ship agent is understood the person intrusted with the provisioning of a
vessel, or who represents her in the port in which she may be found. Vasquez v. CA: If the vessel at fault sinks but it is insured,
the insurance takes the place of such vessel. Hence, liability
Art. 587. The ship agent shall also be civilly liable for the indemnities in favor subsits, but only to the extent of the insurance proceeds. The
of third persons which arise from the conduct of the captain in the vigilance excess is still hypothecary in nature.
over the goods which the vessel carried; but he may exempt himself therefrom o Liabilities under the Labor Code
by abandoning the vessel with all her equipment and the freight he may have
Abueg v. San Diego: Workmens compensation is an
earned during the voyage.
exception to the hypothecary nature of maritime
Hypothecary nature of maritime transactions the liability of the owner of transactions.
the vessel is limited to the vessel itself. If the vessel sinks, generally, the
Art. 588. Neither the shipowner nor the ship agent shall be liable for the
liability of the owner is extinguished, although he may have other properties. obligations contracted by the captain if the latter exceed his powers and
o Aboitiz v. CA: Under the doctrine of limited liability, the privileges pertaining to him by reason of his position or conferred upon him
shipowner or ship agents liability is merely co-extensive with his by the former.
interest in the vessel, such that a total loss thereof results in its
extinction. Art. 826. If a vessel should collide with another, through the fault, negligence,
o Chua v. IAC: The extent of the interest of the shipowner or ship or want of skill of the captain, sailing mate, or any other member of the
complement, the owner of the vessel at fault shall indemnify the damages
agent extends to: freightage, insurance proceeds, the vessel itself, and suffered, after an expert appraisal.
equipment.
Exceptions to the hypothecary nature The ship owner and the shipping agent are liable in the following cases:
o Where the shipowner is at fault (including concurring negligence of 1) under Article 586, they are liable for the acts of the captain.
the shipowner and the captain) 2) under Article 586, they are liable for contracts entered into by the captain for
Aboitiz v. New India: Where the ship sank because it was the repair of the vessel or provisioning of the vessel or equipping of the vessel
unseaworthy, the doctrine of limited liability cannot apply.
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3) under Article 587, they are liable for damages because of the conduct of the Now, there are exceptions to that. First, repairs and provisioning made before
captain in the safety of the goods or passengers being transported the loss of the vessel. Why? Because a vessel which has not been repaired, it
4) they are liable under the provision in the code on quasi-delict where the would never have been able to leave, embark on the voyage.
employer is liable for damages for failure to observe diligence of a good father Now if the vessel was insured, then the proceeds of the insured will take the
of the family or supervision of employees by the captain. place of the vessel. Now if suppose several cargo owners filed a case against
5) the shipowner or shipping agent will be liable for damages in case of collision one insured party, he cannot collect, because he must wait until all lawsuits
due to the fault of the captain. and all the claims against the insured party is decided with finality. Then the
money will be divided pro rata among all the waiting claimants. If you allow
Now there was a case where a Russian vessel was docked in a harbor. A harbor the first one to collect and be paid in full, the others may not get anything.
pilot took over to steer the vessel, but then it rammed against the harbor. And You should wait until everything has been decided will be divided pro rata
the government was running after the owner of the vessel, and claimed for among the winners.
damages. The company argued that the one steering the vessel was not a If somebody chartered vessels, they are both chartered. One of the vessels with
member of the crew, but a harbor pilot. But the court said, the captain the lack of charter sank, I think that it tilted to one side. There might have
retained control of the vessel, although the one steering was the harbor pilot. been uneven distribution of the cargo, it sank. So the ship owner sued him for
He had seen the harbor pilot change course, it was inevitably rammed against the value of the vessel. His defense, limited liability provisions...the court said
the harbor, so he should have intervened or warned the pilot. no, that only applies to the ship owner it doesnt apply to the charterer.
The provisions in the Code of Commerce on contract of employment are not
applicable over the provisions of the Labor Code, as well as the provisions of CHARTER PARTY (We miss you Atty. Palacios! L)
the Overseas Employment Act. Charter party is a contract by virtue of which the owner or the agent of the
Since time immemorial, the rule is that if the vessel sinks, the liability of the vessel leases for a certain price of the whole or a portion of the vessel for the
ship owner is extinguished. Liability attaches the thing, the res and therefore if transportation of goods or persons from one part to another.
it should sink, there is no res to which the liability is attached. Liability does Demurrage is an amount stipulated in the charter party to be paid by the
