2016 University of the Philippines

College of Law
Bar Reviewer

Academics Committee Heads

Evert Callueng
Paulo Faustino
Carlos Hernandez
Audrey Ng
Desiree Sokoken

3RD WEEK

MERCANTILE
LAW

UP Law Bar Operations Commission 2016

UP Law Bar Operations Commission 2016
 UP LAW
BAR OPS 2016
 Table of Contents
CREDIT TRANSACTIONS 1 E.3. Satisfaction of lien by sale 8
E.4. At any time before the goods are so
I. LETTERS OF CREDIT (L/C) 2 sold 9
E.5. Effect of sale 9
A. Definition and Nature of Letter of Credit 2 E.6. Other methods of enforcing lien 9
A.1 Definition 2 E.7. How lien may be lost 9
A.2 Purpose 2 E.8. Lien does not preclude other
A.3. Essential Requisites of Letters of remedies 9
Credit 2
A.4. Nature 2 NEGOTIABLE INSTRUMENTS LAW 10
A.5. Duration of Letters of Credit 2
A.6. Types of letters of credit 3 I. DEFINITION 11
B. Parties to a Letter of Credit 3
B.1. Rights and Obligations of the Parties 3 A. Definition and Purpose 11
C. Basic Principles of Letter of Credit 4
C.1. Doctrine of Independence 4 II. FORMS AND INTERPRETATION 12
C.2. Fraud Exception Principle 4
C.3. Doctrine of Strict Compliance 5 A. Requisites of Negotiability 12
A.1. In writing and signed by the maker or
II. TRUST RECEIPTS LAW [PD 115 (1973)] 5 drawer 12
A.2. Containing an unconditional promise
A. Definition/Concept of a Trust Receipt to pay or order to pay a sum certain in
Transaction 5 money 12
A.1. Loan/Security Feature 6 A.3. Payable on demand, or at a fixed or
A.2. Ownership of the Goods, Documents determinable future time 14
and Instruments Under a Trust Receipt 6 A.4. Payable to order or to bearer 15
B. Rights of the Entruster 6 A.5. Drawee must be named or
B.1. Validity of the Security Interest As designated with reasonable certainty 16
Against the Creditors of the B. Determination of Negotiability 16
Entrustee/Innocent Purchasers For Value 6
C. Obligation and Liability of the Entrustee 7 III. KINDS OF NEGOTIABLE INSTRUMENTS 17
C.1. Payment/Delivery of Proceeds of Sale
or Disposition of Goods, Documents or A. Promissory Note 17
Instruments 7 A.1. Kinds of Promissory Notes 17
C.2. Return of Goods, Documents or B. Bill of Exchange 17
Instruments In Case of Non-Sale 7 B.1. Kinds of bills of exchange 18
C.3. Liability For Loss of Goods, B.2. Instances when a bill of exchange
Documents or Instruments 7 may be treated as a promissory note 18
C.4. Penal Sanction If Offender is a
Corporation 7 IV. COMPLETION AND DELIVERY 19
D. Remedies Available 7
D.1. Upon default or failure of the A. Steps in the Execution Of Negotiable
entrustee to comply with the terms and Instruments 19
conditions 7 B. Insertion of Date 19
D.2. In case of failure to turn over the C. Effect of Ante-Dating and Post-Dating 19
proceeds of the sale, or failure to return in D. Completion of Blanks 19
case of non-sale 8 E. Incomplete and Undelivered
E. Warehousemans Lien 8 Instruments 19
E.1. Claims included in the F. Complete and Undelivered
warehousemans lien 8 Instruments 20
E.2. Against what property the lien may G. Incomplete and Delivered Instruments 20
be enforced 8 H. Complete And Delivered Instruments 20
UP LAW BOC TABLE OF CONTENTS MERCANTILE LAW

V. SIGNATURE 22 B.6. Holder not in due course 39

C. Defenses Against the Holder 39
A. Signing in Trade Name 22
B. Signature of Agent 22 X. LIABILITIES OF PARTIES 40
B.1. Liability of an agent 22
C. Signature Per Procuration 22 A. Parties Primarily Liable 40
D. Indorsement by Minor or Corporation 23 A.1. Maker 40
F. Forgery 23 A.2. Acceptor 40
F.1 Persons precluded from setting up B. Parties Secondarily Liable 40
defense of forgery 23 B.1. Drawer 41
F.2 Rules on forgery 23 B.2. Indorsers 41
G. Acceptance and Payment under Mistake 26 B.3. Order of liability among Indorsers 42

VI. CONSIDERATION 28 XI. WARRANTIES 42

A. Makers Warranties 42
A. Who is a Holder for Value (HFV)? 28 B. Drawers Warranties 42
B. Burden of Proof - Presumption of C. Acceptors Warranties 42
Consideration 28 D. General Indorsers Warranties 43
C. Effect Of Want Of Consideration 28 E. Qualified Indorsers Warranties 43

VII. ACCOMMODATION PARTY 29 XII. PRESENTMENT FOR PAYMENT 43

A. Liability of an Accommodation Party 29
B. Accommodation Party as Surety 29 A. Presentment; Meaning 43
B. Date and Time of Presentment 43
VIII. NEGOTIATION 30 C. Necessity of Presentment for Payment 44
D. Parties to Whom Presentment for
A. Negotiation Distinguished from Payment Should Be Made 44
Assignment 30 E. Dispensation with Presentment for
B. Modes of Negotiation 30 Payment 44
B.1. By delivery if payable to bearer 30 F. Dishonor By Non-Payment 44
B.2. by indorsement completed by
delivery if payable to order 31 XIII. NOTICE OF DISHONOR 45
C. Kinds of Indorsement 31
C.1. As to manner of future method of A. Parties to Be Notified 45
negotiation 32 A.1. To whom in general 45
C.2. As to title transferred 32 A.2. If given by agent 45
C.3. As to kind of liability assumed by A.3. If party is dead 45
indorser 33 A.4. To partners 45
C.4. As to presence/absence of express A.5. To joint parties 45
limitations 33 A.6. To bankrupt 45
C.5. Other kinds of indorsement 34 B. When Given 45
C. When Not Necessary to Give to Drawer 45
IX. RIGHTS OF THE HOLDER 34 D. When Not Necessary to Give to Indorser 46
E. Who Will Benefit 46
A. Definition of a Holder 34 F. Parties Who May Give Notice of Dishonor 46
A.1. Rights of a holder 34 F.1. Who should give 46
B. Holder in Due Course [HDC] 35 G. Effect of Notice 46
B.1. Who are holders in due course 35 H. Form of Notice 46
B.2. The significance of due course I. Waiver 47
holding 35 J. Dispensation with Notice 47
B.3. Rights of a holder in due course 36 K. Effect of Failure to Give Notice 47
B.4. Requisites of a holder in due course 36
B.5. Presumption in favor of due course XIV. DISCHARGE OF NEGOTIABLE
holding 39 INSTRUMENT 47

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C. Effects 56
A. Discharge of Negotiable Instrument 47 D. Presentment for Payment 57
B. By Payment in Due Course 47 D.1. Time 57
C. By Intentional Cancellation 48 E. Effect Of Delay 57
D. By Other Acts That Discharge a Simple
Contract 48 INSURANCE 58
E. By Reacquisition of Principal Debtor in
His Own Right 49 I. CONCEPT OF INSURANCE 59
F. By Material Alteration 49
G. Discharge of Parties Secondarily Liable 49 A. Contract of Insurance 59
H. Right of Party Who Discharged A.1. Definition 59
Instrument 50 A.2. Form 59
I. Renunciation By Holder 50 A.3. Insurance and gambling
distinguished 59
XV. MATERIAL ALTERATION 51 B. Doing or Transacting Insurance Business 60
C. Governing law 60
A. Concept 51 D. Parties to an Insurance Contract 60
B. Changes in the Following Constitute E. Bancassurance 61
Material Alterations 51 F. Pre-need plans 61
C. Effect of Material Alteration 51
II. ELEMENTS OF AN INSURANCE
XVI. ACCEPTANCE 52 CONTRACT 62

A. Definition 52 A. In General 62
B. Requisites 52 B. Subject Matter 62
C. Kinds of Acceptance 52 C. Cause and Risk of Loss or Damage 62
D. Proof of acceptance 52 D. Consideration 62
E. Manner 52 E. Risk-Distributing Scheme 62
E.1. Express acceptance 52 F. Meeting of the Minds 62
E.2. Implied acceptance 52
F. Time for Acceptance 52 III. CHARACTERISTICS OF AN INSURANCE
G. Rules Governing Acceptance 52 CONTRACT 63

XVII. PRESENTMENT FOR ACCEPTANCE 53 A. In General 63

B. Consensual 63
A. Requisites 53 C. Voluntary 63
B. When Presentment for Acceptance D. Aleatory 63
Necessary 53 E. Executory and Unilateral But
C. When Presentment for Acceptance Synallagmatic 63
Excused 53 F. Conditional 63
D. Time/Place/Manner of Presentment 54 G. Contract of Indemnity (For Non-Life
D.1. When Made 54 Insurance) 64
E. What Constitutes Sufficient H. Contract of Adhesion (Fine Print Rule) 64
Presentment? 54 I. Personal Contract 64
F. How Made 54 J. Property (For Life Insurance) 64
G. Effect of Failure to Make Presentment 54 K. Uberrimae Fides Contract 64
H. Dishonor by Non-Acceptance 54
IV. CLASSES OF INSURANCE 65
XVIII. PROMISSORY NOTES 55
A. Marine Insurance 65
XIX. CHECKS 56 A.1. Definition 65
A.2. Divisions 65
A. Definition 56 A.3. Bottomry and respondentia
B. Kinds 56 distinguished 66

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A.4. Risks 66 VI. PERFECTION OF THE INSURANCE

A.4.A. Perils of the sea 66 CONTRACT 84
A.4.B. Perils of the ship 66
A.5. Loss 66 A. Offer and Acceptance/Consensual 84
A.6. Abandonment 67 B. Premium payment 84
A.7. Average 68 B.1. Authority of agent to receive
B. Fire insurance 69 premium 85
B.1. Definition 69 B.2. Payment by post-dated check 85
B.2. Risks 70 B.3. Non-payment of premium 85
B.3. Alterations in use or condition 70 B.4. Excuses for non-payment 86
B.4. Measure of indemnity 70 C. Cover-Notes 86
C. Casualty Insurance 71 D. Non-Default Options in Life Insurance 86
C.1. Definition 71 D.1. Cash surrender value (CSV) 86
C.2. Intentional and accidental injury D.2. Alternative to CSV 87
distinguished 71 E. Reinstatement of a Lapsed Life Insurance
C.3. Divisions 71 Policy 87
D. Suretyship 72 F. Refund of premiums 87
E. Life Insurance 72
E.1. Definition 72 VII. RESCISSION OF INSURANCE
E.2. Types 73 CONTRACTS 88
E.3. Examples of life insurance policies 74
E.4. Risks 74 A.1. Proof of fraud in concealment 88
F. Compulsory Motor Vehicle Liability A.2. Test of materiality 88
Insurance 75 A.3. Effects 89
A.4. Concealment in marine and ordinary
V. INSURABLE INTEREST 76 private insurance distinguished 89
A.5. Concealment in non-medical
A. In General 76 insurance 89
A.1. When insurable interest should exist 77 A.6. Matters which must be disclosed
A.2. Change of interest 77 even in the absence of inquiry 90
B. In Life/Health insurance 77 A.7. Matters which need not be disclosed 90
B.1. In life insurance 78 B. Misrepresentation/omissions 90
B.2. Interest in health insurance 79 B.1. Kinds of representations 90
B.3. Transfer of policy 79 B.2. Test of materiality 91
C. In Property Insurance 79 B.3. Effects 91
C. 1. Time of existence 80 C. Breach of Warranties 92
C.2. Transfer of policy 80 C.1. Warranties, riders, and endorsements 92
C.3. Measure of indemnity 80 C.2. Kinds of warranties 93
C.4. Interest in property and life C.3. Effect 93
distinguished 80
D. Double and Over Insurance; Reinsurance 81 VIII. CLAIMS SETTLEMENT AND
D.1. Double insurance 81 SUBROGATION 94
D.2. Rules for payment 81
D.3. Double and over insurance A. Concept of Loss 94
distinguished 82 A.1. Causes of loss 94
D.4. Reinsurance 82 A.2. Liability for loss 94
D.5. Double insurance and reinsurance B. Notice and Proof of Loss 94
distinguished 82 B.1. Notice of loss 94
E. Multiple or Several Interests on Same B.2. Proof of Loss 95
Property 82 C. Guidelines on Claims Settlement 96
E.1. Open loss payable mortgage clause 83 C.1. Unfair claims settlement; sanctions 97
E.2. Union mortgage or standard C.2. Prescription of action 97
mortgage clause 83
IX. INSURANCE COMMISSIONER 98

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A. Jurisdiction and Adjudicatory Powers 98 B. Limitation of Liability 132

B. Revocation of Certificate of Authority 99 C. Willful misconduct 133
C. Liquidation of Insurance Company 99 D. Jurisdiction 134

TRANSPORTATION LAW 58 CORPORATION CODE 135

I. CORPORATION 136
I. COMMON CARRIERS 101
A. Definition 136
A. Concept 101 B. Attributes of the Corporation 136
B. Diligence Required 103
C. Liabilities 104 II. CLASSES OF CORPORATIONS 137

II. VIGILANCE OVER GOODS 104 A. Stock Corporation 137

B. Non-Stock Corporation 137
A. Liability, in General 104 C. Other Corporations 137
B. Exempting Causes 104
C. Contributory Negligence 107 III. NATIONALITY OF CORPORATIONS 140
D. Duration of Extraordinary Responsibility
for Goods 107 A. Place of Incorporation Test 140
E. Stipulation for Limitation of Liability 108 B. Control Test 140
F. Liability for baggage of passengers 110 C. Grandfather Rule 141
110
III. SAFETY OF PASSENGERS 112 IV. CORPORATE JURIDICAL PERSONALITY 143
A. Doctrine of Separate Juridical Personality 143
A. Liability, in General 112 B. Doctrine of Piercing the Corporate Veil 144
B. Void Stipulations 112
C. Duration of Liability 112 V. INCORPORATION AND ORGANIZATION 145
D. Liability for Acts of Others 114
E. Contributory Negligence 115 A. Promoter 145
F. Extent of Liability for Damages 115 B. Number and Qualifications of
Incorporators 147
IV. BILL OF LADING 117 C. Corporate Name Limitations on Use of
Corporate Name 147
A. Three-Fold Character 117 D. Corporate Term 148
B. Refusal to Transport 118 E. Minimum Capital Stock and Subscription
C. Delivery of Goods 118 Requirements 148
D. Period for Filing Claims 119 F. Articles of Incorporation 148
E. Period for Filing Actions 120 G. Registration and Issuance of Certificate
of Incorporation 153
V. ADMIRALTY AND MARITIME H. Adoption of By-Laws 154
COMMERCE 121
VI. CORPORATE POWERS 156
A. Charter Parties 121
B. Liability of Ship Owners and Shipping A. General Powers, Theory of General
Agents 122 Capacity 156
C. Accidents and Damages in Maritime B. Specific Powers, Theory of Specific
Commerce 125 Capacity 156
D. Carriage of Goods by Sea Act (COGSA) 129 C. How (Corporate Powers) Exercised 161
D. Trust Fund Doctrine 164
VI. INTERNATIONAL AIR TRANSPORT 132
(The Warsaw Convention) 132

A. Applicability 132

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VII. BOARD OF DIRECTORS AND BANKING 227

TRUSTEES 165
I. THE NEW CENTRAL BANK ACT [RA 7653] 228
A. Doctrine of Centralized Management 165
B. Business Judgment Rule 166 A. State Policies 228
C. Tenure, Qualifications and B. Salient Features 228
Disqualifications of Directors or Trustees 167 C. Creation of the BSP 228
D. Elections 168 C.1. Nature of the BSP 228
E. Removal 169 C.2. Capitalization 228
F. Filling of Vacancies 169 D. Responsibility and Primary Objective 228
G. Compensation [Sec. 30] 169 D.1. Primary Objectives 228
H. Fiduciary Duties and Liability Rules 170 D.2. Other Responsibilities 229
I. Responsibility for Crimes 172 D.3. BSP as transferee of Philippine
J. Inside Information 172 Central Bank powers 229
K. Contracts 173 E. Monetary Board 229
L. Executive Committee 174 F. How the BSP Handles Banks in Distress 230
M. Meetings of BoD 174 F.1. Conservatorship 231
F.2. Closure 232
VIII. STOCKHOLDERS AND MEMBERS 176 F.3. Receivership 233
A. Rights of a Stockholder and Members 176 F.4. Liquidation 234
B. Participation in Management 177 G. How the BSP Handles Exchange Crisis 237
C. Proprietary Rights 182 G.1. Legal Tender Power 237
D. Remedial Rights 187 G.2. Retirement of Old Notes and Coins 237
E. Obligation of a Stockholder 188 G.3. Rate of Exchange 238
F. Meetings 190
II. LAW ON SECRECY OF BANK DEPOSITS
IX. CAPITAL STRUCTURE 192 [RA NO. 1405, AS AMENDED] 238
A. Subscription Agreements 192
B. Consideration for Stocks 193 A. Policy 238
C. Shares of Stock 194 B. Purpose 238
D. Payment of Balance of Subscription 200 C. Prohibited Acts 238
E. Certificate of Stock 201 D. Deposits Covered 239
F. Stock and Transfer Book 204 E. Exceptions 239
G. Disposition and Encumbrance of Shares 204 F. Power of the Ombudsman to Examine
Accounts 240
X. DISSOLUTION AND LIQUIDATION 206 G. Garnishment of Deposits 241
A. Modes of Dissolution 206 H. Confidentiality of Foreign Currency
B. Methods of Liquidation 209 Deposits 241
I. Penalties 241
XI. OTHER CORPORATIONS 211
A. Close Corporations 211
B. Non-Stock Corporations 217 III. GENERAL BANKING LAW OF 2000 [RA
C. Religious Corporations 219 8791] 242
D. Foreign Corporations 220
A. Introduction 242
XVII. MERGERS AND CONSOLIDATIONS 224 A.1. Definition of Banks 242
A. Definition and Concept 224 A.2. Classification of banks 242
B. Constituent vs. Consolidated Corporation 224 A.3. Quasi-Banks and Trust Entities 243
C. Plan of Merger or Consolidation 225 A.4. Deposit Substitutes 243
D. Articles of Merger or Consolidation 225 A.5. Trust Entities 243
E. Procedure 225 A.6 Core Banking Functions 243
F. Effectivity 226 B. Powers of a Commercial Bank 243
G. Limitations 226 C. Distinction of Banks from Quasi-Banks
and Trust Entities 244

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D. Bank Powers and Liabilities 245 E. Cancellation of Patent 264

E. Diligence Required of Banks 248 E.1. Grounds for cancellation of a patent 264
F. Fiduciary Duty 249 E.2. Requirement of the petition 264
G. Nature of Bank Funds and Bank Deposits 250 E.3. Notice of hearing 264
H. Stipulation on Interests 251 E.4. Effect of cancellation of patent or
I. Grant of Loans and Security Requirements claim 264
(Prudential Measures) 251 F. Remedy of the True and Actual Inventor 264
I.1. Ratio of Net Worth to Total Risk G. Rights Conferred by a Patent 265
Assets 251 H. Limitations of Patent Rights 265
I.2. Purpose 251 H.1. Prior user 266
I.3. Effect of Non-compliance 251 H.2. Use by the government 266
I.4. Single Borrowers Limit 251 I. Patent Infringement 267
I.5. Restrictions on Bank Exposure to I.1. Contributory infringer 267
DOSRI (Directors, Officers, Stockholders, I.2. Doctrine of patent exhaustion 267
and their Related Interests) 253 I.3. Tests in patent infringement 267
I.6. Loan-Loss Provisioning 253 I.4. Criminal action for repetition of
I.7. Reserves 254 infringement 268
I.8. PDIC Insurance 254 I.5. Infringement action by foreign
I.9.Equity Investment Limits 255 national 268
I.6. Defenses in action for infringement 268
INTELLECTUAL PROPERTY LAW 256 J. Licensing 269
J.1. Voluntary 269
I. INTELLECTUAL PROPERTY RIGHTS IN J.2. Compulsory 270
GENERAL 257
III. TRADEMARKS 272
A. State Policies 257
B. International Conventions Governing A. Definition of Marks, Collective Marks,
Intellectual Property Rights 257 Trade Names 272
C. Intellectual Property Rights 258 B. Acquisition of Ownership of Mark 273
D. Differences Between Copyrights, C. Acquisition of Ownership of Trade Name 273
Trademarks and Patents 258 D. Non-Registrable Marks 274
D.1. Patentable Inventions 258 D.1. Doctrine of secondary meaning 275
D.2. Trademark 258 E. Prior Use of Mark as a Requirement 275
D.3. Trade Name 258 E.1. Use of mark as a requirement 275
D.4. Copyright 258 E.2. Non-use of mark when excused 275
D.5. Other Forms of Intellectual Property 259 F. Well-Known Marks 275
E. Technology Transfer Arrangements 259 F.1. Determinants 276
F.2. Protection extended to well-known
II. PATENTS 260 marks 276
F.3. Rights conferred by a well-known
A. What Are Patentable? 260 mark 276
A.1. Inventions 260 G. Rights Conferred by Registration 277
A.2. Utility model 261 G.1. Limitations on such rights 277
A.3. Industrial designs 261 G.2. Assignment and transfer of
A.4. Lay-out designs (topographies of application and registration 277
integrated circuits) 261 G.3. Protection limited to goods specified
B. Non-Patentable Inventions 262 in registration certificate 278
C. Ownership of a Patent 262 H. Use by Third Parties of Names, Etc.
C.1. Right to a patent 262 Similar to Registered Mark 278
C.2. First-to-file rule 262 I. Infringement and Remedies 278
C.3. Inventions created pursuant to a I.1. Trademark infringement 278
commission 263 I.2. Tests to determine infringement 279
C.4. Right of priority 263 I.3. False designations of origin; false
D. Term of Patent 263 description or representation 280

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I.4. Infringement of name and marks of H. Common Rules on Admissibility of

ownership stamp on containers 280 Evidence 303
I.5. Damages 280 I. Evidence in Patent Cases 303
I.6. Requirement of notice 281 J. Evidence in Trademark Infringement and
I.7. Other remedies available: 281 Unfair Competition Cases 304
I.8. Limitations to actions for K. Evidence in Copyright Cases 305
infringement 281 L. Order of Destruction 305
J. Unfair Competition 282
K. Trade Names or Business Names 284 SPECIAL LAWS 306
L. Collective Marks 284
I. THE CHATTEL MORTGAGE LAW AND
IV. COPYRIGHTS 285 REAL ESTATE MORTGAGE LAW 307

A. Definition 285 II. ANTI-MONEY LAUNDERING ACT 307

B. Basic Principles 285
C. Copyrightable Works 286 A. Policy of the Law 307
C.1. Original literary and artistic works 286 B. Covered Institutions 307
C.2. Derivative works 287 C. Obligations of Covered Institutions 308
D. Non-Copyrightable Works 288 D. Covered Transactions 310
E. Rights of Copyright Owner 289 E. Suspicious Transactions 310
E.1. Copyright or economic rights 289 F. When is Money Laundering Committed 311
E.2. When copyright vests 290 G. Unlawful Activities or Predicate Crimes 312
E.3. Moral rights 290 H. Anti-Money Laundering Council (AMLC) 314
E.4. Rights to proceeds in subsequent I. Freezing of Monetary Instrument or
transfers (droit de suite or follow up Property 315
rights) 291 J. Authority to Inquire into Bank Deposits 316
E.5. Neighboring rights 291
F. Rules On Ownership Of Copyright 294 III. FOREIGN INVESTMENTS ACT 317
F.1. Ownership of copyright 294
F.2. Duration of copyright 295 A. Policy of the Law 317
F.3. Presumption of authorship 296 B. Definition of Terms 317
F.4. Transfer or assignment of copyright 296 B.1. Foreign Investment 317
G. Limitations on Copyright 296 B.2. Doing Business in the Philippines 318
H. Copyright Infringement 297 B.3. Export Enterprise 318
B.4. Domestic Market Enterprise 318
IV. RULES OF PROCEDURE FOR C. Registration of Investments on Non-
INTELLECTUAL PROPERTY RIGHTS CASES 301 Philippine Nationals 318
D. Foreign Investments in Export Enterprise 319
A. In What Courts Applicable 301 E. Foreign Investment in Domestic Market
B. Applicability of Regular Rules 301 Enterprise 319
C. Commencement of Civil Action 301 F. Foreign Investment Negative List 319
C.1. Pleadings 301
C.2. Who may file 301
C.3. Form and contents of the petition 301
C.4. Prohibited pleadings 302
C.5. Failure to file complaint where a writ
of search and seizure is issued 302
C.6. Summons 302
C.7. Answer 302
D. Modes of Discovery 302
E. Pre-Trial 303
F. Clarificatory Hearings and Trial 303
G. Commencement of Criminal Action 303

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MERCANTILE LAW
CREDIT
TRANSACTIONS

PAGE 1 OF 320
UP LAW BOC CREDIT TRANSACTIONS
I. Letters Of Credit
(L/C)
A. DEFINITION AND NATURE OF
LETTER OF CREDIT
A.1 DEFINITION
Letters of credit (L/C) are those issued by one
merchant to another, or for the purpose of
attending to a commercial transaction. [Art.
567, Code of Commerce]
A written instrument whereby the writer
requests or authorizes the addressee to pay
money or deliver goods to a third person and
assumes responsibility for payment of debt
therefor to the addressee [Transfield
Philippines v. Luzon Hydro, G.R. No. 146717
(2004)].
An engagement by a bank or other person
made at the request of a customer that the
issuer shall honor drafts or other demands of
payment upon compliance with the
conditions specified in the credit [Prudential
Bank v. Intermediate Appellate Court, G.R. No.
74886 (1992)]
A.2 PURPOSE
Its purpose is to substitute for, and support,
the agreement of the buyer-importer to pay
money under a contract or other
arrangement, but does not necessarily
constitute as a condition for the perfection of
such arrangement [Reliance Commodities, Inc.
v. Daewoo Industrial Co., Ltd., G.R. No. L-
100831 (1993)]
A.3. ESSENTIAL REQUISITES OF LETTERS
OF CREDIT:
(1) Issued in favor of a definite person and
not to order.
(2) Limited to a fixed and specified amount,
or to one or more undetermined
amounts, but within a maximum the
limits of which has to be stated exactly.
PAGE 2 OF 320
MERCANTILE LAW
Those which do not have one of these
conditions shall be mere letters of
recom m endation. [Art. 568, Code of
Commerce]
A.4. NATURE
(1) Financial device L/Cs are developed
by merchants as a convenient and
relatively safe mode of dealing with sales
of goods to satisfy the seemingly
irreconcilable interests of a seller, who
refuses to part with his goods before he is
paid, and a buyer, who wants to have
control of the goods before paying [Bank
of America, NT&SA v. Court of Appeals,
G.R. No. L-105395 (1993)]
A letter of credit is one of the modes of
payment, set out in Sec. 8, Central Bank
Circular No. 1389, "Consolidated Foreign
Exchange Rules and Regulations," dated
13 April 1993, by which commercial banks
sell foreign exchange to service payments
for, e.g., commodity imports [Reliance
Commodities v. Daewoo, G.R. No. L-
100831 (1993)]
(2) Composite of three distinct
contracts An L/C transaction involves
three distinct but intertwined
relationships:
(a) First Contract between the party
applying for the L/C
(buyer/importer/account party) and
the party for whose benefit the L/C is
issued (seller/exporter/beneficiary).
(b) Second Contract between the
buyer and the issuing bank. This
contract is sometimes called the
"Application and Agreement" or the
"Reimbursement Agreement."
(c) Third Contract between the issuing
bank and the seller, in order to
support the contract, under (a) above
[Reliance Commodities v. Daewoo,
G.R. No. L-100831 (1993)]
A.5. DURATION OF LETTERS OF CREDIT
(1) Period stipulated by the parties; or
(2) If no period is fixed;
UP LAW BOC CREDIT TRANSACTIONS MERCANTILE LAW

(a) 6 months from date if used in the the beneficiary that the confirming bank
Philippines will undertake the issuing bank's
obligation as its own according to the
(b) 12 months if abroad
terms and conditions of the credit [Feati
Bank and Trust Co. v. CA, G.R. No. 94209
(1991)]
A.6. TYPES OF LETTERS OF CREDIT
I. AS TO THE TYPE OF TH E MAIN
CONTRACT
B. PARTIES TO A LETTER OF CREDIT
Commercial Standby
Letter of Credit Letter of Credit
Method of payment Used to guarantee or B.1. RIGHTS AND OBLIGATIONS OF THE
in a contract of sale secure an obligation PARTIES
in a non-sale There would be at least three parties to a
transaction letter of credit:
Reduce the risk of Reduce the risk of
non-payment of non-performance of (1) Buyer/Exporter/Account Party
purchase price under a contractual one who procures the letter of credit and
a contract of sale obligation obliges himself to reimburse the issuing
bank upon receipt of documents of title.
The seller can obtain The credit is payable
payment from the upon certification of (2) Issuing Bank the bank which
issuer of L/C upon a partys non- undertakes: (1) to pay the seller upon
the presentation of performance of the receipt of the draft and proper documents
documents that show agreement of title; and (2) to surrender the
he has taken documents to the buyer upon
affirmative steps to reimbursement.
comply with the sale
The obligation of the issuing bank to pay
agreement
the seller is direct, primary, absolute,
Beneficiary must Beneficiary must
definite and solidary with the buyer, in
demonstrate that he certify that his
the absence of stipulation in the letter of
has performed the obligor has not
credit [Metropolitan Waterworks and
contract performed the
Sewerage System v. Daway, G.R. No.
contract
160732 (2004)]
(3) Seller/Im porter/Beneficiary one
II. AS TO REVOCABILITY
who ships the goods to the buyer in
(a) Revocable L/C - One which can be compliance with a contract of sale and
revoked by the issuing bank without the delivers the documents of title and draft
consent of the buyer and seller to the issuing bank to recover payment.
(b) Irrevocable L/C - One which the
issuing bank cannot revoke without the
Depending on the transaction, the number of
consent of the buyer and seller [Feati
parties to the letter of credit may be
Bank and Trust Co. v. CA, G.R. No. 94209
increased. Thus, the different types of
(1991)]
correspondent banks:
(1) Advising/Notifying Bank the bank
III. AS TO THE OBLIGATION ASSUMED which conveys to the seller the existence
BY CORRESPONDENT BANK of the credit.
(a) Unconfirm ed L/C - One which The bank assumes no liability except to
continues to be the obligation of the notify and/or transmit to the seller the
issuing bank existence of the letter of credit. A
notifying bank is not a privy to the
(b) Confirmed L/C - One which is
contract of sale between the buyer and
supported by the absolute assurance to
PAGE 3 OF 320
UP LAW BOC CREDIT TRANSACTIONS
the seller, its relationship is only with that
of the issuing bank and not with the
beneficiary to whom he assumes no
liability.
The bank may suggest to the seller its
willingness to negotiate, but this fact
alone does not imply that the notifying
bank promises to accept the draft drawn
under the documentary credit [Feati Bank
and Trust Co. v. CA, G.R. No. 94209
(1991)]
(2) Confirming Bank the bank which
lends credence to the letter of credit
issued by a lesser known issuing bank.
The bank assumes a direct obligation to
the seller and its liability is a primary one
as if the bank itself had issued the letter
of credit [Feati Bank and Trust Co. v. CA,
G.R. No. 94209 (1991)]
(3) Negotiating Bank the bank which
discounts the draft presented by the
seller.
The bank buys or discounts a draft under
the letter of credit. Its liability is
dependent upon the stage of the
negotiation. If before negotiation, it has
no liability with respect to the seller but
after negotiation, a contractual
relationship will then prevail between
the negotiating bank and the seller
[Feati Bank and Trust Co. v. CA, G.R. No.
94209 (1991)]
(4) Paying Bank the bank which
undertakes to encash the drafts drawn
by the seller.
C. BASIC PRINCIPLES OF LETTER OF
CREDIT
C.1. DOCTRINE OF INDEPENDENCE
The principle of independence assures the
seller or the beneficiary of prompt payment
independent of any breach of the main
contract and precludes the issuing bank from
determining whether the main contract is
actually accomplished or not.
Under this principle, banks assume no
liability or responsibility for the form,
sufficiency, accuracy, genuineness,
PAGE 4 OF 320
MERCANTILE LAW
falsification or legal effect of any documents,
or for the general and/or particular
conditions stipulated in the documents or
superimposed thereon, nor do they assume
any liability or responsibility for the
description, quantity, weight, quality,
condition, packing, delivery, value or
existence of the goods represented by any
documents, or for the good faith or acts
and/or omissions, solvency, performance or
standing of the consignor, the carriers, or the
insurers of the goods, or any other person
whomsoever [Transfield Philippines v. Luzon
Hydro, G.R. No. 146717 (2004]
The independent nature of the letter of credit
may be
(a) Independent in toto - the credit is
independent from the justification aspect
and is a separate obligation from the
underlying agreement;
(b) Only as to the justification aspect like in a
commercial letter of credit or repayment
standby, which is identical with the same
obligations under the underlying
agreement. [Transfield Philippines v.
Luzon Hydro, G.R. No. 146717 (2004]
C.2. FRAUD EXCEPTION PRINCIPLE
The principle that limits the application of the
independence principle only to instances
where it would serve the commercial function
of the credit and not when fraud attends the
transaction.
In the case of Transfield Philippines v. Luzon
Hydro [G.R. No. 146717 (2004)], the petitioner
alleged misrepresentation as constituting
fraud. The Court, however, made no ruling as
to whether the same indeed constitutes fraud.
Petitioner asserts that the "fraud exception"
exists when the beneficiary, for the purpose of
drawing on the credit, fraudulently presents
to the confirming bank, documents that
contain, expressly or by implication, material
representations of fact that to his knowledge
are untrue. In such a situation, petitioner
insists, injunction is recognized as a remedy
available to it.
Citing Dolan's treatise on letters of credit,
petitioner argues that the independence
UP LAW BOC CREDIT TRANSACTIONS
principle is not without limits and it is
important to fashion those limits in light of
the principle's purpose, which is to serve the
commercial function of the credit. If it does
not serve those functions, application of the
principle is not warranted, and the common
law principles of contract should apply
[Transfield Philippines v. Luzon Hydro, G.R. No.
146717 (2004)]
The untruthfulness of a certificate
accompanying a demand for payment under
a standby credit may qualify as fraud
sufficient to support an injunction against
payment. The remedy of injunction is
available when the following are present:
(1) Clear proof of fraud;
(2) Fraudulent abuse of the independent
purpose of the letter of credit and only
fraud under the main agreement and
(3) Irreparable injury might follow if
injunction is not granted or the recovery
of damages would be seriously damaged
C.3. DOCTRINE OF STRICT COMPLIANCE
The settled rule in commercial transactions
involving letters of credit requires that the
documents tendered by the seller must
strictly conform to the terms of the letter of
credit.
Otherwise, the issuing bank or the concerned
correspondent bank is not obliged to perform
its undertaking under the contract.
The tender of documents by the beneficiary
(seller) must include all documents required
by the letter. A correspondent bank which
departs from what has been stipulated under
the letter of credit, as when it accepts a faulty
tender, acts on its own risks and it may not
thereafter be able to recover from the buyer
or the issuing bank, as the case may be, the
money thus paid to the beneficiary. (Feati v.
Court of Appeals, 1991)
PAGE 5 OF 320
MERCANTILE LAW
II. Trust Receipts Law
[PD 115 (1973)]
A. DEFINITION/CONCEPT OF A TRUST
RECEIPT TRANSACTION
A trust receipt is a written or printed
document whereby the entrustee binds
himself:
(1) to hold the designated goods, documents
or instruments in trust for the entruster,
and
(2) to sell or otherwise dispose of the goods,
documents or instruments with the
obligation to turn over to the entruster
the proceeds thereof to the extent of the
amount owing to the entruster or as
appears in the trust receipt or the goods,
documents or instruments themselves if
they are unsold or not otherwise disposed
of, in accordance with the terms and
conditions specified in the trust receipt.
[PD 115, Sec. 4]
A trust receipt transaction is any
transaction by and between an entruster and
the entrustee, whereby the entruster (who
owns or holds absolute title or security
interests over certain specified goods,
documents or instruments) releases the same
to the possession of the entrustee upon the
latter's execution and delivery to the
entruster of a signed document called a
trust receipt. [PD 115, Sec. 4]
A trust receipt is a security transaction
intended to aid in financing importers and
retail dealers who do not have sufficient
funds or resources to finance the importation
or purchase of merchandise, and who may
not be able to acquire credit except through
utilization, as collateral, of the merchandise
imported or purchased. It is a security
agreement that secures an indebtedness and
there can be no such thing as security interest
that secures no obligation [Spouses Dela Cruz
v. Planters Products Inc., G.R. No. 180677
(2013)]
UP LAW BOC CREDIT TRANSACTIONS
A.1. LOAN/SECURITY FEATURE
In a letter of credit-trust receipt arrangement,
a bank extends a loan covered by the letter of
credit, and the trust receipt acts as the
security for the loan. In other words, the
transaction involves a loan feature
represented by the letter of credit, and a
security feature which is in the covering
trust receipt [Vintola v. Insular Bank of Asia
and America, G.R. No. 73271 (1987)
A.2. OWNERSHIP OF THE GOODS,
DOCUMENTS AND INSTRUMENTS UNDER
A TRUST RECEIPT
To secure that the banker (entrustee) shall be
repaid at the critical point that is, when the
imported goods finally reach the hands of the
intended vendee the banker takes the full
title to the goods at the very beginning, and
he continues to hold that title as his
indispensable security until the goods are
sold.
The importer (entruster) becomes absolute
owner of the imported merchandise as soon
as he has paid its price. The ownership of the
merchandise continues to be vested in the
owner thereof or in the person who has
advanced payment (entrustee), until he has
been paid in full, or if the merchandise has
already been sold, the proceeds of the sale
should be turned over to him by the importer
or by his representative or successor in
interest. [Prudential Bank v. National Labor
Relations Commission, G.R. No. 112592
(1995), citing National Bank v. Viuda e Hijos de
Angel Jose, G.R. No. L-43117 (1936)]
However, in the case of goods delivered
under trust receipt for the purpose of
manufacturing or processing before its
ultimate sale, the entruster shall retain its
title over the goods whether in its original or
processed form until the entrustee has
complied fully with his obligation under the
trust receipt. [PD 115, Sec. 4 (1)]
B. RIGHTS OF THE ENTRUSTER
The entruster shall have the following rights:
(1) In case of sale: Right to the proceeds
from the sale of the goods, documents or
instruments released under a trust
PAGE 6 OF 320
MERCANTILE LAW
receipt to the entrustee to the extent of
the amount owing to the entruster or as
appears in the trust receipt
(2) In case of non-sale: Right to the return
of the goods, documents or instruments
(3) Right to the enforcement of all other
rights conferred on him in the trust
receipt (which are not contrary to the
provisions of PD 115)
(4) Right to cancel the trust and take
possession of the goods, documents or
instruments subject of the trust or of the
proceeds realized therefrom at any time
upon default or failure of the entrustee to
comply with any of the terms and
conditions of the trust receipt or any other
agreement between the entruster and the
entrustee
(5) Right to sell the goods, documents or
instruments at public or private sale, not
less than five days after serving or
sending of notice to the entrustee of the
intention to sell
(6) Right to purchase at a public sale
the goods, documents, or instruments
(7) Right to recover deficiency from the
entrustee should the proceeds be
insufficient [PD 115, Sec. 7]
The entruster holding a security interest
shall not, merely by virtue of such interest
or having given the entrustee liberty of sale or
other disposition of the goods, documents or
instruments under the terms of the trust
receipt transaction be responsible as
principal or as vendor under any sale
or contract to sell m ade by the
entrustee. [PD 115, Sec. 8]
B.1. VALIDITY OF THE SECURITY INTEREST
AS AGAINST THE CREDITORS OF THE
ENTRUSTEE/INNOCENT PURCHASERS
FOR VALUE
The entruster's security interest in goods,
documents, or instruments pursuant to the
terms of a trust receipt shall be valid as
against all creditors of the entrustee for
the duration of the trust receipt agreement.
[PD 115, Sec. 12]
UP LAW BOC CREDIT TRANSACTIONS
A purchaser of goods from an
entrustee with right to sell, or of documents
or instruments through their customary form
of transfer, who buys the goods, documents,
or instruments for value and in good
faith from the entrustee, acquires said goods,
documents or instruments free from the
entruster's security interest. [PD 115, Sec. 11]
C. OBLIGATION AND LIABILITY OF THE
ENTRUSTEE
The entrustee shall have the following
obligations:
(1) Hold the goods, documents or
instruments in trust for the entruster and
shall dispose of them strictly in
accordance with the terms and conditions
of the trust receipt;
(2) Receive the proceeds in trust for the
entruster and turn over the same to the
entruster to the extent of the amount
owing to the entruster or as appears on
the trust receipt;
(3) Insure the goods for their total value
against loss from fire, theft, pilferage or
other casualties;
(4) Keep said goods or proceeds thereof
whether in money or whatever form,
separate and capable of identification as
property of the entruster;
(5) Return the goods, documents or
instruments in the event of non-sale or
upon demand of the entruster; and
(6) Observe terms and conditions of the
trust receipt not contrary to PD 115. [PD
115, Sec. 9]
C.1. PAYMENT/DELIVERY OF PROCEEDS
OF SALE OR DISPOSITION OF GOODS,
DOCUMENTS OR INSTRUMENTS
The failure of an entrustee to turn over
the proceeds of the sale of the goods,
documents or instruments covered by a trust
receipt to the extent of the amount owing to
the entruster or as appears in the trust
receipt shall constitute the crime of estafa,
punishable under RPC 315, par. 1 (b). [PD 115,
Sec. 13]
PAGE 7 OF 320
MERCANTILE LAW
C.2. RETURN OF GOODS, DOCUMENTS OR
INSTRUMENTS IN CASE OF NON-SALE
The failure to return the goods,
documents or instruments if they were not
sold or disposed of in accordance with the
terms of the trust receipt shall constitute
estafa, punishable under RPC 315, par. 1 (b).
[PD 115, Sec. 13]
C.3. LIABILITY FOR LOSS OF GOODS,
DOCUMENTS OR INSTRUMENTS
The risk of loss shall be borne by the
entrustee. Loss of goods, documents or
instruments which are the subject of a trust
receipt, pending their disposition,
irrespective of whether or not it was due to
the fault or negligence of the entrustee,
shall not extinguish his obligation to
the entruster for the value thereof. [PD
115, Sec. 10]
C.4. PENAL SANCTION IF OFFENDER IS A
CORPORATION
If the violation or offense is committed by a
corporation, partnership, association or other
juridical entities, the penalty shall be
im posed upon the directors, officers,
employees or other officials or
persons therein responsible for the
offense, without prejudice to the civil
liabilities arising from the criminal offense.
[PD 115, Sec. 13]
D. REMEDIES AVAILABLE
D.1. UPON DEFAULT OR FAILURE OF THE
ENTRUSTEE TO COMPLY WITH THE TERMS
AND CONDITIONS
(a) The entruster may cancel the trust and
take possession of the goods, documents
or instruments subject of the trust or of
the proceeds realized therefrom.
(b) The entruster may sell the goods,
documents or instruments not less than
five days after serving or sending of the
requisite notice, and the entruster may
become a purchaser at a public sale.
UP LAW BOC CREDIT TRANSACTIONS
(c) The proceeds shall be applied (a) to the
payment of the expenses thereof; (b) to
the payment of the expenses of re-taking,
keeping and storing the goods,
documents or instruments; (c) to the
satisfaction of the entrustee's
indebtedness to the entruster. [PD 115,
Sec. 7]
D.2. IN CASE OF FAILURE TO TURN OVER
THE PROCEEDS OF THE SALE, OR FAILURE
TO RETURN IN CASE OF NON-SALE
File a criminal case for estafa under RPC 315,
par. 1 (b). [PD 115, Sec. 13]
E. WAREHOUSEMANS LIEN
The warehousemans lien under the
Warehouse Receipts Law is the
warehousemans legal right or interest in the
depositors property. It is similar to the
depositarys right of retention, which is a
means or device by which the depositary is
able to obtain payment of what may be due
because of the deposit [Gomez-Somera]
E.1. CLAIMS INCLUDED IN THE
WAREHOUSEMANS LIEN
A warehouseman shall have a lien on the
goods deposited or the proceeds thereof in
his hands:
(1) All lawful charges for storage and
preservation of the goods
(2) All lawful claims for money advanced,
interest, insurance, transportation, labor,
weighing, coopering, and other charges
and expenses in relation to other goods
(3) All reasonable charges and expenses for
notice and advertisements of sale
(4) Sale of the goods where default had been
made in satisfying the warehousemans
lien [Act No. 2137, Sec. 27]
However, if a negotiable receipt is issued for
the goods, the warehouseman shall have no
lien thereon except for charges for storage of
goods subsequent to the date of the receipt
unless the receipt expressly enumerated
other charges for which a lien is claimed. In
such case, there shall be a lien for the
PAGE 8 OF 320
MERCANTILE LAW
charges enumerated so far as they are within
Sec. 27 although the amount of the charges is
not stated in the receipt. [Act No. 2137, Sec.
30]
E.2. AGAINST WHAT PROPERTY THE LIEN
MAY BE ENFORCED
(a) Against all goods, whenever deposited,
belonging to the person who is liable as
debtor for the claims in regard to which
the lien is asserted, and
(b) Against all goods belonging to others
which have been deposited at any time by
the person who is liable as debtor for the
claims in regard to which the lien is
asserted if such person had been so
entrusted with the possession of goods
that a pledge of the same by him at the
time of the deposit to one who took the
goods in good faith for value would have
been valid. [Act No. 2137, Sec. 28]
E.3. SATISFACTION OF LIEN BY SALE
A warehouseman's lien for a claim, which has
become due, may be satisfied as follows:
(1) An itemized statement of the
warehouseman's claim, showing the sum
due at the time of the notice and the date
or dates when it becomes due,
(2) A brief description of the goods against
which the lien exists,
(3) A demand that the amount of the claim
as stated in the notice of such further
claim as shall accrue, shall be paid on or
before a day mentioned, not less than ten
days from the delivery of the notice if it is
personally delivered, or from the time
when the notice shall reach its
destination, according to the due course
of post, if the notice is sent by mail,
(4) A statement that unless the claim is paid
within the time specified, the goods will
be advertised for sale and sold by auction
at a specified time and place. [Act No.
2137, Sec. 33]
In accordance with the terms of a notice so
given, a sale of the goods by auction may be
had to satisfy any valid claim of the
UP LAW BOC CREDIT TRANSACTIONS MERCANTILE LAW