not attach to the owner, rather it attaches to the thing, the vessel. charterer or shipper to the shipowner for any delay in the sailing of his ship
But the ship owner himself must be at fault. It is not sufficient that the captain Primage is an amount stipulated in the charter party to be paid by the
is at fault. Where a captain was negligent, the liability of the ship owners was charterer or shipper as compensation to the captain or master for his particular
not extinguished because under the Civil Code, there was negligence in the care of the goods.
selection and supervision of the captain. We dont apply the Civil Code here Many of the terms in commercial law originated from Italy when Italy was the
because theres an express provision of the Code of Commerce. But the point center of commerce like the credit and debit and likewise, the charter party.
is that the ship owner shall be at fault, like in the Pagbilawan case the vessel The phrase charter party came from the Italian phrase carta partita a
sank and it did not have enough lifeboats (di na natuto sa Titanic!!!), and the divided contract. When a ship owner would lease his vessel to somebody,
captain and crew did not pass the licensure examination. the terms and provisions of the contract would be written twice on a piece of
Ill give you one example where space in the boat is cheapest especially for paper and the paper would be cut in the middle one will be given to the ship
poor people down south. That boat was overloaded and the owner knew what owner, and one will be given to the charterer.
was happening and he allowed it. In fact, the departure to be delayed so they
can take in more and more passengers. When you talk of the ship owner being Basic types of charter party
at fault, it contemplates a situation in which the vessel is not seaworthy. 1. bareboat charter
There, the liability was not extinguished. Now, in the vessel of Aboitiz 2. contract of affreightment
shipping, when it sank, the court said it was not seaworthy, therefore the a. time charter
liability of the ship owner was not extinguished. b. voyage charter
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1. bareboat charter. it is not a charter party which is a bareboat charter, it is a voyage charter
The ship owner delivers the boat to the charterer, who now undertakes to therefore the one liable would be the ship owner.
provide the crew, provisions, the fuel, food for the duration of the charter
party. The charterer becomes the owner pro hac vice. PROTEST
o Pro hac vice is a Latin term for for this occasion.
During the time, he has the powers and authorities of the shipowner. He is Maritime protest is the written statement made by the master of a vessel or any
entitled to choose the crew and the one who orders the crew. He is the one authorized officer, attested by proper officer or a notary, to the effect that damages has
who pays for their salary. If cargoes are lost, he will be the one liable not the been suffered by the ship. (Sundiang, citing Aquino)
ship owner. And if the vessel is a common carrier, it becomes a private carrier
in his possession. Now a protest must be made in 4 instances:
o Planters v. CA: Under a bareboat charter, by the terms of which, the 1) general average
whole vessel is let to the charterer, with a transfer to him of its entire 2) collision
command and possession and subsequent control over its navigation, 3) arrival under stress
including the master and crew, who are his servants. 4) shipwreck
Now if the charterer did not pay the ship owner, the ship owner cannot run
after the cargo owners and say I have a lien over your goods for payment of AVERAGE
charter fee because there is no privity of contract between the shipowner and Now the average, two types: the particular average and the general average. In the
the owners of cargo. particular average, loss or damage incurred but there was no common danger to persons
interested in the cargoes. Now general average, there are 4 prerequisites:
2. contract of affreightment a. common danger to the vessel and cargo.
Under a contract of affreightment, the shipping space on a vessel is leased by In the case of Magsaysay v. Agan, the vessel got stranded in the shore
the shipowner, in part or as a whole, to carry goods for others. of the river. Expenses were incurred to refloat it and the ship owner
o Planters v. CA: Under a contract of affreightment, the charter party wanted to claim contribution from the owners of the cargo because
provides for the hire of vessel only, with the shipowner supplying the there was no general average, there was no danger to which the
ships store, payment for the wages of the master and the crew, and vessel was exposed. The court said that is not general average but
the defrayment of expenses for the maintenance of the ship. caused by negligence.
o NFA v. CA: Under such contract, the shipowner retains the b. common safety part of the vessel or cargo is deliberately sacrificed
possession, command, and navigation of the ship, the charter or c. there should be success in saving the vessel and cargo
freighter merely having use of the space in the vessel in return for his d. Lastly, damages should have been incurred after taking the legal steps. That
payment of charter hire. should have been entered in the logbook, the captain should have called the
Types of contract of affreightment: crew, gather officers, if the cargo owners aboard, they ought to be consulted.
o Time charter the ship is leased for a specified period of time
o Voyage charter the ship is leased for a single voyage COLLISIONS