warehouseman for which he has a lien on the E.7. HOW LIEN MAY BE LOST
goods. [Act No. 2137, Sec. 33] (1) By surrendering possession of the goods
From the proceeds of such sale, the (2) By refusing to deliver the goods when a
warehouseman shall satisfy his lien including demand is made with which he is bound
the reasonable charges of notice, to comply [Act No. 2137, Sec. 29]
advertisement and sale. The balance, if any,
shall be held by the warehouseman and
delivered on demand to the person to whom E.8. LIEN DOES NOT PRECLUDE OTHER
he would have been bound to deliver or REMEDIES
justified in delivering goods. [Act No. 2137, Whether or not a warehouseman has a lien
Sec. 33] upon the goods, he is entitled to all remedies
allowed by law to a creditor against a debtor
for the collection of all charges and advances
E.4. AT ANY TIME BEFORE THE GOODS
which the depositor has contracted to pay.
ARE SO SOLD [Act No. 2137, Sec. 32]
General rule: The warehouseman shall
retain the possession of the goods according
to the terms of the original contract of
deposit
Exception: At any time before the goods are
so sold, any person claiming a right of
property or possession may pay the
warehouseman the amount necessary to
satisfy his lien and to pay the reasonable
expenses and liabilities incurred. The
warehouseman shall deliver the goods to the
person making payment. [Act No. 2137, Sec.
33]

E.5. EFFECT OF SALE

The warehouseman shall not be liable for
failure to deliver the goods to the depositor or
owner of the goods or to a holder of the
receipt given for the goods when they were
deposited, even if such receipt be negotiable.
[Act No. 2137, Sec. 36]

E.6. OTHER METHODS OF ENFORCING

LIEN
Other remedies allowed by law for the
enforcement of a lien against personal
property are not precluded. The right to
recover so much of the warehouseman's
claim as shall not be paid by the proceeds of
the sale is not barred as well. [Act No. 2137,
Sec. 35]

PAGE 9 OF 320
 MERCANTILE LAW
NEGOTIABLE
INSTRUMENTS LAW

PAGE 10 OF 320
UP LAW BOC NEGOTIABLE INSTRUMENTS LAW
I. Definition
A. DEFINITION AND PURPOSE
Written contract for the payment of
money, by its form and on its face,
intended as substitute for money and
intended to pass from hand to hand to
give the holder in due course (HDC) the
right to hold the same and collect the
sum due.
Instruments are negotiable when they
conform to all the requirements
prescribed by the Negotiable Instruments
Law (NIL; Act 2031, 03 February 1911).
However, the fact that an instrument
does not meet the foregoing requisites
will not affect its validity, the only
consequence being that it will be
governed not by the NIL but by the
general law on contracts. (Campos)
Negotiable Instrum ents Not Legal
tender
Art. 1249, Civil Code. The payment of debts in
money shall be made in the currency
stipulated, and if it is not possible to deliver
such currency, then in the currency which is
legal tender in the Philippines.
The delivery of promissory notes payable to
order, or bills of exchange or other mercantile
documents shall produce the effect of
payment only when they have been cashed, or
when through the fault of the creditor they
have been impaired.
In the meantime, the action derived from the
original obligation shall be held in the
abeyance. (1170)
Sec. 52, New Central Bank Act. Legal Tender
Power. - All notes and coins issued by the
Bangko Sentral shall be fully guaranteed by
the Government of the Republic of the
Philippines and shall be legal tender in the
Philippines for all debts, both public and
private: Provided, however, That, unless
otherwise fixed by the Monetary Board, coins
PAGE 11 OF 320
MERCANTILE LAW
shall be legal tender in amounts not exceeding
Fifty pesos (P50.00) for denominations of
Twenty-five centavos and above, and in
amounts not exceeding Twenty pesos
(P20.00) for denominations of Ten centavos or
less.
Although considered as medium for
payment of obligations, negotiable
instruments are not legal tender.
Negotiable instruments shall produce the
effect of payment only when they have
been encashed or when through the fault
of the creditor they have been impaired.
[Art. 1249, Civil Code]
BUT a CHECK which has been cleared and
credited to the account of the creditor
shall be equivalent to a delivery to the
creditor of cash.
Settled is the rule that payment must be
made in legal tender. A check is not legal
tender and, therefore, cannot constitute a
valid tender of payment. Since a
negotiable instrument is only a substitute
for money and not money, the delivery of
such an instrument does not, by itself,
operate as payment. Mere delivery of
checks does not discharge the obligation
under a judgment. The obligation is not
extinguished and remains suspended
until the payment by commercial
document is actually realized. [BPI vs.
Royeca, G.R. No. 176664 (2008)]
UP LAW BOC NEGOTIABLE INSTRUMENTS LAW
II. Forms and
Interpretation
A. REQUISITES OF NEGOTIABILITY
(Most Frequently Asked since 1992; Last
appeared in 2013)
Sec. 1, Negotiable Instruments Law (NIL). Form
of negotiable instruments. - An instrument to
be negotiable must conform to the following
requirements:
(a) It must be in writing and signed by the
maker or drawer;
(b) Must contain an unconditional
promise or order to pay a sum certain
in money;
(c) Must be payable on demand, or at a
fixed or determinable future time;
(d) Must be payable to order or to bearer;
and
(e) Where the instrument is addressed to
a drawee, he must be named or
otherwise indicated therein with
reasonable certainty.
Note: Sections 184 and 126 define a
promissory note and a bill of exchange using
the requisites listed in Section 1.
A.1. IN WRITING AND SIGNED BY THE
MAKER OR DRAWER
Sec. 18, NIL. Liability of person signing in trade
or assumed name. - No person is liable on the
instrument whose signature does not appear
thereon, except as herein otherwise expressly
provided. But one who signs in a trade or
assumed name will be liable to the same
extent as if he had signed in his own name.
IN W RITING
What is considered "In writing" - includes
print; written or typed. Section 191 of the NIL
provides that the word written includes
printed, and writing includes print.
Rationale for requirem ent: Since an
instrument is a document, there must be
PAGE 12 OF 320
MERCANTILE LAW
something in written form that can be
transferred from person to person. (Abad)
SIGNED
General Rule: No person is liable on the
instrument whose signature does not appear
thereon.
Note:
One who signs in a trade or assumed
name will be liable to the same extent as
if he had signed in his own name. [Sec. 18,
NIL]
Signature of any party may be made by
duly authorized agent; no particular form
of appointment necessary. [Sec. 19, NIL]
Signature is binding and may be in ones
handwriting, printed, engraved,
lithographed or photographed so long as
it is intended or adopted as the signature
of the signer or made with his authority.
(Campos)
Signature may appear on any part of the
instrument. However, if the signature is
so placed upon the instrument that it is
not clear in what capacity the person
intended to sign, he is deemed an
indorser. [Sec. 17 (f), NIL]
A.2. CONTAINING AN UNCONDITIONAL
PROMISE TO PAY OR ORDER TO PAY A
SUM CERTAIN IN MONEY
Sec. 3, NIL. When promise is unconditional. -
An unqualified order or promise to pay is
unconditional within the meaning of this Act
though coupled with:
(a) An indication of a particular fund out
of which reimbursement is to be made
or a particular account to be debited
with the amount; or
(b) A statement of the transaction which
gives rise to the instrument.
But an order or promise to pay out of a
particular fund is not unconditional.
UP LAW BOC NEGOTIABLE INSTRUMENTS LAW MERCANTILE LAW

UNCONDITIONAL As to promissory note: Promise to pay

should be express on the face of the
The promise or order to pay, to be
instrument. (Campos)
unconditional, must be unqualified.
(Campos) o The word "promise" is not
absolutely necessary. Any
Must not be dependent upon a expression equivalent to a
contingent event that is not certain to promise is sufficient.
happen. (Abad) (Campos)
The fact that the condition appearing on o Mere acknowledgment of a
the instrument has been fulfilled will not debt is insufficient. (Campos)
convert it into a negotiable one. [Sec. 4,
NIL] As to bill of exchange: Order
command made by the drawer
An instrument which contains an order or addressed to the drawee ordering the
promise to do an act in addition to the latter to pay the payee or the holder a
payment of money (with the exception of sum certain in money; the instrument
certain acts enumerated in Sec. 5 of the is, by its nature, demanding a right.
NIL) is not negotiable.
o Words which are equivalent
An instrument where the maker or the to an order are sufficient.
person primarily liable has the option to
require something to be done in lieu of o A mere request or authority to
payment of money is not negotiable. But pay does not constitute an
it is negotiable if the option to require order. Although the mere use
something to be done in lieu of payment of polite words like "please"
of money is with the holder.[Campos] does not of itself deprive the
instrument of its
characteristics as an order, its
language must clearly
Fund indicate a demand upon the
Particular Fund
for Reimbursement drawee to pay.
(conditional)
(unconditional)

The drawee pays the The drawee pays SUM PAYABLE MUST BE CERTAIN
payee from his own directly from the
funds. Afterwards, particular fund Sec. 2, NIL. What constitutes certainty as to
the drawee pays indicated. sum. - The sum payable is a sum certain within
himself from the the meaning of this Act, although it is to be
indicated fund. paid:

Indicated fund is not Particular fund (a) with interest; or

the direct source of indicated is the direct (b) by stated installments; or
payment. source of payment. (c) by stated installments, with a
(Sundiang and provision that, upon default in
Aquino) payment of any installment or of
interest, the whole shall become due;
or
(d) with exchange, whether at a fixed rate
When conditional: A negotiable instrument is or at the current rate; or
conditional when reference to the fund clearly (e) with costs of collection or an
indicates an intention that such fund alone attorney's fee, in case payment shall
should be the source of payment. not be made at maturity.
[Metropolitan Bank vs. CA, G.R. No. 88866
(1991)]
ORDER OR PROMISE TO PAY
PAGE 13 OF 320
UP LAW BOC NEGOTIABLE INSTRUMENTS LAW
Note: A sum is certain if from the face of the
instrument it can be determined even if it
requires mathematical computation.
(Sundiang and Aquino)
PAYABLE IN MONEY
The instrument must be capable of being
transformed into money, since negotiable
instruments are intended to be
substitutes for money
Money as used in the law is not
necessarily limited to legal tender as
defined by law but includes any particular
kind of current money. [Sec. 6(e), NIL and
PNB v. Zulueta, G.R. No. L-7271 (1957)]
An agreement to pay in foreign currency
is valid. (RA 8183)
An instrument payable in personal
property like merchandise, shares of
stock or gold is non-negotiable.
A.3. PAYABLE ON DEMAND, OR AT A
FIXED OR DETERMINABLE FUTURE TIME
Rationale: to inform the holder of the
instrument of the date when he may enforce
payment thereof.
ON DEMAND
Sec. 7, NIL. When payable on demand. - An
instrument is payable on demand:
(a) When it is so expressed to be payable
on demand, or at sight, or on
presentation; or
(b) In which no time for payment is
expressed.
Where an instrument is issued, accepted, or
indorsed when overdue, it is, as regards the
person so issuing, accepting, or indorsing it,
payable on demand.
Note: The holder may call for payment any
time; and the maker has an option to pay at
any time. The refusal of the holder to accept
payment will terminate the running of
PAGE 14 OF 320
MERCANTILE LAW
interest, if any, but the obligation to pay the
note remains.
AT A FIXED TIME
Only on the stipulated date, and not
before, may the holder demand its
payment.
Should he fail to demand payment, the
instrument becomes overdue but remains
valid and negotiable. It is merely
converted to a demand instrument with
respect to the person who issued,
accepted, or indorsed it when overdue.
[Sec. 7, NIL]
AT A DETERMINABLE FUTURE TIME
Sec. 4, NIL. Determinable future time; what
constitutes. - An instrument is payable at a
determinable future time, within the meaning
of this Act, which is expressed to be payable:
(a) At a fixed period after date or sight; or
(b) On or before a fixed or determinable
future time specified therein; or
(c) On or at a fixed period after the
occurrence of a specified event which
is certain to happen, though the time
of happening be uncertain.
An instrument payable upon a contingency is
not negotiable, and the happening of the
event does not cure the defect.
Note: It is required that the maturity of the
instrument can be absolutely determined
with certainty. (Abad)
Examples:
At a fixed period after date or sight, e.g.,
30 days after date.
On or before a fixed or determinable
future time specified therein, e.g.,
payable on or before December 1, 2000
On or at a fixed period after the
occurrence of a specified event which is
certain to happen, though the time of
happening be uncertain, e.g., payable
within 60 days after the death of Jose
UP LAW BOC NEGOTIABLE INSTRUMENTS LAW
Effect of Acceleration Provisions
If option (absolute or conditional) to
accelerate maturity is on the maker, the
instrum ent is still negotiable. (Campos)
If option to accelerate is on the holder
and can be exercised only after the
happening of a specified event/act over
which he has no control (conditional), the
instrument is still negotiable. (Campos)
Note: If option on the part of the holder is
absolute, the instrument is non-negotiable.
Insecurity Clauses
Provisions in the contract which allow the
holder to accelerate payment if he deems
himself insecure. The instrument is rendered
non-negotiable. (Sundiang and Aquino)
Provisions extending tim e of paym ent
General rule: Negotiability not affected.
Effect is similar with that of an acceleration
clause at the option of the maker. (Campos)
Exception: Where a note with a fixed
maturity provides that the maker has the
option to extend time of payment until the
happening of contingency, the instrument is
NOT negotiable. The time for payment may
never come at all.
Extension Clauses
An instrument is payable at a definite time if
by its terms, it is payable at a definite time
subject to extension at the option of the
holder, ot to an extension to a further definite
time at the option of the maker or acceptor or
automatically upon or after a specified event
or act. (Sundiang and Aquino)
Paym ent on Installm ents
If the instrument states that the amount shall
be paid in two equal installments, the second
being payable pm a fixed date, the
instrument can be considered negotiable
since the first installment would then be
payable on demand. (Vitug)
PAGE 15 OF 320
MERCANTILE LAW
A.4. PAYABLE TO ORDER OR TO BEARER
The negotiability or non-negotiability of
an instrument is determined from the
face of the instrument itself. [Caltex vs.
CA, G.R. No. 97753 (1992)]
Therefore, the instrument must contain
words of negotiability. (2012 Bar
Question) For example:
o Pay to the order of Juan Cruz, or
I promise to pay to the order of
Juan Cruz
o Pay to Juan Cruz or bearer, or I
promise to pay Juan Cruz or
bearer
Instrument need not follow the language
of the law, but any term which clearly
indicates an intention to conform to the
legal requirements is sufficient.
PAYABLE TO ORDER
Sec. 8, NIL. When payable to order. - The
instrument is payable to order where it is
drawn payable to the order of a specified
person or to him or his order. It may be drawn
payable to the order of:
(a) A payee who is not maker, drawer, or
drawee; or
(b) The drawer or maker; or
(c) The drawee; or
(d) Two or more payees jointly; or
(e) One or some of several payees; or
(f) The holder of an office for the time
being.
Where the instrument is payable to order, the
payee must be named or otherwise indicated
therein with reasonable certainty.
Note: Without the words "to order" or "to the
order of" the instrument is payable only to
the person designated therein and is
therefore non-negotiable. [Consolidated
Plywood Industries vs. IFC Leasing, G.R. No.
72593 (1987)]
UP LAW BOC NEGOTIABLE INSTRUMENTS LAW
PAYABLE TO BEARER
Sec. 9, NIL. When payable to bearer. - The
instrument is payable to bearer:
(a) When it is expressed to be so payable;
or
(b) When it is payable to a person named
therein or bearer; or
(c) When it is payable to the order of a
fictitious or non-existing person, and
such fact was known to the person
making it so payable; or
(d) When the name of the payee does not
purport to be the name of any person;
or
(e) When the only or last indorsement is
an indorsement in blank.
Exam ples:
(1) Expressed to be so payable - "I promise
to pay the bearer the sum"
(2) Payable to a person named therein or
bearer -"Pay to A or bearer"
(3) Payable to the order of a fictitious person
or non-existing person, and such fact was
known to the person making it so payable
- Pay to John Doe or order"
(4) Name of payee does not purport to be the
name of any person "Pay to cash"; "Pay
to sundries."
(5) Only or last indorsement is an
indorsement in blank.
Fictitious Payee Rule
It is not necessary that the person
referred to in the instrument is really non-
existent or fictitious to make the
instrument payable to bearer. The person
to whose order the instrument is made
payable may in fact be existing but he is
still fictitious or non-existent under Sec.
9(c) of the NIL if the person making it so
payable does not intend to pay the
specified persons. [PNB v. Rodriguez, G.R.
No. 170325 (2008)]
A check drawn payable to the order of
"CASH" is a check payable to bearer, and
the bank may pay it to the person
PAGE 16 OF 320
MERCANTILE LAW
presenting it for payment without the
drawer's indorsement. [Ang Tek Lian vs.
CA, G.R. No. L-2516 (1950)]
W here the Maker is the Payee
In effect making himself liable to himself.
Thus, the instrument produces no legal
effect.
It will produce legal effects only once the
payee-maker indorses the instrument to
another person because such
indorsement will then give rise to rights
and obligations. (Abad)
A.5. DRAWEE MUST BE NAMED OR
DESIGNATED WITH REASONABLE
CERTAINTY
Applies only to a bill of exchange.
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. [Sec. 128,
NIL]
Examples:
o To Juan Cruz and Jose Reyes
negotiable
o To Juan Cruz or Jose Reyes not
negotiable; no certainty as to
drawee
B. DETERMINATION OF
NEGOTIABILITY
In determining the negotiability of an
instrument, the instrument in its entirety
and by what appears on its face must be
considered. It must comply with the
requirements of Sec. 1 of the Negotiable
Instruments Law. [Caltex Phils. v. CA, G.R.
No. 97753 (1992)]
The acceptance of a bill of exchange is
not important in the determination of its
negotiability. The nature of acceptance is
important only on the determination of
the kind of liabilities of the parties
UP LAW BOC NEGOTIABLE INSTRUMENTS LAW MERCANTILE LAW

involved. [PBCOM vs. Aruego, G.R. Nos. Manila Oil Refining, G.R. No. L-18103
L-25836-37 (1993)] (1922)]

Omissions and
Additional Provisions
Provisions That Do
That Do Not Affect
Not Affect
Negotiability
Negotiability

(1) Non-dating of the (1) Authorizes the

instrument sale of collateral
securities on
(2) Non-specification
default;
of value given, or
that any value (2) Authorizes
had been given confession of
judgment on
(3) Non-specification
default;
of place where it
is drawn or place (3) Waives the benefit
where it is of law intended to
payable protect the
debtor; or
(4) Bears a seal
(4) Allows the
(5) Designation of
creditor the
particular kind of
option to require
currency in which
something in lieu
payment is to be
of money. (Sec. 5)
made. (Sec. 6)

Note: Negotiability is
affected when
instrument contains a
promise or order to do
any act in addition to
the payment of
money.

Note:
A confession of judgment is provision
given by the maker authorizing the
plaintiff's attorney to sign judgment and
issue execution for the value of the
instrument, costs, and attorney's fees.
This is also called a judgment cognivit
actionem. If accompanied by withdrawal
of plea, it is called judgment relicta
verificatione.
A confession of judgment is not
recognized in our country, as it is against
public policy. It denies due process, and
deprives the right of appeal. [PNB v.

PAGE 17 OF 320
UP LAW BOC NEGOTIABLE INSTRUMENTS LAW
III. Kinds of Negotiable
Instruments
A. PROMISSORY NOTE
Sec. 184, NIL. Promissory note, defined. - A
negotiable promissory note within the
meaning of this Act is an unconditional
promise in writing made by one person to
another, signed by the maker, engaging to pay
on demand, or at a fixed or determinable
future time, a sum certain in money to order or
to bearer. Where a note is drawn to the
maker's own order, it is not complete until
indorsed by him.
A.1. KINDS OF PROMISSORY NOTES
(1) Certificate of deposit a form of
promissory note which is a written
acknowledgment of a bank of its receipt
of a certain sum with a promise to repay
the same.
(2) Bonds a certificate or evidence of a
debt on which the issuing company or
governmental body promises to pay the
bondholders a specified amount of
interest for a specified length of time, and
to repay the loan on the expiration date.
(3) Debenture a promissory note or bond
backed by the general credit of a
corporation and usually not secured by a
mortgage or lien on any specific property.
(Sundiang and Aquino)
B. BILL OF EXCHANGE
Sec. 126, NIL. Bill of exchange, defined. - A bill
of exchange is an unconditional order in
writing addressed by one person to another,
signed by the person giving it, requiring the
person to whom it is addressed to pay on
demand or at a fixed or determinable future
time a sum certain in money to order or to
bearer. (Sec. 126)
PAGE 18 OF 320
MERCANTILE LAW
B.1. KINDS OF BILLS OF EXCHANGE
(1) Draft used synonymously with bill of
exchange although it normally refers to a
bill of exchange used in documentary
exchange like letters of credit
transactions.
(2) Inland and foreign bill an Inland
bill is a bill which is, or on its face
purports to be, both drawn and payable
within the Philippines. Any other bill is a
foreign bill.
(3) Time draft draft that is payable at a
fixed date.
(4) Sight or dem and draft payable
when the holder presents it for payment.
(5) Trade acceptance used in contracts
of sale where the seller as drawer orders
the buyer (as drawee) to pay a sum
certain to the same seller (payee).
(6) Bankers acceptance a time draft
across the face which the drawee has
written the word accepted. (Sundiang
and Aquino)
(7) Check - A bill of exchange drawn on a
bank payable on demand (Sec. 185). It is
the most common form of bill of
exchange.
B.2. INSTANCES WHEN A BILL OF
EXCHANGE MAY BE TREATED AS A
PROMISSORY NOTE
(2011 and 2015 Bar Question)
Sec. 130, NIL. When bill may be treated as
promissory note. - Where in a bill the drawer and
drawee are the same person or where the
drawee is a fictitious person or a person not
having capacity to contract, the holder may treat
the instrument at his option either as a bill of
exchange or as a promissory note.
Sec. 17, NIL. Construction where instrument is
ambiguous. - Where the language of the
instrument is ambiguous or there are omissions
therein, the following rules of construction apply:
x---x
(e) Where the instrument is so ambiguous that
there is doubt whether it is a bill or note, the
holder may treat it as either at his election;
UP LAW BOC NEGOTIABLE INSTRUMENTS LAW MERCANTILE LAW

x---x IV. Completion and

(1) The drawer and the drawee are the same Delivery
person;
(2) Drawee is a fictitious person; A. STEPS IN THE EXECUTION OF
(3) Drawee does NOT have the capacity to NEGOTIABLE INSTRUMENTS
contract (Sec. 130, NIL)
(4) Where the bill is drawn on a person who (1) Writing of the instrument completely in
is legally absent; accordance with the requisites of
negotiability under Sec. 1.
(5) Where the instrument is so ambiguous
that there is doubt whether it is a bill or (2) Delivery of the instrument by the maker
note, the holder may treat it as either at or the drawer to the payee in order to give
his election (Sec. 17[e], NIL) legal effect thereto. (Abad)
Note: It may sometimes be difficult to locate
the boundary line between a complete and an
Promissory Note Bill of Exchange incomplete instrument... It would seem that if
an instrument contains all the requisites for
Unconditional Unconditional order making it a negotiable one, it should be
promise considered as complete though it in fact may
Involves two parties Involves three parties have blanks as to non-essentials... (Campos)
Maker is primarily Drawer is only
liable secondarily liable
B. INSERTION OF DATE
Only one Two presentments:
presentment: for for acceptance and for
(2012 Bar Question)
payment payment
Sec. 13, NIL. When date may be inserted. -
Bill of Exchange Check Where an instrument expressed to be payable
at a fixed period after date is issued undated,
Not necessarily It is necessary that a or where the acceptance of an instrument
drawn on a deposit. check be drawn on a payable at a fixed period after sight is
The drawee need not bank deposit. undated, any holder may insert therein the
be a bank Otherwise, there true date of issue or acceptance, and the
would be fraud. instrument shall be payable accordingly. The
Death of a drawer of a Death of the drawer of insertion of a wrong date does not avoid the
BOE, with the a check, with the instrument in the hands of a subsequent
knowledge of the knowledge of the holder in due course; but as to him, the date so
bank, does not revoke bank, revokes the inserted is to be regarded as the true date.
the authority of the authority of the
drawee to pay. banker to pay.
Any holder may insert the true date of issue
or acceptance of an instrument where:
May be presented for Must be presented for
payment within payment within a (1) The instrument is expressed to be
reasonable time after reasonable time after payable at a fixed period after date is
its last negotiation. its issue. issued undated; or
May be payable on Always payable on (2) The acceptance of an instrument
demand or at a fixed demand payable at a fixed period after sight is
or determinable undated.
future time

PAGE 19 OF 320
UP LAW BOC NEGOTIABLE INSTRUMENTS LAW
C. EFFECT OF ANTE-DATING AND
POST-DATING
Sec. 12, NIL. Ante-dated and post-dated. - The
instrument is not invalid for the reason only
that it is ante-dated or post-dated, provided
this is not done for an illegal or fraudulent
purpose. The person to whom an instrument
so dated is delivered acquires the title thereto
as of the date of delivery.
D. COMPLETION OF BLANKS
Sec. 14, NIL. Blanks; when may be filled. -
Where the instrument is wanting in any
material particular, the person in possession
thereof has a prima facie authority to complete
it by filling up the blanks therein. And a
signature on a blank paper delivered by the
person making the signature in order that the
paper may be converted into a negotiable
instrument operates as a prima facie authority
to fill it up as such for any amount. In order,
however, that any such instrument when
completed may be enforced against any
person who became a party thereto prior to its
completion, it must be filled up strictly in
accordance with the authority given and within
a reasonable time. But if any such instrument,
after completion, is negotiated to a holder in
due course, it is valid and effectual for all
purposes in his hands, and he may enforce it
as if it had been filled up strictly in accordance
with the authority given and within a
reasonable time.
E. INCOMPLETE AND UNDELIVERED
INSTRUMENTS
Sec. 15, NIL. Incomplete instrument not
delivered. - Where an incomplete instrument
has not been delivered, it will not, if completed
and negotiated without authority, be a valid
contract in the hands of any holder, as against
any person whose signature was placed
thereon before delivery.
PAGE 20 OF 320
MERCANTILE LAW
In this case a real defense exists and not even
a holder in due course can recover on the
instrument, for the law is specific that it is not
a valid contract in the hands of any holder.
(Campos)
Note: A drawee bank whose negligent
custody of the checks, after partial execution,
contributed to its escape, is estopped from
raising the real defense under Sec. 15 of the
NIL. (Campos)
F. COMPLETE AND UNDELIVERED
INSTRUMENTS
Sec. 16, NIL. Delivery; when effectual; when
presumed. - Every contract on a negotiable
instrument is incomplete and revocable until
delivery of the instrument for the purpose of
giving effect thereto. As between immediate
parties and as regards a remote party other
than a holder in due course, the delivery, in
order to be effectual, must be made either by
or under the authority of the party making,
drawing, accepting, or indorsing, as the case
may be; and, in such case, the delivery may be
shown to have been conditional, or for a
special purpose only, and not for the purpose
of transferring the property in the instrument.
But where the instrument is in the hands of a
holder in due course, a valid delivery thereof by
all parties prior to him so as to make them
liable to him is conclusively presumed. And
where the instrument is no longer in the
possession of a party whose signature appears
thereon, a valid and intentional delivery by him
is presumed until the contrary is proved.
Non-delivery of a complete instrument is
a personal defense. (Campos)
Delivery of an instrument is a prerequisite
for liability. If the instrument is complete
in all its particulars, but is not delivered,
there is no contract. However if the
instrument is no longer in the possession
of a party who has signed it, a delivery is
presumed until the contrary is proved.
(Campos)
If the holder of the instrument is a holder
in due course, the instrument is not
merely prima facie deemed delivered, but
UP LAW BOC NEGOTIABLE INSTRUMENTS LAW MERCANTILE LAW

this fact is conclusively presumed. Thus, evidence that there was no

(Campos)
Until the same is delivered, the
instrument remains revocable.
G. INCOMPLETE AND DELIVERED
INSTRUMENTS (SEC. 14, NIL)
(1) Holder has prima facie authority to fill up
the instrument, but he must first prove
that he has the authority to fill up. For
such presumption to apply, issuance is
necessary.
Note: Prima facie authority to complete
the check does not extend to its use (i.e.,
subsequent transfer or negotiation) once
the check is completed. Only the
authority to complete the check is
presumed. The laws use of the term
"prima facie" underscores the fact that
the authority which the law accords to a
holder is a presumption juris tantum only;
hence, subject to subject to contrary proof.
authority or that the authority granted
has been exceeded may be presented by
the maker in order to avoid liability under
the instrument. [Patrimonio v. Gutierrez
and Marasigan, G.R. No. 187769 (2014)]
(2) The instrument must be filled up strictly
in accordance with the authority given
and within reasonable time
(3) HDC may enforce the instrument as if
filled up according to (2) above.
This provision merely raises a personal
defense. (Campos)
H. COMPLETE AND DELIVERED
INSTRUMENTS
In a complete and delivered instrument,
rights and liabilities under the negotiable
instruments law attach.

Section 14 Section 15 Section 16

Delivery

Delivered Undelivered Undelivered

Completeness

(1) Wanting in any material

particular; Mechanically incomplete Mechanically incomplete
(2) Blank paper with signature

Authority of Person in Possession

(1) Prima facie authority to

complete it by filling up the May negotiate if delivered to him
blanks; No authority to complete and/or by or under the authority of the
(2) Signature operates as a prima negotiate party making, indorsing, drawing,
facie authority to fill it up for any or accepting
amount

When Enforceable

Delivery is made by or under

Filled up strictly in accordance
with authority given and within a
reasonable time
authority of the party making,
Not enforceable
indorsing, drawing, or accepting,
as the case may be

PAGE 21 OF 320
UP LAW BOC NEGOTIABLE INSTRUMENTS LAW MERCANTILE LAW

Kind of Defense

Personal Real Personal

Rights of Holder

Can enforce the instrument. Here,

(1) If HDC, he can enforce the the instrument is in the hands of a
instrument as completed as HDC, a valid delivery thereof by all
against parties prior or parties prior to him so as to make
subsequent to the completion; them liable to him is conclusively
(2) If not a HDC, he can enforce None in the hands of any holder. presumed. Where the instrument
the instrument as completed only is no longer in the possession of a
against parties subsequent to the party whose signature appears
completion but not against those thereon, a valid and intentional
prior thereto. delivery to him is presumed until
the contrary is proved.

PAGE 22 OF 320
UP LAW BOC NEGOTIABLE INSTRUMENTS LAW
V. Signature
Sec. 18, NIL. Liability of person signing in trade
or assumed name. - No person is liable on the
instrument whose signature does not appear
thereon, except as herein otherwise expressly
provided. But one who signs in a trade or
assumed name will be liable to the same
extent as if he had signed in his own name.
General rule: One whose signature does
not appear on the instrument shall not be
liable thereon.
Exceptions:
(1) The principal who signs through an agent
(2) The forger
(3) One who indorses in a separate
instrument (allonge) OR where an
acceptance is written on a separate paper
(4) One who signs his assumed or trade
name
(5) A person negotiating by delivery (as in the
case of a bearer instrument) is liable only
to his immediate indorsee.
A. SIGNING IN TRADE NAME
One who signs in a trade or assumed name
will be liable to the same extent as if he had
signed in his own name [Sec. 18, NIL]
B. SIGNATURE OF AGENT
Sec. 19, NIL. Signature by agent; authority;
how shown. - The signature of any party may
be made by a duly authorized agent. No
particular form of appointment is necessary for
this purpose; and the authority of the agent
may be established as in other cases of
agency.
Sec. 20, NIL. Liability of person signing
as agent, and so forth. - Where the
instrument contains or a person adds to his
PAGE 23 OF 320
MERCANTILE LAW
signature words indicating that he signs for or
on behalf of a principal or in a representative
capacity, he is not liable on the instrument if
he was duly authorized; but the mere addition
of words describing him as an agent, or as
filling a representative character, without
disclosing his principal, does not exempt him
from personal liability.
Signature of any party may be made by duly
authorized agent, established as in ordinary
agency.
B.1. LIABILITY OF AN AGENT
General rule: Where a person adds to his
signature words indicating that he signs on
behalf of a principal, then he is not liable if he
was duly authorized.
Exceptions:
(1) Mere addition of words describing
him as an agent WITHOUT disclosing
his principal [Sec. 20, NIL]
(2) Where a broker or agent negotiates
an instrument without indorsement,
he incurs all liabilities in Sec. 65 of the
NIL, unless he discloses name of
principal and the fact that he is only
acting as an agent. [Sec. 69, NIL]
Requisites to negative personal
liablity of agent:
(1) He must be duly authorized;
(2) He must act within the scope of his
authority
(3) He must indicate in the instrument that
he is signing merely as agent; and
(4) He must disclose his principal.
C. SIGNATURE PER PROCURATION
(2011 Bar Question)
A signature per procuration operates as
notice to the holder that the agent has a
limited authority to sign, and the
principal is bound only in case the agent
UP LAW BOC NEGOTIABLE INSTRUMENTS LAW
in so signing acted within the actual
limits of his authority [Sec. 21, NIL]
According to the majority rule, the words
per proc or procuration must appear
on the note for this rule in Section 21 to
be applicable (Campos)
D. INDORSEMENT BY MINOR OR
CORPORATION
The indorsement or assignment of the
instrument by a corporation or by an
infant (minor) passes the property therein,
notwithstanding that from want of
capacity, the corporation or infant may
incur no liability thereon. [Sec. 22, NIL]
The provision does not change the rule in
civil law on minor's contracts, which
provides that a contract enetered into by
a minor is voidable, and the minor cannot
be held liable thereon unless he ratifies it
upon reaching majority.
However, under Section 22 of the NIL,
should the minor indorse a negotiable
instrument, although he cannot be held
liable on his contract of indorsement, title
to the instrument passes to his indorsee
and the latter can rightfully recover from
the maker, free from the defense of
minority. (Campos)
REAL defense but available only to the
incapacitated party (i.e. the minor or the
corporation).
F. FORGERY
(3rd Most Frequently Asked Since 1992)
(2006, 2008, 2010, 2011 2015 Bar Question)
Sec. 23, NIL. Forged signature; effect of. -
When a signature is forged or made without
the authority of the person whose signature it
purports to be, it is wholly inoperative, and no
right to retain the instrument, or to give a
discharge therefor, or to enforce payment
thereof against any party thereto, can be
acquired through or under such signature,
unless the party against whom it is sought to
enforce such right is precluded from setting up
PAGE 24 OF 320
MERCANTILE LAW
the forgery or want of authority.
Counterfeit making or fraudulent alteration of
any writing, which may consist of:
(1) Signing of anothers name with intent to
defraud; or
(2) Alteration of an instrument in the name,
amount, name of payee, etc. with intent
to defraud.
General rule: When a signature is forged or
made without the authority of the person,
only the forged signature (not the instrument
itself and the other genuine signatures) is
wholly inoperative
Effects:
(1) No right to retain the instrument
(2) No right to give a discharge therefor
(3) No right to enforce payment thereof
against any party thereto can be acquired
through or under such signature
Exception: The party against whom it is
sought to be enforced is precluded from
setting up the forgery or want of authority as
a defense. [Sec. 23, NIL]
F.1 PERSONS PRECLUDED FROM SETTING
UP DEFENSE OF FORGERY (CAMPOS)
(1) Those who warrant or admit the
genuineness of the signature in question.
This includes indorsers, persons
negotiating by delivery and acceptors.
(2) Those who, by their acts, silence, or
negligence, are estopped from setting up
the defense of forgery.
(3) Those who are negligent.
F.2 RULES ON FORGERY
F.2.A. PROMISSORY NOTE
Makers signature forged
(1) Maker is not liable because he never
became a party to the instrument.
(2) Indorsers subsequent to forgery are liable
because of their warranties.
(3) Party who made the forgery is liable.
UP LAW BOC NEGOTIABLE INSTRUMENTS LAW MERCANTILE LAW

[Associated Bank vs. CA, G.R. No. 107382

(1996)]
Payees signature forged
(4) Indorsers subsequent to forgery are liable
(1) Payee is not liable.
(such as collecting bank or last endorser)
(2) Maker is still liable. (REASON:
Indorsement is not necessary to title and (5) Party who made the forgery is liable
the maker engages to pay holder)
Payees signature forged
(3) Indorsers subsequent to forgery are liable.
(4) Party who made the forgery is liable. (1) Payee is not liable
(2) Drawer is still secondarily liable
Indorsers signature forged
(3) Drawee is liable if it paid or accepted
(1) Maker, payee, indorser whose signature/s the instrument [Sec. 62, NIL; Price v.
was/were forged, and all indorsers Neal, 3 Burr. 1354 (1762)], but it may
preceding the forgery are not liable. pass liability back through the
(2) Indorsers subsequent to forgery are liable. collection chain
(3) Party who made the forgery is liable.
(4) Indorsers subsequent to forgery are
liable (such as collecting bank)
F.2.B. BILL OF EXCHANGE
(5) Party who made the forgery is liable
Drawers signature forged
Indorsers signature forged
(1) Drawer is not liable because he was never
(1) Drawer, payee, indorser whose
a party to the instrument.
signature/s was/were forged and all
(2) Drawee is liable if it paid or accepted the indorsers preceding the forgery are
instrument (no recourse to drawer) not liable.
because he admitted the genuineness of
(2) Drawee is liable if it paid or accepted
the drawers signature [Sec. 62, NIL; Price
the instrument [Sec. 62, NIL; Price v.
v. Neal, 3 Burr. 1354 (1762)]
Neal, 3 Burr. 1354 (1762)]
(3) Drawee cannot recover from the
(3) Indorsers subsequent to forgery are
collecting bank because there is no privity
liable. (such as collecting bank)
between the collecting bank and the
drawer. The collecting bank does not give (4) Party who made the forgery is liable.
any warranty re: the drawers signature.

SUMMARY OF RULES ON FORGERY AS TO PROMISSORY NOTES

Order Instrument Bearer Instrument

Makers Signature Forged

Maker is not liable because he never became a party

Same
to the instrument.

Indorsers subsequent to forgery are liable because Indorsers may be made liable to those persons who
of their warranties. obtain title through their indorsements.

Payees Signature Forged

Maker and payee not liable. Maker is liable.

Indorsers subsequent to forgery are liable because Indorsers may be made liable to those persons who
of their warranties. obtain title through their indorsements.

PAGE 25 OF 320
UP LAW BOC NEGOTIABLE INSTRUMENTS LAW MERCANTILE LAW

Order Instrument Bearer Instrument

Indorsers Signature Forged

Maker, payee and indorser whose signature was
forged are not liable.
Indorsers subsequent to forgery are liable because
of their warranties.
Maker is liable. Indorsement is not necessary to
pass title and the maker engages to pay any bearer
of the instrument.
Only the indorser whose signature was forged can
raise the defense of forgery against a HDC.