o In time charter and voyage charter, the owner remains in control of Then you have collisions. The liability determined by the provisions on the
the vessel and therefore, it is operated as a common carrier. The ship Code of Commerce on maritime tort will not apply to provisions of the Civil
owner will be liable for loss of cargo or damage of cargo. Code. Likewise, you should not apply the principle of comparative fault. If
There was a case where Caltex chartered the oil tanker it was a voyage two buses collided, the one who had the last clear chance to avoid the accident
charter. It collided with a vessel, the Don Juan. The shipping line figured out to would be liable to the other. Now in maritime commerce you will not apply
better sue someone with deeper pockets, they sued Caltex. The court said that the Civil Code on comparative fault. In civil law, if the fault of one of the
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guilty parties is greater than the fault of the other, then that guilty party will c. Vessel at fault not knownapply the doctrine of inscrutable fault
have greater share in the computation of the damages. (both vessels at fault)
If two vessels collided and one vessel is at fault, it will then shoulder its own d. Third vessel at faultapply the rule where one vessel is at fault
loss, and it will be liable for the other vessel; it will be liable for damages to the e. Fortuitous eventno liability. Each bears its own loss
cargo onboard both vessels. The second situation, if both vessels are at fault,
each one will bear its own loss and they will jointly be liable to the owners of Art. 829 of the Code of Commerce: after collision, the captain of the innocent
the cargo onboard both vessels. vessel must file a marine protest within 24 hours upon reaching the nearest port.
There was a case that the vessel was pursuing the wrong route and then they Failure to do so bars recovery, no matter how meritorious the case is. But the
collided with another vessel. But the other vessel did not promptly take failure to file the marine protest on time will not prejudice the cargo owners,
action, it only started to take action when collision was already inevitable. The the innocent vessel that does not have a buque (i.e., it is without a deck), and
court said, both vessels are at fault for inaction and ship owners who are guilty small crafts in bay or river traffic.
should be liable to the cargo owners.
Doctrine of inscrutable fault: Suppose you cannot determine who is at fault, ARRIVAL UNDER STRESS
you apply the same rule: both parties are at fault, the so-called principle of It is the arival of the vessel at the nearest and most convenient port, if during
inscrutable fault. Inscrutable, you cannot determine who is at fault. the voyage the vessel cannot continue the trip due to lack of provisions; well
If three vessels collided and it is the fault of one of them, the one at fault will founded fear of seizure, privateers, or pirates; or by any accident of the sea
bear its own loss and will be liable for damages to two other vessels, and will disabling it to navigate.
be liable to the cargo owners of the three vessels. Of course, if the captain cannot make the protest because of a fortuitous event,
Then if a vessel collided through a fortuitous event, everybody bears their that is excusable. Like he was injured and was in the hospital, so he is not in a
losses. And finally, if two vessels that are properly anchored or moored, but condition to make the protest.
they collided, everyone will bear its own loss.
January 15, 2015 (JG)
From CLV:
General rule on collision: The guilty vessel must pay for the damage caused by CARRIAGE OF GOODS BY SEA ACT (COGSA)
the collision
Section 1. That the provisions of Public Act No. 521 of the 7th Congress of the
o Except: if the guilty vessel sinks because of its hypothecary nature United States, approved on April 16, 1936, be accepted, as it is hereby
o Exception to the exception: Manila Steamship v. Abdulhaman, accepted to be made applicable to all contracts for the carriage of goods by
where the hypothecary nature will not apply when the shipowner is sea to and from Philippine ports in foreign trade: Provided, that nothing in this
personally at fault due to Act shall be construed as repealing any existing provision of the Code of
Lack of proper equipment Commerce which is now in force, or as limiting its application.
Lack of training
TITLE I, Sec. 1. When used in this Act
Five cases covered by collision and allision (a) The term "carrier" includes the owner or the charterer who enters into
a. One vessel at faultsuch vessel is liable for damage caused to a contract of carriage with a shipper.
innocent vessel, as well as damages suffered by the owners of cargo of (b) The term "contract of carriage" applies only to contracts of carriage
both vessels. by covered by a bill of lading or any similar document of title, insofar
Note the exception, and exception to exception as such document relates to the carriage of goods by sea, including
b. Both vessels at faulteach vessel must bear its own loss, but the any bill of lading or any similar document as aforesaid issued under
or pursuant to a character party from the moment at which such bill of
shippers of both vessels may go against the ship owners, who will be lading or similar document of title regulates the relations between a
solidarily liable carrier and a holder of the same.
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(c) The term "goods" includes goods, wares, merchandise, and articles the goods has at the time of their receipt been the subject of a joint survey