SUMMARY OF RULES ON FORGERY AS TO BILLS OF EXCHANGE

Order Instrument Bearer Instrument
Drawers Signature Forged
Drawer is not liable because he was never a party to
Same
the instrument.
Drawee-acceptor is liable, without recourse to
Drawee-acceptor is liable if it paid. It cannot recover
drawer, if it paid because he admitted the genuiness
from the collecting bank because it is bound to
of the drawers signature.
know the drawers signature since the latter is its
depositor.
Drawee also cannot recover from the collecting
bank because there is no privity of contract between
The drawee may recover from the drawer when the
the collecting bank and the drawer. The collecting
latters negligence is the proximate cause of the loss
bank does not give any warranty regarding the
or contributed thereto.
signature of the drawer.
Indorsers subsequent to forgery (such as collecting Indorsers may be made liable to those persons who
bank or last endorser) are liable. obtain title through their indorsements.
Payees Signature Forged
Drawer, drawee and payee not liable. Drawer is liable (his indorsement is not necessary to
pass title).
Cut-off rule applies.
Drawee is liable (no privity between drawer and
Indorsers subsequent to forgery (such as collecting payee because indorsement of payee is not
bank) are liable without prejudice to their right to necessary).
proceed against the forger.
Payee is not liable.

Collecting bank is liable because of warranty.

Indorsers Signature Forged
Drawer, payee and indroser whose signatures were
forged are not liable.
Cut-off rule does not apply.
Drawee is liable if it paid.
Indorsers subsequent to forgery (such as collecting
bank) are liable.
However, it may recover from the person who forged
the indorsement on the check and deposited or
encashed the same.
Drawer is liable even if special indorsement was
forged because indorsement is not necessary to
title.
Drawee is liable.
Indorser whose signature was forged is liable
because indorsement is not necessary to title.

PAGE 26 OF 320
UP LAW BOC NEGOTIABLE INSTRUMENTS LAW
G. ACCEPTANCE AND PAYMENT
UNDER MISTAKE
Sec. 62, NIL. Liability of acceptor. - The
acceptor, by accepting the instrument,
engages that he will pay it according to the
tenor of his acceptance and admits:
(1) The existence of the drawer, the
genuineness of his signature, and his
capacity and authority to draw the
instrument; and
(2) The existence of the payee and his
then capacity to indorse.
(1) W hen the drawee accepts or pays a
forged instrum ent
Price v. Neal doctrine: As between equally
innocent persons, the drawee who pays
money on, or accepts, a check or draft the
signature on which was forged CANNOT
recover the money from the one who
received it. The drawee is bound to know
the signature of its depositor.
A bank is bound to know the signatures of
its depositors. If a bank pays a forged
check it must be considered as making
the payment out of its own funds and
cannot charge the account of the
depositor whose signature was forged.
[PNB vs. Quimpo, G.R. No. L-53194
(1988)]
A bank is liable, irrespective of its good
faith, in paying a forged check. [Samsung
vs. Far East Bank, G.R. No. 129015
(2004)]
(2) Extensions of Price v. Neal
doctrine
The bar to recovery on the part of a drawee
who pays money on, or accepts, a check or
draft, is extended to overdrafts and stop
payment orders.
a) Overdraft occurs when a check is issued
for an amount more than what the
drawer has in deposit with the drawee
bank.
PAGE 27 OF 320
MERCANTILE LAW
Rule: The drawee who pays the holder of the
bill cannot recover from the holder what he
paid under mistake. (Campos)
b) Stop Paym ent Order is one issued by
the drawer of a check countermanding
his first order to the drawee bank to pay
the check.
Rule: The drawee bank is bound to follow the
order, provided it is received prior to its
certification or payment of the check.
(Campos)
(3) Effects of Negligence of Depositor
If such negligence of the depositor was
the proximate cause of the loss, the
drawee-bank would NOT be liable.
The negligence of the depositor/drawer
would consist of the failure to to carefully
examine bank statements, cancelled
checks, his check stubs, and other
pertinent records within a reasonable
time and to report any errors without
unreasonable delay to the drawee bank.
If a drawer/depositors negligence and
delay should cause a bank to honor a
forged check, the drawer cannot later
complain should bank refuse to recredit
his account. (Campos)
(4) Effect of Paym ent under Forged
Indorsements
In the case of a drawee's acceptance or
payment of a bill on which only an
INDORSEMENT has been forged, the
drawee can recover the amount paid out
by him. RATIONALE: The drawee makes
no warranty as to the genuineness of any
indorsement. (Campos)
(5) Effect of negligence of drawee in
inform ing recipient of forgery
The rule is that a drawee's acceptance or
payment of a bill on which only an
INDORSEMENT has been forged is not a
bar to his right to recover the amount
paid out by him; however, there is an
exception to this rule.
UP LAW BOC NEGOTIABLE INSTRUMENTS LAW MERCANTILE LAW

If it is shown that the drawee on learning o However, it should be noted that as

of the forgery did not give prompt notice
of it to the holder and that damage
resulted to said holder, recovery by the
drawee is barred [Clearfield Trust Co. vs.
US, 318 U.S. 363 (1943)]
(6) Effect of negligence of drawer in
case of forged indorsem ent on checks
The drawer, as soon as he comes to know
of a forged indorsement should promptly
notify the drawee bank. Otherwise,
should his negligent delay be the
proximate cause of any subsequent loss
to the bank, the latter may properly
charge it to the drawer's account.
an exception to the rule that a drawee
bank is not liable for a forged
indorsement, when the negligence of
the drawee bank is the proximate
cause of the collecting banks
payment of a check with a forged
indorsement, the drawee bank may
be held liable to the collecting bank.
o Furthermore, when both the
collecting bank and the drawee bank
are guilty of negligence, the degree of
negligence of each will be weighed in
considering the amount of loss which
each should bear. [BPI vs. CA, G.R. No.
102383 (1992)]

(7) Com paring the liability of a

collecting bank and a drawee bank
A collecting bank is only liable for forged
indorsements and not forgeries of the
drawer or makers signature. [PNB vs. CA,
G.R. No. L-26001 (1968)]
o Rationale: In presenting the checks
for clearing, the collecting agent
made an express guarantee on the
validity of all the prior
endorsements.
The collecting bank or last indorser
generally suffers the loss because it has
the duty to ascertain the genuineness of
all prior indorsements considering that
the act of presenting the check for
payment to the drawee is an assertion
that the party making the presentment
had done its duty to ascertain the
genuineness of the indorsements. [BPI vs.
CA, G.R. No. 102383 (1992)]
A drawee bank is not liable for forged
indorsements.
o Rationale: The drawee bank is not
similarly situated as the collecting
bank because the former makes no
warranty as to the genuineness of any
indorsement. The drawee banks duty
is but to verify the genuineness of the
drawers signature and not of the
indorsement because only the drawer
is its client.
PAGE 28 OF 320
UP LAW BOC NEGOTIABLE INSTRUMENTS LAW
VI. Consideration
Sec. 25, NIL. Value, what constitutes. Value
is any consideration sufficient to support a
simple contract. An antecedent or pre-existing
debt constitutes value; and is deemed such
whether the instrument is payable on demand
or at a future time.
Sec. 191, NIL. Definition and meaning of
terms. - In this Act, unless the contract
otherwise requires:
x---x
"Value" means valuable consideration;
x---x
Value and consideration are generally
convertible terms. However, they may have
different implications.
Consideration is the proper term when the
payee of a note sues the maker, or the payee
of a bill sues the drawer, or an indorsee sues
his immediate indorser.
Value is the proper term when a holder
sues any party to the instrument with whom
he himself has not dealt, the term value is
more appropriate.
An antecedent or pre-existing debt
constitutes value; and is deemed such
whether the instrument is payable on
demand or at a future time. [Sec. 25, NIL]
Value need not be full and a holder will be
one for value even if he gave less than the
face value of the instrument, provided the
intention of the transferor is to transfer the
full amount represented by the instrument.
A. WHO IS A HOLDER FOR VALUE
(HFV)?
1. A holder of an instrument for which value,
which need not be in full, has been given
at any given time but only with respect to
all parties who have become parties to
the instrument prior to the time at which
value has been given. [Sec 26, NIL]
2. A holder who has a lien on the instrument
but only to the extent of his lien. [Sec 27,
NIL] (2011 Bar Question)
PAGE 29 OF 320
MERCANTILE LAW
B. BURDEN OF PROOF -
PRESUMPTION OF CONSIDERATION
Sec. 24, NIL. Presumption of consideration. -
Every negotiable instrument is deemed prima
facie to have been issued for a valuable
consideration; and every person whose
signature appears thereon to have become a
party thereto for value.
Because of the presumption, it is immaterial
whether or not for value received appears in
the instrument.
C. EFFECT OF WANT OF
CONSIDERATION
Sec. 28, NIL. Effect of want of consideration. -
Absence or failure of consideration is a matter
of defense as against any person not a holder
in due course; and partial failure of
consideration is a defense pro tanto, whether
the failure is an ascertained and liquidated
amount or otherwise.
Absence or failure of consideration is a
matter of defense as against any person not a
holder in due course, hence, it is a personal
defense.
Partial failure of consideration is a defense
pro tanto, meaning a defense to the extent of
the failure. (Abad)
Effect of an illicit or unlawful
consideration: Illicit or illegal
consideration does not affect the negotiability
of the instrument as validity of consideration
is not one of the requisites of a negotiable
instrument. It is merely constitutes a defect of
title hence such illegality of consideration is
merely a personal defense which cannot be
raised against a holder in due course. [Sec. 55
and 57, NIL] [2009 bar question]
UP LAW BOC NEGOTIABLE INSTRUMENTS LAW MERCANTILE LAW

VII. Accommodation accommodation party. [Stelco Marketing

Corp. v. CA, G.R. No, 96160 (1992)]
Party
B. ACCOMMODATION PARTY AS
Sec. 29, NIL. Liability of accommodation SURETY
party. - An accommodation party is one who
has signed the instrument as maker, drawer, An accommodation party is generally
acceptor, or indorser, without receiving value regarded as a surety for the party
therefor, and for the purpose of lending his accommodated.
name to some other person. Such a person is
When the accommodation party makes
liable on the instrument to a holder for value,
payment to holder of the note, he has the
notwithstanding such holder, at the time of
right to sue the accommodated party for
taking the instrument, knew him to be only an
reimbursement. [Caeda v. CA, G.R. No.
accommodation party.
81322 (1990)]
Note: A corporation cannot act as an
Accom m odation Party
accommodation party. The issue or
(1) Must be a party to the instrument, endorsement of negotiable instruments
signing as maker, drawer, acceptor, or by a corporation without consideration
indorser; and for the accommodation of another is
ultra vires [Crisologo v. CA, G.R. No.
(2) Must not have receieved value therefor;
80599 (1989)]
and
(3) Signed for the purpose of lending his
Accom modation Party v. Regular
name to some other person.
Party

A. LIABILITY OF AN ACCOMMODATION Accommodation Party Regular Party

PARTY Purpose
Whether the liability is primary or Signs instrument for
secondary will depend on whether he the purpose of Does not sign the
signs as a maker, acceptor, drawer or lending his name or instrument for the
indorser. credit to some other same purpose
person
The holder for value to whom the Value Received
instrument thus executed is subsequently
negotiated has a right of recourse against Signs the intrument Signs the instrument
the accommodation party in spite of the without receiving for value
formers knowledge that no consideration value therefor
passed between the accommodation and Absence or Failure of Consideration as Defense
accommodated parties. [Sec. 28, NIL]
Cannot avail of the Can avail of said
Does this mean that the accommodation defense of absence or defense against a
party is liable to a holder even if he is not failure of person not a holder in
a holder in due course, provided he is a consideration against due course
holder for value? The Supreme Court has a holder not in due
ruled that an accommodation party is course
liable ONLY to a HOLDER IN DUE Right to Sue
COURSE. However, the mere fact that the
holder knew of the accommodation does After paying the May not sue any
not prevent him from being a holder in holder, may sue the subsequent party for
due course in order to recover from the accommodated party reimbursement
for reimbursement

PAGE 30 OF 320
UP LAW BOC NEGOTIABLE INSTRUMENTS LAW MERCANTILE LAW

and completed by delivery.

VIII. Negotiation B.1. BY DELIVERY IF PAYABLE TO

BEARER

Sec. 30, NIL. What constitutes negotiation. - Sec. 191, NIL. Definition and meaning of
An instrument is negotiated when it is terms. - In this Act, unless the contract
transferred from one person to another in such otherwise requires:
manner as to constitute the transferee the x---x
holder thereof. If payable to bearer, it is "Delivery" means transfer of possession,
negotiated by delivery; if payable to order, it is actual or constructive, from one person to
negotiated by the indorsement of the holder another;
and completed by delivery. x---x
"Issue" means the first delivery of the
instrument, complete in form, to a person who
A. NEGOTIATION DISTINGUISHED takes it as a holder;
FROM ASSIGNMENT x---x

Delivery means transfer of possession of

Transfer is a broader term than negotiation. If
an instrument is transferred without
negotiation, the transfer is a mere
assignment which constitutes the transferee
as a mere assignee, not a holder, subject to
all defenses existing among prior parties.
Transfer thus includes both an ordinary
assignment and a negotiation. (Campos)
instrument by the maker or drawer, with
intent to transfer title to the payee and
recognize him as holder thereof
Issuance is the FIRST delivery of the
instrument complete in form to a person who
takes it as a holder.

Requisites
Negotiation Assignment (1) Mechanical act of writing the instrument
completely and in accordance with the
The transfer of the The transferee does requirements of Section 1 of the NIL; and
instrument from one not become a holder,
person to another so nor can he become a (2) The delivery of the complete instrument
as to constitute the holder in due course; by the maker or drawer, with the
transferee the holder and he merely steps intention of giving effect to it, to the
thereof. [Sec.30, NIL] into the shoes of the payee or holder.
transferor. As such,
any defense available
against the transferor Presumption of delivery
is available against Where the instrument is no longer in the
the transferee. possession of a party whose signature
appears thereon, a valid and intentional
delivery by him is presumed until the
B. MODES OF NEGOTIATION contrary is proved [Sec. 16, NIL]
If it is in the hands of a holder in due
Sec. 30, NIL. What constitutes negotiation. - course, the presumption of a valid
An instrument is negotiated when it is delivery is conclusive [Sec. 16, NIL]
transferred from one person to another in such
manner as to constitute the transferee the
holder thereof. If payable to bearer, it is Presumption as to date
negotiated by delivery; if payable to order, it is
negotiated by the indorsement of the holder Date is not an essential element of
negotiability; it is not included in the
PAGE 31 OF 320
UP LAW BOC NEGOTIABLE INSTRUMENTS LAW
requirements for an instrument to be
negotiable under Sec. 1 of the NIL.
An undated instrument is considered to
be dated as of the time it was issued [Sec.
17 (c), NIL]
B.2. BY INDORSEMENT COMPLETED BY
DELIVERY IF PAYABLE TO ORDER
Sec. 191, NIL. Definition and meaning of
terms. - In this Act, unless the contract
otherwise requires:
x---x
"Indorsement" means an indorsement
completed by delivery;
x---x
B.2.A. INDORSEM ENT; HOW DONE
Sec. 31, NIL. Indorsement; how made. - The
indorsement must be written on the
instrument itself or upon a paper attached
thereto. The signature of the indorser, without
additional words, is a sufficient indorsement.
(1) W here placed The indorsement
must be written [Sec. 31, NIL]:
(a) On the instrument itself [Sec. 31, NIL] , or
(b) On a separate piece of paper attached to
the instrument called allonge[Sec. 31, NIL]
(2) Signature of the indorser,
without additional words, is a Where the instrument is payable or
sufficient indorsement [Sec. 31, NIL]
(3) Must be of the ENTIRE instrum ent
Sec. 32, NIL. Indorsement must be of entire
instrument. - The indorsement must be an
indorsement of the entire instrument. An
indorsement which purports to transfer to the
indorsee a part only of the amount payable,
or which purports to transfer the instrument
to two or more indorsees severally, does not
operate as a negotiation of the instrument.
But where the instrument has been paid in
part, it may be indorsed as to the residue.
PAGE 32 OF 320
MERCANTILE LAW
CANNOT indorse a part only of the
amount payable; BUT if the instrument
has been paid in part, then the
instrument may be indorsed as to the
residue [Sec. 32, NIL] (2012 Bar Question)
CANNOT transfer the instrument to two
or more indorsees severally [Sec. 32, NIL]
If not an indorsement of the entire
instrument, the transfer remains valid,
but as a mere assignment which subjects
the holder to all defenses on the
instrument (Campos)
(4) If name misspelled in
indorsement, indorsement will be
prim a facie deemed not valid.
Sec. 43, NIL. Indorsement where name is
misspelled, and so forth. - Where the name of
a payee or indorsee is wrongly designated or
misspelled, he may indorse the instrument as
therein described adding, if he thinks fit, his
proper signature.
The indorsement should be made by the
holder in the manner he was designated,
otherwise the signature will prima facie
not be a valid indorsement of the
instrument [Sec 43, NIL]
(5) Indorsem ent where there are joint
payees
indorsed to A and B, they are joint
payees and an indorsement by either A or
B only will not constitute a valid
negotiation, UNLESS the one indorsing is
authorized by the other. (Campos)
But where the instrument is payable to A
or B, they payees are merely in the
alternative, and either one may valdily
negotiate the same. (Campos)
C. KINDS OF INDORSEMENT
Sec. 33, NIL. Kinds of indorsement. - An
indorsement may be either special or in blank;
UP LAW BOC NEGOTIABLE INSTRUMENTS LAW
and it may also be either restrictive or qualified
or conditional.
Four bases of classification of
indorsem ents under the NIL:
(1) Special or in blank
(2) Restrictive or Non-Restrictive
(3) Qualified or unqualified
(4) Conditional or unconditional
All of the four bases of classification coexist
with each other; thus, an indorsement may be
special and qualified at the same time. It may
also be special and unqualified, special and
restrictive, special, unrestrictive and
unqualified and so on. (Campos)
C.1. AS TO MANNER OF FUTURE METHOD
OF NEGOTIATION
Sec. 34, NIL. Special indorsement;
indorsement in blank. - A special indorsement
specifies the person to whom, or to whose
order, the instrument is to be payable, and the
indorsement of such indorsee is necessary to
the further negotiation of the instrument. An
indorsement in blank specifies no indorsee,
and an instrument so indorsed is payable to
bearer, and may be negotiated by delivery.
Sec. 40, NIL. Indorsement of instrument
payable to bearer. - Where an instrument,
payable to bearer, is indorsed specially, it may
nevertheless be further negotiated by delivery;
but the person indorsing specially is liable as
indorser to only such holders as make title
through his indorsement.
Sec. 35, NIL. Blank indorsement; how changed
to special indorsement. - The holder may
convert a blank indorsement into a special
indorsement by writing over the signature of
the indorser in blank any contract consistent
with the character of the indorsement.
Special
PAGE 33 OF 320
MERCANTILE LAW
Specifies the person to whom/to whose
order the instrument is to be payable; and
the indorsement of such indorsee is
necessary to further negotiation.
A special indorser is liable to all
subsequent holders, unless the
instrument is an originally bearer
instrument, in which case he is liable only
to those who take title through his
indorsement. [Sec. 40, NIL]
An instrument, payable to bearer, and
indorsed specially, may nevertheless be
further negotiated by delivery. [Sec 40,
NIL]
Originally bearer instrument always
remains a bearer instrument. (Sundiang
and Aquino)
Blank
Specifies no indorsee, instrument so
indorsed is payable to bearer, and may be
negotiated by delivery
The holder may convert a blank
indorsement into a special indorsement
by writing over the signature of the
indorser in blank any contract consistent
with the character of the indorsement.
[Sec 35, NIL]
An order instrument may be converted
into a bearer instrument by means of a
blank indorsement, and may be later
reconverted into an order instrument by a
subsequent special indorsement
C.2. AS TO TITLE TRANSFERRED
Sec. 36, NIL. When indorsement restrictive. -
An indorsement is restrictive which either:
(a) Prohibits the further negotiation of the
instrument; or
(b) Constitutes the indorsee the agent of
the indorser; or
(c) Vests the title in the indorsee in trust
for or to the use of some other
persons.
But the mere absence of words implying power
to negotiate does not make an indorsement
UP LAW BOC NEGOTIABLE INSTRUMENTS LAW
restrictive.
Sec. 37, NIL. Effect of restrictive indorsement;
rights of indorsee. - A restrictive indorsement
confers upon the indorsee the right:
(a) to receive payment of the instrument;
(b) to bring any action thereon that the
indorser could bring;
(c) to transfer his rights as such indorsee,
where the form of the indorsement
authorizes him to do so.
But all subsequent indorsees acquire only the
title of the first indorsee under the restrictive
indorsement.
(1) Restrictive Such indorsement either:
(a) Prohibits further negotiation of
instrument
(b) Constitutes indorsee as agent of
indorser
Vests title in indorsee in trust for another [Sec
36, NIL]
RIGHTS OF RESTRICTIVE INDORSEE
Receive payment
Bring any action thereon that the indorser
could bring.
Transfer his rights as such indorsee, but
all subsequent indorsees acquire only the
title of first indorsee under restrictive
indorsement. [Sec 37, NIL]
(2) Non-restrictive
C.3. AS TO KIND OF LIABILITY ASSUMED
BY INDORSER
Sec. 38, NIL. Qualified indorsement. - A
qualified indorsement constitutes the indorser
a mere assignor of the title to the instrument.
It may be made by adding to the indorser's
signature the words "without recourse" or any
words of similar import. Such an indorsement
does not impair the negotiable character of
the instrument.
PAGE 34 OF 320
MERCANTILE LAW
(1) Qualified
Constitutes indorser as mere assignor of
title
Made by adding the words without
recourse, sans recourse, indorser not
holder, at the indorsers own riske, and
other terms of similar import. [Sec. 38,
NIL].
But this does not mean that the
transferee only has the rights of an
assignee; transfer remains a negotiation
and transferee can still be a holder
capable of acquiring a title free from
defenses of prior parties.
Effects:
1. Relieves the qualified indorser of his
liability to pay the instrument should the
maker be unable to pay
2. The qualified indorser does not guarantee
the solvency of the maker, but merely his
legal title to the instrument
3. A qualified indorsement does not impair
the negotiable charater of the
intstrument
(2) Non-qualified
C.4. AS TO PRESENCE/ABSENCE OF
EXPRESS LIMITATIONS
Sec. 39, NIL. Conditional indorsement. - Where
an indorsement is conditional, the party
required to pay the instrument may disregard
the condition and make payment to the
indorsee or his transferee whether the
condition has been fulfilled or not. But any
person to whom an instrument so indorsed is
negotiated will hold the same, or the proceeds
thereof, subject to the rights of the person
indorsing conditionally.
(1) Conditional
Additional condition annexed to
indorsers liability; such condition must
be expressed
Where an indorsement is conditional, a
party required to pay the instrument may
UP LAW BOC NEGOTIABLE INSTRUMENTS LAW
disregard the condition, and make
payment to the indorsee or his transferee,
whether condition has been fulfilled or
not.
But any person to whom an instrument so
indorsed is negotiated, will hold the same,
or the proceeds thereof, subject to the
rights of the person indorsing
conditionally. [Sec. 39, NIL]
(2) Unconditional
C.5. OTHER KINDS OF INDORSEMENT
(1) Absolute One by which the indorser
binds himself to pay, upon no other
condition than the failure of prior parties
to do so, and of due notice to him of such
failure
(2) Joint All must indorse when an
instrument is payable to the order of two
or more payees or indorsees who are not
partners. [Sec. 41, NIL]
Exceptions:
Where the payee or indorsee are partners;
and
Where the payee or indorsee indorsing
has authority to indorse for the others.
(3) Irregular A person who, not otherwise
a party to an instrument, places thereon
his signature in blank before delivery.
[Sec. 64, NIL]
Liability of Irregular Indorser:
If the instrument is payable to the order
of a third person, he is liable to the payee
and to all subsequent parties.
If the instrument is payable to the order
of the maker or drawer, or is payable to
bearer, he is liable to all parties
subsequent to the maker or drawer.
If he signs for the accommodation of the
payee, he is liable to all parties
subsequent to the payee. [NIL, Sec. 64]
PAGE 35 OF 320
MERCANTILE LAW
IX. Rights of the Holder
A. DEFINITION OF A HOLDER
Sec. 191, NIL. Definition and meaning of terms.
- In this Act, unless the contract otherwise
requires:
x---x
"Holder" means the payee or indorsee of a bill
or note who is in possession of it, or the bearer
thereof;
A.1. RIGHTS OF A HOLDER
A holder is a payee or indorsee of a bill or
note who is in possession of it, or the bearer
thereof [Sec. 191, NIL]. He has the following
rights [Sec. 51, NIL]:
(1) To sue on the instrument in his
own nam e
Unindorsed instruments: Section. 49, NIL.
Transfer without indorsement; effect of.
Where the holder of an instrument
payable to his order transfers it for value
without indorsing it, the transfer vests in
the transferee such title as the transferor
had therein, and the transferee acquires
in addition, the right to have the
indorsement of the transferor. But for the
purpose of determining whether the
transferee is a holder in due course, the
negotiation takes effect as of the time
when the indorsement is actually made.
Note: This section applies only to an
instrument payable to the order of the
transferor. This cannot apply to bearer
instruments.
Cancellation of indorsement: Section 48,
NIL. Striking out indorsement. The holder
may at any time strike out any
indorsement which is not necessary to his
title. The indorser whose indorsement is
struck out, and all indorsers subsequent
to him, are thereby relieved from liability
on the instrument.
Indorsement by agent: Section 20, NIL.
Liability of person signing as agent, and so
forth. Where the instrument contains or a
UP LAW BOC NEGOTIABLE INSTRUMENTS LAW
person adds to his signature words
indicating that he signs for or on behalf of
a principal or in a representative capacity,
he is not liable on the instrument if he
was duly authorized; but the mere
addition of words describing him as an
agent, or as filling a representative
character, without disclosing his principal,
does not exempt him from personal
liability.
(2) Payment in due course to the
holder discharges instrum ent
B. HOLDER IN DUE COURSE [HDC]
(2nd Most Frequently Asked since 1992)
Sec. 52, NIL. What constitutes a holder in due
course. - A holder in due course is a holder
who has taken the instrument under the
following conditions:
(a) That it is complete and regular upon
its face;
(b) That he became the holder of it
before it was overdue, and without
notice that it has been previously
dishonored, if such was the fact,
(c) That he took it in good faith and for
value;
(d) That at the time it was negotiated to
him he had no notice of any infirmity
in the instrument or defect in the title
of the person negotiating it.
Sec. 58, NIL. When subject to original
defense. - In the hands of any holder other
than a holder in due course, a negotiable
instrument is subject to the same defenses as
if it were non-negotiable. But a holder who
derives his title through a holder in due
course, and who is not himself a party to any
fraud or illegality affecting the instrument,
has all the rights of such former holder in
respect of all parties prior to the latter.
Section 59, NIL. Who is deemed holder in due
course. - Every holder is deemed prima facie
to be a holder in due course; but when it is
shown that the title of any person who has
negotiated the instrument was defective, the
burden is on the holder to prove that he or
PAGE 36 OF 320
MERCANTILE LAW
some person under whom he claims acquired
the title as holder in due course. But the last-
mentioned rule does not apply in favor of a
party who became bound on the instrument
prior to the acquisition of such defective title.
B.1. WHO ARE HOLDERS IN DUE COURSE
(1) Holder in due course [HDC] under Sec. 52,
NIL
(2) HDC under Sec. 58, NIL: A holder who
DERIVES title to the instrument through
a HDC has all the rights of the latter even
though he himself satisfies none of the
requirements of due course holding
HDC under Sec. 59, NIL
[presum ption]: Every holder is deemed
prima facie to be a holder in due course
Sec. 191 of the NIL defines holder as the
payee or indorsee of a bill or note, who is in
possession of it, or the bearer thereof. The
word holder in the first clause of Sec. 52
and in the second subsection thereof may be
replaced by the definition in Sec. 191 so as to
read a holder in due course is a payee or an
indorsee in possession, etc. [De Ocampo vs.
Gatchalian, G.R. No. L-15126 (1961)]
B.2. THE SIGNIFICANCE OF DUE COURSE
HOLDING
The question of whether a holder is a
holder in due course or not is significant
only when there is an existing defense
between prior parties. (Campos)
A holder in due course can acquire a
better title than his predecessors because
he takes the instrument free from any
defect of title of prior parties. He is
furthermore free from defenses available
to prior parties among themselves.
(Campos)
A holder not in due course, on the other
hand, takes the instrument subject to all
defenses because he is treated as a
transferee of a non-negotiable paper.
Real defenses, however, which attach to
the instrument itself would be available
even against a holder in due course.
(Campos)
UP LAW BOC NEGOTIABLE INSTRUMENTS LAW
B.3. RIGHTS OF A HOLDER IN DUE
COURSE
Sec. 51, NIL. Right of holder to sue; payment.
- The holder of a negotiable instrument may
to sue thereon in his own name; and payment
to him in due course discharges the
instrument.
Sec. 57, NIL. Rights of holder in due course. -
A holder in due course holds the instrument
free from any defect of title of prior parties,
and free from defenses available to prior
parties among themselves, and may enforce
payment of the instrument for the full
amount thereof against all parties liable
thereon.
Sec. 58, NIL. When subject to original
defense. - In the hands of any holder other
than a holder in due course, a negotiable
instrument is subject to the same defenses as
if it were non-negotiable. But a holder who
derives his title through a holder in due
course, and who is not himself a party to any
fraud or illegality affecting the instrument,
has all the rights of such former holder in
respect of all parties prior to the latter.
(1) To sue on the instrument in his own name
[Sec. 51, NIL]
(2) To receive payment on the instrument
[Sec. 51, NIL]
(3) Holds instrument free of any defect of
title of prior parties [Sec. 57, NIL]
(4) Free from defenses available to prior
parties among themselves [Sec. 57, NIL]
(5) May enforce payment of instrument for
full amount, against all parties liable
[Sec. 57, NIL]
PAGE 37 OF 320
MERCANTILE LAW
B.4. REQUISITES OF A HOLDER IN DUE
COURSE
Sec. 52, NIL. What constitutes a holder in due
course.- A holder in due course is a holder
who has taken the instrument under the
following conditions:
(a) That it is complete and regular upon
its face;
(b) That he became the holder of it
before it was overdue, and without
notice that it has been previously
dishonored, if such was the fact;
(c) That he took it in good faith and for
value;
(d) That at the time it was negotiated to
him, he had no notice of any infirmity
in the instrument or defect in the title
of the person negotiating it.
These four requisites must concur. If any one
of them is absent, the holder cannot be
considered a holder in due course. (Campos)
B.4.A. COM PLETE AND REGULAR
UPON ITS FACE
An instrument is incomplete when it is
wanting in any material particular or
particular proper to be inserted in a
negotiable instrument without which the
same will not be complete. (De Leon)
B.4.B. BECAM E THE HOLDER BEFORE
OVERDUE AND W ITHOUT NOTICE OF
PREVIOUS DISHONOR
Overdue The Following Cannot Be
Holders in Due Course:
(a) A holder who became such after the
date of maturity of the instrument
[instrument is overdue; Sec. 53, NIL]
(b) In case of demand instruments: a
holder who negotiates it after an
unreasonable length of time after its
issue [Sec. 53, NIL]
The fact that the instrument is overdue is a
strong indication that it was dishonored and
the law puts the potential holder on inquiry
as to whether it was dishonored and the
reason therefor. (Campos)
UP LAW BOC NEGOTIABLE INSTRUMENTS LAW MERCANTILE LAW

An instrument may be dishonored either by Value

non-acceptance or by non-payment.
(1) Any consideration sufficient to support a
(1) Dishonor by non-acceptance takes simple contract [Sec. 25, NIL]
place when the drawee refuses to accept
(2) An antecedent or pre-existing debt
the order of the drawer as stated in the
constitutes value, whether the instrument
bill. Can refer only to a bill of exchange.
is payable on demand or at a future time
(2) Dishonor by non-paym ent takes [Sec. 25, NIL]
place when the party primarily liable fails
to pay the instrument at the date of
maturity. (Campos) Holder For Value
(1) Where value has at any time been given
for the instrument, the holder is deemed
Notes:
a holder for value in respect to all parties
(1) An overdue instrument is still negotiable, who become such prior to that time [Sec.
but it is subject to the defenses (real and 26, NIL]; and
personal) existing at the time of the
(2) Where the holder has a lien on the
transfer.
instrument, he is deemed a HFV to the
(2) As to what constitutes a reasonable time, extent of his lien [Sec .27, NIL]
regard is to be had to the nature of the
The holder is a holder for value only to the
instrument, the usage of trade or
extent that the consideration agreed upon
business with respect to such instrument,
has been paid, delivered, or performed.
and the facts of the particular case. [Sec.
(Sundiang and Aquino)
193, NIL]
A negotiable instrument may be given as a
(3) An instrument is not invalid for the
gift to the indorsee or transferee. In such
reason only that it is ante-dated or
cases, whatever defenses can be set up
postdated provided it is not done for an
against the transferor can also be set up
illegal or fraudulent purpose. The person
against the transferee, but where the holder
to whom an instrument so dated is
gave valuable consideration for the note and
delivered acquires the title thereto as of
the other requisites of Sec. 52 are present, he
the date of delivery [Sec. 12, NIL]
will be free from such defenses.
(4) Instruments with fixed maturity
Value need not be full and a holder will be
but subject to acceleration: ultimate
one for value even if he gave less than the
date of maturity is the date of maturity for
face value of the instrument, provided that
the purpose of determining whether a
intention of the transferor is to transfer the
purchaser is a HDC
full amount represented by the instrument.
(5) Undated instrum ents: Prima facie (Campos)
presumption that it was negotiated
Presumption: Every negotiable instrument
before it was overdue [Sec. 45, NIL]
is deemed prima facie issued for valuable
consideration; and every person whose
signature appears thereon is deemed to have
B.4.C. THAT HE TOOK IT IN GOOD
become a party thereto for value. [Sec. 24,
FAITH AND FOR VALUE
NIL]
Good Faith
Such presumption cannot be overcome by the
Holder must have taken the instrument in petitioners bare denial of receipt of the
good faith and that at the time it was consideration. [Bayani v. People, G.R. No.
negotiated to him he had no notice of any 154947 (2004)]
infirmity in the instrument or defect in the
title of the person negotiating it. (Campos)
B.4.D. NO NOTICE OF INFIRMITY IN
THE INSTRUMENT OR DEFECT IN THE
PAGE 38 OF 320
UP LAW BOC NEGOTIABLE INSTRUMENTS LAW
TITLE OF THE PERSON NEGOTIATING
IT
Defective title
Sec. 55, NIL. When title defective. The title
of a person who negotiates an instrument is
defective within the meaning of this act when
he obtained the instrument, or any signature
thereto, by fraud, duress, or force and fear, or
other unlawful means, or for an illegal
consideration, or when he negotiates it in
breach of faith, or under such circumstances
as amount to a fraud.
Title is defective when [Sec. 55, NIL]
(1) instrument/signature obtained by fraud,
duress, force or fear or other unlawful
means OR for an illegal consideration; or
(2) instrument is negotiated in breach of
faith, or fraudulent circumstances
Title is not defective when at the time it was
negotiated to him, he had no notice of:
(1) any infirmity in instrument
(2) any defect in title of person negotiating
Note: Due course holding is not affected by
the holders acquisition of knowledge after he
has taken the instrument.
To constitute notice of an infirmity in the
instrument or defect in the title of the person
negotiating the same, the person to whom it
is negotiated must have had actual
knowledge of the infirmity or defect, or
knowledge of such facts that his action in
taking the instrument amounted to bad faith.
[Sec. 56, NIL]
A transferee who receives notice of any
infirmity or defect before he has paid the full
amount for the instrument will be deemed a
HDC only to the extent of the amount
therefore paid by him [Sec.54, NIL]
Gross negligence in itself would not
constitute notice since it is not the equivalent
of actual knowledge nor of bad faith.
PAGE 39 OF 320
MERCANTILE LAW
Suspicious circumstances
General rule: A purchaser of an instrument
is not required to investigate every suspicious
circumstance; failure to investigate such
circumstances does not constitute him as
being in bad faith or having a notice of defect.
(Campos)
Rationale: The general principle that a
purchaser who has knowledge of certain facts
is put on inquiry does not operate to its full
extent in the law of negotiable instruments.
Negotiable instruments are usually issued in
pursuance of commercial transactions where
time is of the essence. To require
investigation of every suspicious
circumstance would hamper their function of
facilitating exchange; thus negligence in
tracking down a suspicious circumstance
which would put a prudent man on inquiry is
not of itself sufficient to prevent recovery.
(Campos)
Exceptions:
(a) Suspicious circumstances together
with other circumstances, may be
admitted as evidence of bad faith.
(b) Where the suspicious circumstances
are so cogent and obvious
A check with 2 parallel lines in the upper left
hand corner means that it could only be
deposited and may not be converted to cash.
Consequently, such circumstance should put
the payee on inquiry and upon him devolves
the duty to ascertain the holders title to the
check or the nature of his possession. Failing
in this respect, the payee is declared guilty of
gross negligence amounting to legal absence
of good faith and as such the consensus of
authority is to the effect that the holder of the
check is not a holder in good faith. [State
Investment House vs. IAC, G.R. No. 72764
(1989)]
UP LAW BOC NEGOTIABLE INSTRUMENTS LAW MERCANTILE LAW

B.5. PRESUMPTION IN FAVOR OF DUE Holder in Due Course Not Holder in Due
COURSE HOLDING Course
Every holder is deemed prima facie to be a
Rights
holder in due course. [Sec. 59, NIL]
(1) Burden shifts when it is shown that the Has the right to Has the right to
title of any person who has negotiated enforce payment, sue enforce payment, sue
the instrument was defective. Holder in his own name, and in his own name, and
must then prove that he or some person negotiate the negotiate the
under whom he claims acquired the title instrument instrument
as a holder in due course.
(2) But the last mentioned rule does not
apply in favor of a party who became C. DEFENSES AGAINST THE HOLDER
bound on the instrument prior to the
acquisition of such defective title.
Real Defenses Personal Defenses

Those which Attach to

B.6. HOLDER NOT IN DUE COURSE the instrument itself
Those wherein a true
(1) One who became a holder of an and generally disclose
contract appears, but
instrument without any, some or all of the an absence of one of
where for some
requisites under Sec. 52 of the NIL the essential
reason, such as fraud,
elements of a contract
(2) With respect to demand instruments, if it the defendant is
or where the admitted
is negotiated an unreasonable length of excused from the
contract is void for all
time after its issue, the holder is deemed obligation to perform
purposes for reasons
not a holder in due course. [Sec. 53, NIL]
of public policy
Rights of a holder not in due course
[Sec. 51, NIL] Available against all Can be raised only
holders, including against holders not in
(1) To sue on the instrument under in his holders in due course due course
own name
(2) To enforce the instrument Forgery, incapacity, Those mentioned in
fraud in the execution, Sec. 55 (fraud, duress,
The only disadvantage of a holder who is not some types of duress, force and fear, other
a holder in due course is that the negotiable and lack of delivery of unlawful means,
instrument is subject to defenses as if it were an incomplete illegal consideration,
non-negotiable. [Chan Wan vs. Tan Kim, G.R. instrument negotiating in breach
No. L-15380 (1960)] of faith), want of
consideration,
incompleteness of the
Holder in Due Course Not Holder in Due instrument, lack of
Course delivery of a
completed instrument
Compliance with Requisites

All the requisites Not all of the

under Sec. 52, NIL are requisites under Sec.
complied with 52 are complied with

Defenses

His rights can only be His rights can be

defeated by real defeated by real and
defenses personal defenses

PAGE 40 OF 320
UP LAW BOC NEGOTIABLE INSTRUMENTS LAW
X. Liabilities of Parties
Primary liability: The unconditional
promise attaches the moment the maker
makes the instrument while the acceptors
assent to the unconditional order attaches
the moment he accepts the instrument. No
further act is necessary in order for the
liability to accrue. Presentment for payment
is all that is necessary.
A. PARTIES PRIMARILY LIABLE
Sec. 192, NIL. Person primarily liable on
instrument. The person primarily liable
on an instrument is the person who by the
terms of the instrument is absolutely required
to pay the same. All other parties are
secondarily liable.
A.1. MAKER
Sec. 60, NIL. Liability of maker. The maker
of a negotiable instrument by making it
engages that he will pay it according to its
tenor, and admits the existence of the payee
and his then capacity to indorse.
The term maker applies only to the
promissory note.
By signing the note, the maker also
represents to the world that the payee named
has the capacity to indorse at the time of the
making of such note and thus represents that
the named payee can transfer a good and
valid title to the note by indorsement. The
maker is therefore precluded from setting up
such defenses as minority or insanity of the
payee or ultra vires act of a payee-corporation.
(Campos)
A.2. ACCEPTOR
Sec. 62, NIL. Liability of acceptor. The
acceptor by accepting the instrument
engages that he will pay it according to the
tenor of his acceptance; and admits:
(a) The existence of the drawer, the
PAGE 41 OF 320
MERCANTILE LAW
genuineness of his signature and his
capacity and authority to draw the
instrument, and
(b) The existence of the payee and his
then capacity to indorse.
A drawee has no liability on the bill until and
unless he accepts the same.
Unconditionally liable; the acceptor is duty-
bound to pay the holder at date of maturity,
WON holder demands payment from him,
and he is not relieved from liability even if the
instrument should become overdue due to
failure of holder to make such demand.
(Campos)
Requisites for a valid acceptance
(a) It must be in writing;
(b) It must be signed by the drawee; and
(c) It must not change the implied promise of
the acceptor to pay only in money. [Sec.
132, NIL]
Note: A bill may be accepted even after it is
overdue or dishonored, since an instrument
does not lose its negotiability by the mere
fact that its maturity date has passed or that
the drawee has refused to accept or pay it.
(Campos)
B. PARTIES SECONDARILY LIABLE
Secondary liability: A party secondarily
liable is not bound to pay unless the
following have been fulfilled:
(a) Due presentment or demand to the
primary party
(b) Dishonor by such party
(c) Notice of dishonor to secondary party,
and, in cases of foreign bills of exchange,
protest of the bill
Presentment means that the instrument is
presented at maturity to the party primarily
liable for the purpose of obtaining payments
thereof. Without this presentment, the
secondary parties cannot be held liable
UP LAW BOC NEGOTIABLE INSTRUMENTS LAW
should the primary party have refused to pay
upon such presentment. (Campos)
B.1. DRAWER
Sec. 61, NIL. Liability of drawer. The drawer
by drawing the instrument admits the
existence of the payee and his then capacity
to indorse; and engages that on due
presentment the instrument will be accepted
or paid, or both, according to its tenor, and
that if it be dishonored, and the necessary
proceedings on dishonor be duly taken, he
will pay the amount thereof to the holder, or
to any subsequent indorser who may be
compelled to pay it. but the drawer ay insert
in the instrument an express stipulation
negativing or limiting his own liability to the
holder.
The drawer warrants the existence of the
payee and the latters capacity to indorse the
instrument at the time of its issuance.
(Campos)
B.2. INDORSERS
The following indorsers assume the liability
to pay the instrument:
(1) General or Unqualified Indorser; and
(2) Irregular Indorser
B.2.A. GENERAL OR UNQUALIFIED
INDORSER
(2011 Bar Question)
Sec. 66, NIL. Liability of general indorser.
Every indorser who indorses without
qualification, warrants to all subsequent
holders in due course:
(a) The matters and things mentioned in
subdivisions [a],[b] and [c] of the next
preceding section;
(b) That the instrument is at the time of
his indorsement valid and subsisting.
And in addition, he engages that on due
presentment, it shall be accepted or paid, or
both, as the case may be, according to its
tenor, and that if it be dishonored, and the
necessary proceedings on dishonor be duly
PAGE 42 OF 320
MERCANTILE LAW
take, he will pay the amount thereof to the
holder, or to any subsequent indorser who
may be compelled to pay it.
W ho is a qualified indorser? One who is
constituted as a mere assignor of the title to
the instrument by adding to his signature the
words "without recourse" or any words of
similar import.
A qualified indorser does not assume the
liability to pay the instrument since he is
merely an assignor of the title to the
instrument. However, he becomes liable once
he breaches a warranty.
W ho is a general or unqualified
indorser? Every person who indorses
without qualification [Sec. 66, NIL]
A person placing his signature upon an
instrument other than as a maker, drawer, or
acceptor unless he indicates by appropriate
words his intention to be bound in some other
capacity [Sec. 63, NIL]
A person, who places his signature on an
instrument negotiable by delivery, incurs all
the liabilities of an indorser [Sec. 67, NIL]
The general indorser makes two contracts:
(1) An assignment or sale of the
instrument; and
(2) A special contract of indorsement
B.2.B. IRREGULAR INDORSER
When a person not otherwise a party to an
instrument, places thereon his signature in
blank before delivery, he is liable as an
indorser, in accordance with these rules:
(1) Instrument payable to order of
3rd person: liable to payee and to
all subsequent parties
(2) Instrument payable to the
order of m aker/drawer, or
payable to bearer: liable to all
parties subsequent to maker/drawer
(3) Signs for accom m odation of
payee: liable to all parties
subsequent to payee [Sec. 64, NIL]
UP LAW BOC NEGOTIABLE INSTRUMENTS LAW MERCANTILE LAW