of every kind whatsoever, except live animals and cargo which by the inspection. In the case of any actual or apprehended loss or damage, the
contract of carriage is stated as being carried on deck and is so carrier and the receiver shall give all reasonable facilities to each other for
carried. inspecting and tallying the goods.
(d) The term "ship" means any vessel used for the carriage of goods by
sea. In any event the carrier and the ship shall be discharged from all liability in
(e) The term "carriage of goods" covers the period from the time when respect of loss or damage unless suit is brought within one year after delivery
the goods are loaded to the time when they are discharged from the of the goods or the date when the goods should have been delivered:
ship. Provided, 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
COGSA applies in international transportation of goods by sea. goods or the date when the goods should have been delivered.
If goods are to be transshipped, the COGSA applies.
For example, equipment was imported from the US. The vessel of American ONE-YEAR PRESCRIPTIVE PERIOD
President Lines carried the equipment from San Francisco to Manila. Then it According to jurisprudence, the COGSA will only apply
was transferred to a vessel of Sulpicio Lines, which brought it to Cebu, the 1. Non-delivery, or if the goods were not delivered
final destination. The COGSA will apply to that portion of the shipment 2. They were delivered, but they were damaged
because COGSA applies until the final destination.
How do you count the one-year period?
An arrastre operator cannot invoke the provisions of COGSA. Lets say the goods were being delivered over a period of 3 days. On Monday,
The one-year prescriptive period (see below) cannot be invoked by an arrastre the vessel starts delivering the cargo, and it was finished by Wednesday. So the
operator, because he is not engaged in international shipping. one-year period will be counted from Thursday.
Likewise, if a customs broker obtained the release of goods imported by his Likewise, if the goods were not delivered, then you consider the last day that
customer and the goods were damaged while he was bringing them to the the shipping company had the opportunity to deliver the goods.
premises, he cannot invoke the prescriptive period in the COGSA. o For example, the goods were supposed to be delivered on Monday,
and it should have reached the destination on Wednesday. But, the
However, while this law deals with the international shipment of goods, it is not vessal only departed on Wednesday afternoon. You start counting
prohibited by public policy for parties in domestic shipping or inter-island shipping to from Thursday, the day after the day when the goods should have
stipulate that the COGSA will apply to domestic shipping or inter-island shipping. been delivered.
The two main features of this law are: In the Civil Code, a written demand will interrupt the running of the prescriptive
1. The one-year prescriptive period; and period. That does NOT apply to COGSA.
2. The limitation of liability up to $500 per package. A written demand will not suspend the running of the one-year prescriptive
period, because it is a matter of public policy and interest that claims involving
Sec. 3 xxx Unless notice of the loss or damage and the general nature of such carriage of goods should be decided and adjudicated as soon as possible.
loss or damage be given in writing to the carrier or his agent at the port of
discharge 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
Atty. Tesoro: The 1-year prescriptive period is interrupted in the following cases:
removal shall be prima facie evidence of the delivery by the carrier of the a. in case an action has already been filed in court;
goods as described in the bill of lading. If the loss or damage is not apparent, b. when there is an express agreement that an extrajudicial claim for
the notice must be given within 3 days of delivery. Such notice of loss or damages will suspend the running of the prescriptive period for in
damage may be endorsed upon the receipt for the goods given by the person such a case, their agreement becomes the law for them.
taking delivery thereof. The notice in writing need not be given if the state of
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This period can be extended by agreement of the parties. Comparison of COGSA and Art. 366 of the Code of Commerce
For example, a consignee filed a claim. The shipping company said, Please COGSA Art. 366
hold the filing of the case. Were investigating your claim. Were looking into Where applicable International trade Inter-island trade
it. Just give us more time. They can agree to extend the one-year period. Period to file claim Apparent at the time of Apparent immediately
with the carrier receipt/discharge of goods
The COGSA applies to cases of non-delivery of goods and delivery of goods in damaged Latent within 24 hours
condition. It does not apply in cases of misdelivery. Latent within 3 days of from delivery
If the Power Rangers want to eat smores, they say, Its Smorephin time! delivery
The court has said, it is a case of misdelivery where the goods were delivered Period to file suit Within one year after delivery If theres a bill of lading
to a third party, and not the consignee. So what will apply will be the Civil with the court or the date when the goods 10 years (written contract)
Code for the actions based on a written contract you have 10 years under should have been delivered
Art. 1144; if youre suing for quasi-delict - 6 years. No bill of lading 6 years
In one case, where someone imported sweaters and jackets which were (oral contract)
supposed to be for sale in time for winter. But they were delivered after Is filing a claim with No. Failure to notify the Yes.
winter. So the importer-retailer had to sell at a big discount during spring the carrier a carrier does not prejudice the
time. It now sued the shipping company. The shipping company invoked a condition right of the shipper to bring
defense that the action was filed out of time. The court said no, what is precedent? suit
involved here is delay. The COGSA does not apply to claim for damages Effect of Does not toll the prescriptive Tolls the prescriptive
because of delay. Instead, you apply again the Civil Code: 10 years if youre extrajudicial written period. The Civil Code does period
suing based on contract; 6 years for quasi-delict. demand not apply.
o Non-delivery does not apply, because the goods were eventually
delivered. Non-delivery implies that the goods were never delivered. LIMITATION OF LIABILITY UNDER COGSA
There are conflicting decisions in case of insurance. Neither the carrier nor the ship shall in any event be or become liable for any
First View: In most cases, the consignee will not bother to sue the shipping 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
company. He will just file a claim with the insurance company that issued the
in case of goods not shipped in packages, per customary freight unit, or the
marine insurance policy. Remember when an insurance company pays, it equivalent of that sum in other currency, unless the nature and value of such
becomes subrogated to the rights of the insured and because of that whatever goods have been declared by the shipper before shipment and inserted in the
defenses could be invoked against the insured could be invoked against the bill of lading. This declaration, if embodied in the bill of lading, shall be prima
insurer. So if the action is barred by prescription, that can be invoked against facie evidence, but shall not be conclusive on the carrier.
the insurer. So the Court said, if the insured did not file a case within one-
By agreement between the carrier, master or agent of the carrier, and the
year, and as a result the insurer cannot recover because of prescription, then it
shipper, another maximum amount than that mentioned in this paragraph may
follows that the insurance company should not be held liable. Because the be fixed: Provided, that such maximum shall not be less than the figure above
insurers right to be indemnified was prejudiced because of default of the named. In no event shall the carrier be liable for more than the amount of
insured he did not file the case on time. So his right to be subrogated was damage actually sustained.
prejudiced. (Jack agrees with this view)
Second View: But in another case, the court said the act against the insurer is Neither the carrier nor the ship shall be responsible in any event for loss or
damage to or in connection with the transportation of the goods if the nature
based on a written contract, so it must be 10 years.
or value thereof has been knowingly and fraudulently misstated by the shipper
I think the better one is the first one. Jack in the bill of lading.
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The second main feature is the limitation of liability up to $500 per package. For the
cargoes, it must be per package, not per container van.
In the Aboitiz case, the court said, its valid for the parties to stipulate that the
liability will be less than $500.
On the other hand, the law also provides that the shipping company may be
held liable for more than $500 if the bill of lading indicated the nature of the
goods, and indicated the value, and the value given is more than $500.
o But the court has said, that the Bill of Lading itself must indicate that
the value is more than $500. Because in one case, the Bill of Lading
contained a statement that according to the letter of credit, the value
of the goods is so much. The court said that is not compliant with
the law. The Bill of Lading must say its worth $700.
End! Congrats! On
to graduation and
bar review J

Final Commpilation

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A2015 | Updated Commpilation of Commercial Law Review Transcripts and Notes | Atty.

Jacinto Jimenez Page 1

Treasury warrants and money orders are not bills of exchange.

Stop payment due to fraud SC case, no title mentioned:

Evergreen Clause #edsheeran #thinkingoutloud #srsly

Sec. 31. Liability of directors, trustees or officers. - Directors or trustees who

Sec. 77. Stockholder's or member's approval. - Upon approval by majority vote

2. Special preferred credits (two-tiered!)

f. Philconsa case: Philconsa obtained a loan from the consortium of funds in

A. Secrecy of Bank Transactions

1. The disclosure to an authorized person is permitted.

1. AMLA (Same as Confidentiality of Banking Transactions of Peso Deposits)

But in Matibag case: SC made distinctions the policy provided

4. Where a credit term was agreed upon Different kinds of agents:

o Devices adopted to temper the harshness of the forfeiture of benefits of a

e) Land transportation operator means the owner or owners of motor

Evidence as to numbers and types of valid and justifiable complaints to

J SEC. 251. It is unlawful to:

Sec. 24. Prior Art. - Prior art shall consist of:

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