B.3. ORDER OF LIABILITY AMONG
INDORSERS
Sec. 68, NIL. Order in which indorsers are
liable. As respects one another, indorsers
are liable prima facie in the order in which
they indorse; but evidence is admissible to
show that as between or among themselves
they have agreed otherwise. Joint payees or
joint indorsees who indorse are deemed to
indorse jointly and severally.
Among themselves, indorsers are liable prima
facie in the order they indorse.
Sec. 68 does not bind the holder, and he may
sue any of the indorsers, regardless of the
order of their indorsement. (Campos)
Promissory Note Bill of Exchange
XI. Warranties
The primary or secondary liability of the
parties should be distinguished from their
warranties.
(1) Primary or secondary liability of the
parties makes them liable to pay the
sum certain in money stated in the
instrument.
(2) Warranties are affirmations of the
fact on the part of the parties that
impose no direct obligation to pay in
the absence of breach thereof.
(Aquino)
In case of breach of warranties, the person
who breached the same may either be liable
or he may be barred from asserting a
particular defense.

No person primarily A. MAKERS WARRANTIES

liable to pay until and
unless the drawee (1) The maker admits the existence of the
Maker is the person accepts the order of payee AND
primarily liable the drawer to pay; (2) His then capacity to indorse [Sec. 60, NIL]
when the drawee
accepts, he becomes
the acceptor
B. DRAWERS WARRANTIES
Indorsers are Drawer and indorsers
secondarily liable. are secondarily liable (1) The drawer admits the existence of the
payee AND
(2) His then capacity to endorse

C. ACCEPTORS WARRANTIES

(1) As to the drawer, the acceptor admits:

(a) His existence
(b) Genuineness of his signature
(c) Capacity and authority to draw the
instrument
(2) As to the payee, the acceptor admits:
(a) His existence
(b) His then capacity to indorse [Sec. 62,
NIL]

PAGE 43 OF 320
UP LAW BOC NEGOTIABLE INSTRUMENTS LAW
The acceptor is precluded from setting up
certain defenses by reason of his warranties
like the defense that the drawer is a minor or
the signature of the drawer is forged.
(Aquino)
D. GENERAL INDORSERS
WARRANTIES
(1) That the instrument is genuine in and
in all respects what it purports to be
(2) That he has a good title to it
(3) That all prior parties had capacity to
contract
(4) That the instrument is, at the time of
his indorsement, valid and subsisting
[Sec. 66, NIL]
These warranties are in favor of all
subsequent holders in due course. [Ang Tiong
v. Ting, G.R. No. L-26767 (1968)]
E. QUALIFIED INDORSERS
WARRANTIES
(1) That the instrument is genuine in and in
all respects what it purports to be
(2) That he has a good title to it
(3) That all prior parties had capacity to
contract
(4) That he has no knowledge of any fact
which would impair the validity of the
instrument or render it valueless. [Sec. 68,
NIL]
PAGE 44 OF 320
MERCANTILE LAW
XII. Presentment for
Payment
A. PRESENTMENT; MEANING
Presentment for payment is the presentation
of the instrument, whether a note or a bill, to
the person primarily liable for the purpose of
demanding and obtaining payment thereof.
(Campos)
(1) The production of a Bill of Exchange to
the drawer or acceptor for payment; or
(2) The production of a Promissory Note to
the party liable for payment.
B. DATE AND TIME OF PRESENTMENT
Sec. 72, NIL. What constitutes sufficient
presentment. - Presentment for payment, to
be sufficient, must be made:
(a) By the holder, or by some person
authorized to receive payment on his
behalf;
(b) At a reasonable hour on a business
day;
(c) At a proper place as herein defined;
(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 is
made.
(1) Bearing fixed m aturity/not
payable on demand on the day it
falls due [Secs. 71 and 85, NIL]
(2) Payable on demand within a
reasonable time after its issue [Sec. 7,
NIL]
(3) Dem and bill of exchange within a
reasonable time after the last negotiation.
[Sec. 71, NIL]
Presentment for payment cannot be made on
a Sunday or legal holiday, and if the note
matures on such a day, since the maker
cannot be compelled to pay sooner than he
promised, the note or bill will have to be
presented on the next business day. (Campos)
UP LAW BOC NEGOTIABLE INSTRUMENTS LAW
Instruments falling due or becoming payable
on Saturday are to 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 for
payment before twelve oclock noon on
Saturday when that entire day is not a holiday.
[Sec. 85, NIL]
Inevitable or unavoidable causes not
attributable to the fault of the holder and
making presentment morally or physically
impossible may excuse delay in presentment.
(Campos)
Note: Although presentment was made
within a reasonable time from last
negotiation, it may have been made within an
unreasonable time from issuance. Thus
holder may still not be a holder in due course
under Sec. 71.
C. NECESSITY OF PRESENTMENT FOR
PAYMENT
W hen necessary: In order to charge the
drawer and indorsers [Sec. 70, NIL]
W hen NOT necessary:
(1) To charge the person primarily liable on
the instrument [Sec. 70, NIL]
(2) To charge the drawer where he has no
right to expect or require that the drawee
or acceptor will pay the instrument. [Sec.
79, NIL]
(3) To charge an indorser where the
instrument was made or accepted for his
accommodation and he has no reason to
expect that the instrument will be paid if
presented. [Sec. 80, NIL]
(4) When the bill of exchange has previously
been dishonored by non-acceptance and
has not been subsequently accepted
PAGE 45 OF 320
MERCANTILE LAW
D. PARTIES TO WHOM PRESENTMENT
FOR PAYMENT SHOULD BE MADE
General rule: Presentment for payment
must be made to the person primarily liable
on the instrument or if he is absent or
inaccessible, to any person found at the place
where the presentment is made.
Exceptions: Where the person primarily
liable is/are:
(1) Dead presentment for payment
must be made to his personal
representative
(2) Partners presentment for
payment may be made to any one of
them, even though there has been a
dissolution of the firm
(3) Several persons, not partners
(joint debtors) presentment for
payment must be made to them all
E. DISPENSATION WITH
PRESENTMENT FOR PAYMENT
W hen Excused:
(1) Where, after the exercise of reasonable
diligence, presentment cannot be made;
(2) Where the drawee is a fictitious person;
(3) By waiver of presentment, express or
implied. [Sec. 82, NIL]
F. DISHONOR BY NON-PAYMENT
The instrument is dishonored by non-
payment when:
(1) It is duly presented for payment and
payment is refused or cannot be
obtained; or
(2) Presentment is excused and the
instrument is overdue and unpaid [Sec.
83, NIL]
In case of waiver of protest, whether
in the case of a foreign bill of
exchange or other NI deemed to be a
waiver not only of a formal protest but also of
presentment and notice of dishonor [Sec. 111,
NIL]
UP LAW BOC NEGOTIABLE INSTRUMENTS LAW
XIII. Notice of Dishonor
Notice of dishonor is bringing either verbally
or in writing, to the knowledge of the drawer
or the indorser of the instrument, the fact
that a specified negotiable instrument, upon
proper proceedings taken, has not been
accepted, or has not been paid, and that the
party notified is expected to pay it. [Martin v.
Brown, 75 Ala. 442]
Notice given by holder or his agent to party or
parties secondarily liable that the instrument
was dishonored by:
(1) Non-acceptance by the drawee of a
bill; or
(2) Non-payment by the acceptor of a
bill; or
(3) Non-payment by the maker of a note
[Sec. 89, NIL]
Requisites:
(a) Given by holder or his agent, or by
any party who may be compelled by
the holder to pay [Sec. 90, NIL]
(b) Given to secondary party or his agent
[Sec. 97, NIL]
(c) Given within the periods provided by
law [Sec. 102, NIL]
(d) Given at the proper place [Secs. 103
and 104, NIL]
A. PARTIES TO BE NOTIFIED
(1) Non-acceptance [bill] to
persons secondarily liable, namely,
the drawer and indorsers as the case
may be
(2) Non-payment (both bill and
note) to indorsers
Note: Notice must be given to persons
secondarily liable. Otherwise, such parties
are discharged. Notice may be given to the
party himself or to his agent.
A.1. TO WHOM IN GENERAL
PAGE 46 OF 320
MERCANTILE LAW
Notice of dishonor may be given either to the
party himself or to his agent in that behalf.
[Sec. 97, NIL]
A.2. IF GIVEN BY AGENT
Where the instrument has been 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. [Sec. 94, NIL]
A.3. IF PARTY IS DEAD
The notice must be given to a personal
representative, if there be one, and if with
reasonable diligence, he can be found.
If there be no personal representative, notice
may be sent to the last residence or last place
of business of the deceased. [Sec. 98, NIL]
A.4. TO PARTNERS
Where the parties to be notified are partners,
notice to any one partner is notice to the firm,
even though there has been a dissolution.
[Sec. 99, NIL]
A.5. TO JOINT PARTIES
Notice to joint parties who are not partners
must be given to each of them, unless one of
them has authority to receive such notice for
the others. [Sec. 10, NIL]
A.6. TO BANKRUPT
Where a party has been adjudged a bankrupt
or an insolvent, or has made an assignment
for the benefit of creditors, notice may be
given either to the party himself or to his
trustee or assignee. [Sec. 101]
B. WHEN GIVEN
Notice may be given as soon as the
instrument is dishonored [Sec. 102, NIL]
C. WHEN NOT NECESSARY TO GIVE TO
DRAWER
UP LAW BOC NEGOTIABLE INSTRUMENTS LAW
(2011 Bar Question)
Notice of dishonor is not required to be given
to the drawer in any of the following cases:
(1) Drawer and drawee are the same;
(2) Drawee is a fictitious person or not having
the capacity to contract;
(3) Drawer is the person to whom the
instrument is presented for payment;
(4) The drawer has no right to expect or
require that the drawee or acceptor swill
honor the instrument;
(5) Where the drawer has countermanded
payment [Sec. 114, NIL]
D. WHEN NOT NECESSARY TO GIVE TO
INDORSER
(2011 Bar Question)
Notice of dishonor is not required to be given
to an indorser in the following cases:
(1) Drawee is a fictitious person or does
not have the capacity to contract, and
indorser was aware of that fact at the
time he indorsed the instrument;
(2) Indorser is the person to whom the
instrument is presented for payment;
(3) Instrument was made or accepted for
his accommodation. [Sec. 115, NIL]
E. WHO WILL BENEFIT
If given by or on behalf of the holder:
(1) All subsequent holders
(2) All prior parties (as to holder) who have a
right of recourse against the party to
whom it is given. [Sec. 92, NIL]
If given by the indorser:
(1) Holder
(2) All parties subsequent to the party to
whom notice is given. [Sec. 93, NIL]
F. PARTIES WHO MAY GIVE NOTICE OF
DISHONOR
PAGE 47 OF 320
MERCANTILE LAW
The notice may be given by or on behalf of the
holder, or by or on behalf of any party to the
instrument who might be compelled to pay it
to the holder, and who, upon taking it up,
would have a right to reimbursement from
the party to whom the notice is given. [Sec.
90, NIL]
F.1. WHO SHOULD GIVE
(1) Holder
(2) Agent or representative of holder.
(3) Any party who may be compelled to
pay like indorsers.
(4) Agent of any party who may be
compelled. [Sec. 90, NIL]
G. EFFECT OF NOTICE
Notice of dishonor is required to charge
parties secondarily liable.
Upon valid notice of dishonor, immediate
right of recourse against the indorser arises. It
is as if the indorser becomes primarily liable
in the sense that the holder need not claim
payment from the person primarily liable
(Sundiang and Aquino)
H. FORM OF NOTICE
The notice may be:
(1) In writing; or
(2) Merely oral
The notice may be given in any terms which:
(1) Sufficiently identify the instrument;
and
(2) Indicate that it has been dishonored
by non-acceptance or non-payment
It may in all cases be given by delivering it
personally or through the mails. [Sec. 96 NIL]
No misdescription of the amount, or of the
date, or of the name of the parties, or of the
time the paper falls due, or other defect will
vitiate the notice of dishonor, unless it
misleads the party to whom it is sent.
(Campos)
UP LAW BOC NEGOTIABLE INSTRUMENTS LAW
I. WAIVER
Notice of dishonor may be waived either
before the time of giving notice has arrived or
after the omission to give due notice, and the
waiver may be expressed or implied. [Sec. 109,
NIL]
Where the waiver is embodied in the
instrument itself, it is binding upon all
parties; but, where it is written above the
signature of an indorser, it binds him only.
[Sec. 110, NIL]
J. DISPENSATION WITH NOTICE
Notice of dishonor is dispensed with:
(1) When party to be notified knows about
the dishonor, actually or constructively
[Secs. 114-117, NIL]
(2) If waived [Sec. 109, NIL]
(3) When after due diligence, it cannot be
given [Sec. 112, NIL]
K. EFFECT OF FAILURE TO GIVE
NOTICE
Failure to give notice to parties secondarily
liable discharges such parties
An omission to give notice of dishonor by
non-acceptance does not prejudice the rights
of a holder in due course subsequent to the
omission [Sec. 117, NIL]
Note: A holder in due course cannot be
prejudiced by the failure or neglect of a
previous holder to give notice of dishonor by
non-acceptance.
A dishonor by non-payment necessarily
presupposes the instrument has matured,
and therefore, no holder subsequent thereto
can be a holder in due course. Such dishonor
by non-payment will thus prejudice al
subsequent holders. (Campos)
PAGE 48 OF 320
MERCANTILE LAW
XIV. Discharge of
Negotiable Instrument
Discharge: The release of all parties,
whether primary or secondary, from the
obligation on the instrument. It renders the
instrument without force and effect and,
consequently, non-negotiable (De Leon)
A. DISCHARGE OF NEGOTIABLE
INSTRUMENT
Sec. 119, NIL. Instrument; How discharged. - A
negotiable instrument is discharged:
(1) By payment in due course by or on behalf
of the principal debtor;
(2) By payment in due course by the party
accommodated, where the instrument is
made or accepted for his
accommodation;
(3) By the intentional cancellation thereof by
the holder;
(4) By any other act which will discharge a
simple contract for the payment of
money;
(5) When the principal debtor becomes the
holder of the instrument at or after
maturity in his own right.
B. BY PAYMENT IN DUE COURSE
(2000 Bar Question)
Sec. 51, NIL. Right of Holder to Sue for
Payment. The holder of a negotiable
instrument may sue thereon in his own name;
and payment to him in due course discharges
the instrument.
Sec. 88, NIL. What Constitutes Payment in
Due Course. - Payment is made in due course
when it is made at or after the maturity of the
payment to the holder thereof in good faith
and without notice that his title is defective.
(Sec. 88)
UP LAW BOC NEGOTIABLE INSTRUMENTS LAW
Requisites:
(1) Payment must be made at or after
maturity.
(2) Payment must be made to the holder.
(3) Payment must be made in good faith and
without notice that holders title is
defective.
Payment should be in money in order to
effect its discharge. (Campos)
If payment is made before maturity and
the note is negotiated to a HDC, the latter
may recover on the instrument.
Payment to one of several payees or
indorsees in the alternative discharges
the instrument, but payment to one of
several joint payees or joint indorsers is
not a discharge. The party receiving
payment must have been authorized by
others to receive payment.
By whom m ade:
(1) Payment in due course by or on behalf of
the principal debtor.
(2) Payment in due course by party
accommodated where party is made/
accepted for accommodation whether or
not he appears to be a party to the
instrument.
If payment is not made by the parties
enumerated, it would constitute a
purchase or negotiation and the
instrument would remain outstanding.
Principal debtor: includes the maker
and the acceptor.
If the primary party is an accommodation
party, like a guarantor or a surety,
payment by him does not discharge the
instrument. [Fox v. Kroeger, 119 Tex. 511
(1931)]
PAGE 49 OF 320
MERCANTILE LAW
C. BY INTENTIONAL CANCELLATION
(2011 Bar Question)
Sec. 123, NIL. Cancellation; Unintentional;
Burden of Proof. - A cancellation made
unintentionally or under a mistake or without
the authority of the holder, is inoperative; but
where an instrument or any signature thereon
appears to have been cancelled, the burden
of proof lies on the party who alleges that the
cancellation was made unintentionally or
under a mistake or without authority.
The burden of proving that a cancellation
was made unintentionally or by mistake
or through fraud, is on the person
claiming its effectiveness. Cancellation is
presumed to be intentional. (Campos)
Cancellation need not be supported by
consideration and is effective even
without notice to the primary party.
D. BY OTHER ACTS THAT DISCHARGE A
SIMPLE CONTRACT
FOR PAYMENT OF MONEY
Any other act which discharges a simple
contract for payment of money.
Sec. 1231, Civil Code. Obligations are
extinguished by:
(1) Payment or performance;
xxx
(3) By condonation or remission of the debt;
(4) By the confusion or merger of the rights of
a debtor;
(5) By compensation;
(6) By novation
Other causes of extinguishment of
obligations, such as annulment, rescission,
fulfillment of a resolutory condition, and
prescription, are governed elsewhere in this
Code.
UP LAW BOC NEGOTIABLE INSTRUMENTS LAW
E. BY REACQUISITION OF PRINCIPAL
DEBTOR IN HIS OWN RIGHT
Principal debtor becomes holder of
instrument at or after maturity in his own
right and not as an agent or for and in behalf
of another.
Reacquisition must be at or after maturity
for the instrument to be discharged,
otherwise the instrument may be further
negotiated. (Campos)
F. BY MATERIAL ALTERATION
Section 125, NIL. What constitutes a material
alteration. - Any alteration which changes:
(1) Date
(2) Sum payable, either for principal or
interest
(3) Time or place of payment
(4) Number or relations of the parties
(5) Medium or currency in which payment
is to be made
(6) Or which adds a place of payment
where no place of payment is
specified
(7) Or any other change or addition
which alters the effect of the
instrument in any respect
Material alteration without assent of all
parties liable avoids instrument except as
against party to alteration and subsequent
indorsers [Sec. 124, NIL] (2011 Bar Question)
G. DISCHARGE OF PARTIES
SECONDARILY LIABLE
Sec. 120, NIL. When Persons Secondarily
Liable on, Discharged.- A person secondarily
liable on the instrument is discharged:
(1) By any act which discharges the
instrument;
(2) By the intentional cancellation of his
signature by the holder;
(3) By the discharge of a prior party;
PAGE 50 OF 320
MERCANTILE LAW
(4) By a valid tender or payment made by
a prior party;
(5) By a release of the principal debtor
unless the holder's right of recourse against
the party secondarily liable is expressly
reserved;
(6) By any agreement binding upon the
holder to extend the time of payment or to
postpone the holder's right to enforce the
instrument unless made with the assent of
the party secondarily liable or unless the right
of recourse against such party is expressly
reserved.
OTHER GROUNDS
(1) Failure to make due presentment
Sec. 144, NIL. When Failure to Present
Releases Drawer and Indorsers. - Except as
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 acceptance or negotiate it
within a reasonable time. If he fails to do so,
the drawer and all indorsers are discharged.
(2) Failure to give notice of dishonor
(3) Certification of check at instance of
holder
Sec. 188, NIL. Effect where the holder of check
procures it to be certified. - Where the holder
of a check procures it to be accepted or
certified, the drawer and all indorsers are
discharged from liability thereon.
(4) Reacquisition by prior party
Sec. 121, NIL. Right of party who discharges
instrument. - Where the instrument is paid by
a party secondarily liable thereon, it is not
discharged; but the party so paying it is
remitted to his former rights as regard all
prior parties, and he may strike out his own
and all subsequent indorsements and against
negotiate the instrument, except:
(a) Where it is payable to the order of a
third person and has been paid by the
drawer; and
(b) Where it was made or accepted for
UP LAW BOC NEGOTIABLE INSTRUMENTS LAW
accommodation and has been paid by
the party accommodated.
Where instrument negotiated back to a
prior party, such party may reissue and
further negotiate, but he is not entitled
to enforce payment against any
intervening party to whom he was
personally liable
Sec. 50, NIL. When prior party may negotiate
instrument. - Where an instrument is
negotiated back to a prior party, such party
may, subject to the provisions of this Act,
reissue and further negotiable the same. But
he is not entitled to enforce payment thereof
against any intervening party to whom he
was personally liable.
Where instrument is paid by party
secondarily liable, it is not discharged,
but
(a) the party so paying it is remitted to
his former rights as regard to all prior
parties
(b) and he may strike out his own and all
subsequent indorsements, and again
negotiate instrument, except: where
it is payable to order of 3rd party and
has been paid by drawer or where its
made/accepted for accommodation
and has been paid by party
accommodated
(5) By taking a qualified acceptance
H. RIGHT OF PARTY WHO
DISCHARGED INSTRUMENT
Sec. 121, NIL. Where the instrument is paid by
a party secondarily liable thereon, it is not
discharged; but the party so paying it is
remitted to his former rights as regards to all
prior parties, and he may strike out his own
and all subsequent indorsements, and again
negotiate the instrument, except:
(1) Where it is payable to the order of a
PAGE 51 OF 320
MERCANTILE LAW
third person, and has been paid by the
drawer;
(2) Where it was made or accepted for
accommodation, and has been paid by
the party accommodated.
The discharge of a secondary party is not
the same as the discharge of the
instrument. The discharge of the
instrument prevents subsequent holders
from becoming holders in due course.
I. RENUNCIATION BY HOLDER
Sec. 122, NIL. Renunciation by Holder. - The
holder may expressly renounce his rights
against any party to the instrument before,
at, or after its maturity. An absolute and
unconditional renunciation of his rights
against the principal debtor made at or after
the maturity of the instrument discharges the
instrument. But a renunciation does not
affect the rights of a holder in due course
without notice. A renunciation must be in
writing, unless the instrument is delivered up
to the person primarily liable thereon.
Two forms of renunciation
(1) A written declaration to that effect; or
(2) By surrender of the instrument to the
primary party.
To Whom Made Effect
At or after maturity in Discharges the
favor of principal instrument
debtor
At or after maturity in Discharge only such
favor of any party party and the parties
subsequent to him
Need not be supported by consideration.
UP LAW BOC NEGOTIABLE INSTRUMENTS LAW MERCANTILE LAW

XV. Material Alteration HDC, he may enforce payment

thereof according to its original tenor
regardless of whether the alteration
A. CONCEPT was innocent or fraudulent.
(2) Alteration by a stranger
Any change in the instrument which (spoliation) (2011 Bar Question)-
affects or changes the liability of the the effect is the same as where the
parties in any way. alteration was made by a party
wherein a HDC can recover on the
Any alteration which changes the date, original tenor of the instrument. [Sec.
sum payable, time or place of payment, 124, NIL]
number of relation of the parties, or
medium of currency of payment where
none is specified or which alters the effect
of the instrument in any respect [PNB v.
CA, GR No. L-26001 (1968)]
An alteration is said to be material if it
alters the effect of the instrument. In
other words, a material alteration is one
which changes the items which are
required to be stated under Sec. 1 of the
NIL (ibid.)

B. CHANGES IN THE FOLLOWING

CONSTITUTE MATERIAL ALTERATIONS
[Sec. 125, NIL]
(1) Date
(2) Sum payable, either for principal or
interest
(3) Time or place of payment
(4) Number or relations of the parties
(5) Medium or currency in which payment is
to be made
(6) That which adds a place of payment
where no place of payment is specified
(7) Any other change or addition which
alters the effect of the instrument in any
respect.

C. EFFECT OF MATERIAL ALTERATION

(1) Alteration by a party Avoids the

instrument except as against the
party who made, authorized, or
assented to the alteration and
subsequent indorsers. However, if an
altered instrument is negotiated to a
PAGE 52 OF 320
UP LAW BOC NEGOTIABLE INSTRUMENTS LAW
XVI. Acceptance
A. DEFINITION
Acceptance: an acceptance completed by
delivery or notification. [Sec. 191, NIL] The
signification by the drawee of his assent to
the order of the drawer. [Sec. 132, NIL]
B. REQUISITES
[Sec. 132, NIL]
(1) In writing
(2) Signed by the drawee
(3) Does not express that the drawee will
perform his promise by and other means
than the payment of money
C. KINDS OF ACCEPTANCE
(1) General assents without qualification
to the order of the drawer [Sec. 139, NIL]
(2) Qualified which in express terms
varies the effect of the bill as drawn [Secs.
141 & 142, NIL]:
(a) Conditional makes payment by
the acceptor dependent on the
fulfillment of a condition therein
stated
(b) Partial an acceptance to pay part
only of the amount for which the bill
is drawn.
(c) Local an acceptance to pay only at
a particular place.
(d) Qualified as to time
(e) The acceptance of some one or more
of the drawees but not of all.
D. PROOF OF ACCEPTANCE
(Sundiang and Aquino)
The written acceptance may be in the
instrument itself or in a separate instrument.
However, under Sec. 133, the holder of a bill
presenting the same for acceptance may
require the acceptance be written on the bill,
PAGE 53 OF 320
MERCANTILE LAW
and, if such request is refused, may treat the
bill as dishonored
Effects: When an acceptance is written on a
paper than the bill itself, it does not bind the
acceptor except in favor of a person to whom
it is shown and who, on the faith thereof,
receives the bill for value.
E. MANNER
E.1. EXPRESS ACCEPTANCE
Must be in writing and signed by the drawee
and must not express that the drawee will
perform his promise by any other means than
the payment of money. [Sec. 132, NIL]
If request for a written acceptance is refused,
the holder may treat the bill as dishonored
[Sec. 13, NIL]
E.2. IMPLIED ACCEPTANCE
(1) If the drawee refuses to return the
instrument within 24 hours after it was
delivered for acceptance.
(2) If the drawee destroys the same.
(3) If the drawee makes an unconditional
promise in writing before the instrument is
drawn, with respect to every person who,
upon the faith thereof, receives the bill for
value.
F. TIME FOR ACCEPTANCE
[Sec. 136, NIL]
The drawee is allowed twenty-four hours
after presentment in which to decide
whether or not he will accept the bill.
The acceptance, if given, dates as of the
day of presentation.
G. RULES GOVERNING ACCEPTANCE
Implication of payment without acceptance
by a drawee [FEBTC vs. Gold Palace Jewellery
Co,, Nachura, G.R. No. 168274 (2008)]
UP LAW BOC NEGOTIABLE INSTRUMENTS LAW
The NIL explicitly provides that the
acceptor, by accepting the instrument,
engages that he will pay it according to
the tenor of his acceptance.
This provision applies with equal force in
case the drawee pays a bill without having
previously accepted it.
His actual payment of the amount in the
check implies not only his assent to the
order of the drawer and a recognition of
his corresponding obligation to pay the
aforementioned sum, but also, his clear
compliance with that obligation.
Actual payment by the drawee is greater
than his acceptance, which is merely a
promise in writing to pay. The payment of
a check includes its acceptance.
Right to unqualified acceptance
The holder may refuse to take a qualified
acceptance and if he does not obtain an
unqualified acceptance, he may treat the
bill as dishonored by non-acceptance.
Where a qualified acceptance is taken,
the drawers and indorsers are discharged
from liability on the bill unless they have
expressly or impliedly authorized the
holder to take a qualified acceptance, or
subsequently assent thereto.
When the drawer or indorser receives
notice of a qualified acceptance, he must,
within a reasonable time, express his
dissent to the holder or he will be deemed
to have assented thereto.
However, acceptance is presumed to be
unqualified or absolute. (Sundiang and
Aquino)
PAGE 54 OF 320
MERCANTILE LAW
XVII. Presentment for
Acceptance
A. REQUISITES:
(1) By the holder, or by some person
authorized to receive payment on his
behalf;
(2) At a reasonable hour on a business
day;
(3) At a proper place as herein defined;
(4) To the person primarily liable on the
instrument, or if he is absent or
inaccessible, to any person found at the
place where the presentment is made.
General rule: Presentment for acceptance
is not necessary in order to render any party
to the bill liable. [Sec. 143, NIL]
B. WHEN PRESENTMENT FOR
ACCEPTANCE NECESSARY:
Presentment for acceptance must be made:
(1) Where the bill is payable after sight, or
in any other case, where presentment
for acceptance is necessary in order to
fix the maturity of the instrument; or
(2) Where the bill expressly stipulates that
it shall be presented for acceptance; or
(3) Where the bill is drawn payable
elsewhere than at the residence or place
of business of the drawee.[Sec. 143, NIL]
Note: It is not necessary to present a check
for acceptance because it is not one of those
required under Sec. 143.
C. WHEN PRESENTMENT FOR
ACCEPTANCE EXCUSED:
Presentment for acceptance is excused and a
bill may be treated as dishonored by non-
acceptance in either of the following cases:
(1) Where the drawee is dead, or has
absconded, or is a fictitious person or a
UP LAW BOC NEGOTIABLE INSTRUMENTS LAW
person not having capacity to contract by
bill.
(2) Where, after the exercise of reasonable
diligence, presentment cannot be made.
(3) Where, although presentment has been
irregular, acceptance has been refused on
some other ground. [Sec. 148,NIL]
D. TIME/PLACE/MANNER OF
PRESENTMENT
D.1. WHEN MADE
A bill may be presented for acceptance on
any day on which negotiable instruments may
be presented for payment under the
provisions of Sections 72 and 85 of this Act.
When Saturday is not otherwise a holiday,
presentment for acceptance may be made
before twelve o'clock noon on that day. [Sec.
146, NIL]
E. WHAT CONSTITUTES SUFFICIENT
PRESENTMENT?
Presentment for payment, to be sufficient,
must be made:
(1) By the holder, or by some person
authorized to receive payment on his
behalf;
(2) At a reasonable hour on a business day;
(3) At the proper place as herein defined
[Sec. 73, NIL];
(4) To the person primarily liable on the
instrument or if he is absent or
inaccessible, to any person found at the
place where the presentment is made.
[Sec. 72, NIL]
Time of maturity: Every negotiable
instrument is payable at the time fixed therein
without grace. When they day of maturity
falls upon Sunday, or a holiday, the
instrument is payable on the next succeeding
business day. Instruments falling due or
becoming payable on Saturday are to be
presented for payment on the next succeeding
business day, except that instrument payable
PAGE 55 OF 320
MERCANTILE LAW
on demand may, at the option of the holder
be presented for payment before twelve
oclock noon on Saturday when that entire day
is not a holiday. [Sec. 85, NIL]
F. HOW MADE
[Sec. 145, NIL]
In general:
(1) By or on behalf of the holder
(2) At a reasonable hour
(3) On a business day
(4) Before the bill is overdue
(5) To the drawee or his agent
W here a bill is addressed to 2 or m ore
drawees who are not partners
presentment must be made to them all XPT.
One has authority to accept/refuse for all
W here the drawee is dead
presentment may be made to his personal
representative
W here the drawee has been adjudged
a bankrupt or insolvent or has m ade
an assignm ent for the benefit of
creditors presentment may be made to
him or to his trustee or assignee.
G. EFFECT OF FAILURE TO MAKE
PRESENTMENT
Failure to make presentment discharges the
drawer and all indorsers. [Sec. 144, NIL]
H. DISHONOR BY NON-ACCEPTANCE
W hen dishonored by non-acceptance:
A bill is dishonored by non-acceptance:
(1) When it is duly presented for acceptance
and such an acceptance as is prescribed
by this Act is refused or cannot be
obtained; or
UP LAW BOC NEGOTIABLE INSTRUMENTS LAW
(2) When presentment for acceptance is
excused and the bill is not accepted. [Sec.
149, NIL]
Duty of holder: Where a bill is duly
presented for acceptance and is not accepted
within the prescribed time, the person
presenting it m ust treat the bill as
dishonored by non-acceptance or he
loses the right of recourse against the drawer
and indorsers. [Sec. 150, NIL]
Effect: When a bill is dishonored by non-
acceptance, an immediate right of recourse
against the drawer and indorsers accrues to
the holder and no presentment for payment is
necessary. [Sec. 151, NIL]
PAGE 56 OF 320
MERCANTILE LAW
XVIII. Promissory Notes
A promissory note is:
(1) An unconditional promise in writing
(2) Made by one person to another
(3) Signed by the maker
(4) Engaging to pay on demand, or at a fixed
or determinable future time
(5) A sum certain in money to order or to
bearer
(6) Where a note is drawn to the maker's own
order, it is not complete until indorsed by
him. [Sec. 184, NIL]
There are originally 2 parties in a promissory
note:
(1) Maker party who executes the written
promise to pay.
(2) Payee party in whose favor the
promissory note is made payable.
UP LAW BOC NEGOTIABLE INSTRUMENTS LAW
XIX. Checks
A. DEFINITION
A check is a bill of exchange drawn on a bank
payable on demand. Except as herein
otherwise provided, the provisions of this Act
applicable to a bill of exchange payable on
demand apply to a check. [Sec. 185, NIL]
B. KINDS
(1) Cashiers Check One drawn by the
cashier of a bank, in the name of the bank
against the bank itself payable to a third
person. It is a primary obligation of the
issuing bank and accepted in advance
upon issuance. [Tan vs. CA, G.R. No.
108555 (1994)]
(2) Managers Check A check drawn by
the manager of a bank in the name of the
bank itself payable to a third person. It is
similar to the cashiers check as to the
effect and use.
In issuing a managers check, the bank
assumed the liabilities of the acceptor
under Sec. 62, NIL. [Equitable PCI Bank v.
Ong, G.R. No. 156207 (2006)]
(3) Memorandum Check A check given
by a borrower to a lender for the amount
of a short loan, with the understanding
that it is not to be presented at the bank,
but will be redeemed by the maker
himself when the loan falls due and
which understanding is evidenced by
writing the word memorandum, memo
or mem on the check.
(4) Certified Check An agreement
whereby the bank against whom a check
is drawn undertakes to pay it at any
future time when presented for payment
[Sec. 187, NIL]
(a) Certification is equivalent to
acceptance. [Sec. 187, NIL]
(b) Where the holder of a check procures
it to be accepted or certified, the
drawer and all indorsers are
PAGE 57 OF 320
MERCANTILE LAW
discharged from liability. [Sec. 188,
NIL]
(c) A check of itself does not operate as
an assignment of any part of the
funds to the credit of the drawer with
the bank, and the bank is not liable to
the holder unless and until it accepts
or certifies the check. [Sec. 189, NIL]
(5) Crossed Check The NIL is silent with
respect to crossed checks, although the
Code of Commerce makes reference to
such instruments.
Article 541 of the Code of Commerce
states: The maker or any legal holder of
a check shall be entitled to indicate
therein that it be paid to a certain banker
or institution, which he shall do by writing
across the face the name of said banker
or institution, or only the words and
company.
Under usual practice, crossing a check is
done by placing two parallel lines
diagonally on the left top portion of the
check. [State Investment House vs. IAC,
G.R. No. 72764 (1989)]
Types: Special and General
The crossing may be special wherein between
the two parallel lines is written the name of a
bank or a business institution, in which case
the drawee should pay only with the
intervention of that bank or company, or
crossing may be general wherein between two
parallel diagonal lines are written the words
"and Co." or none at all as in the case at bar,
in which case the drawee should not encash
the same but merely accept the same for
deposit.
C. EFFECTS
(1) The check may not be encashed; it may
only be deposited with the bank;
(2) The check may be negotiated only once to
a person who has an account with the
bank; and
(3) It serves as a warning to a holder that the
check has been issued for a definite
UP LAW BOC NEGOTIABLE INSTRUMENTS LAW MERCANTILE LAW

purpose. [Bataan Cigar vs. CA, G.R. No.

93048 (1994)]

D. PRESENTMENT FOR PAYMENT

A check of itself does not operate as an

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

D.1. TIME
When to present? A check must be presented
for payment within reasonable time after its
issue.

E. EFFECT OF DELAY

The drawer will be discharged from liability

thereon to the extent of the loss caused by
the delay. [Sec. 186, NIL]

Certification of checks: An agreement

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

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

Refusal of drawee bank to certify: The

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

PAGE 58 OF 320
UP LAW BOC INSURANCE MERCANTILE LAW

MERCANTILE LAW
INSURANCE

PAGE 58 OF 320
UP LAW BOC
I. Concept of Insurance
On August 15, 2013, RA 10607 was signed
into law. It is a restatement of the Insurance
Code (PD 612), with amendments.
While RA 10607 restated the whole law, most
of the amendments touch only the
administrative portion of the Code, and very
little on the substantive portion.
The section numbers hereinafter generally
pertain to RA 10607, unless otherwise
indicated.
A. CONTRACT OF INSURANCE
Sec. 2(a).A contract of insurance is an
agreement whereby one undertakes for a
consideration to indemnify another against
loss, damage or liability arising from an
unknown or contingent event.
A contract of suretyship shall be deemed to be
an insurance contract only if made by a surety
who or which, as such, is doing an insurance
business.
A contract of insurance involves public interest.
Thus, the business is regulated by the state
through the requirement of licenseor
certificate of authority [White Gold Marine
Services v. Pioneer Insurance, G.R. No. 154514
(2005)].
A.1. DEFINITION
Thus, a contract of insurance is:
(1) A contract of indemnity;
(2) Wherein one undertakes for
consideration;
(3) To indemnify another against loss,
damage, or liability;
(4) Arising from an unknown or contingent
event.
A contingent event is one that is not certain to
take place. An unknown event is one which is
certain to happen, but the time of its
happening is not known. A past event may be
INSURANCE MERCANTILE LAW
a designated event only in cases where it has
happened already but the parties do not
know about it, e.g., prior loss of a ship at sea
(applicable only to marine insurance). [De
Leon, The Insurance Code of the Philippines
Annotated (2014)]
A.2. FORM
An Insurance policy is different from the
contract of insurance. The policy is the formal
written instrument evidencing the contract of
insurance entered into between the insured
and the insurer. On the other hand, there is
no particular form required for a contract of
insurance.
Sec. 232. No policy, certificate or contract of
insurance shall be issued or delivered within
the Philippines unless in the form previously
approved by the Commissioner, and no
application form shall be used with, and no
rider, clause, warranty or endorsement shall
be attached to, printed or stamped upon such
policy, certificate or contract unless the form
of such application, rider, clause, warranty or
endorsement has been approved by the
Commissioner.
A.3. INSURANCE AND GAMBLING
DISTINGUISHED
A contract of insurance is a contract of
indemnity and is not a wagering or gambling
contract. It is based on contingency, but it is
not a contract of chance for profit.
In a wagering contract, the parties
contemplate gain through mere chance; in a
contract of insurance, the parties seek to
distribute possible loss by reason of
mischance [Carale, The Philippine Insurance
a Law (2014)]
PAGE 59 OF 320
UP LAW BOC
B. DOING OR TRANSACTING
INSURANCE BUSINESS
Sec. 2(b). The term doing an insurance
business or transacting an insurance
business includes:
(1) Making or proposing to make, as insurer,
any insurance contract;
(2) Making or proposing to make, as surety,
any contract of suretyship as a vocation
and not as merely incidental to any other
legitimate business or activity of the
surety;
(3) Doing any kind of business, including a
reinsurance business, specifically
recognized as constituting the doing of
an insurance business within the
meaning of the Insurance Code;
(4) Doing or proposing to do any business in
substance equivalent to any of the
foregoing in a manner designed to evade
the provisions of the Insurance Code.
In the application of the provisions of this
Code, the fact that no profit is derived from
the making of insurance contracts,
agreements or transactions or that no
separate or direct consideration is received
therefor, shall not be deemed conclusive to
show that the making thereof does not
constitute the doing or transacting of an
insurance business
General rule: An insurance business
consists in undertaking, for a consideration, to
indemnify another against loss, damage or
liability arising from an unknown or
contingent event.
Exception: Those not formally designated
as insurance businesses but are deemed
doing or transacting an insurance business
as listed in Sec. 2(b).
In Philippine Health Care Providers Inc. v. CIR
[G.R. No. 167330 (2009)]the Court clarified
that:
(1) Contracts a law firm enters into with
clients whereby in consideration of
periodical payments, the law firm
promises to represent such clients in all
suits for or against them are not
PAGE 60 OF 320
INSURANCE MERCANTILE LAW
insurance contracts but are contracts for
personal services;
(2) But, a contract by which a corporation, in
consideration of a stipulated amount,
agrees at its own expense to defend a
physician against all suits for damages
for malpractice is one of insurance, and
the corporation will be deemed as
engaged in the business of insurance
since the purpose of the contract is to
indemnify against loss and damage.
A Protection and Indemnity agreement is
a form of insurance against third party
liability where an association of ship owners
in general band together for the specific
purpose of providing insurance cover on a
mutual basis against liabilities incidental to
ship owning that the members incur against
third parties. In Pandiman Philippines v.
Marine Manning Management, [G.R. No.
143313 (2005)] the Court considered a P & I
agreement as an insurance contract.
C. GOVERNING LAW
The Insurance Code primarily governs
insurance contracts, unless there is a special
law which specifically govern (e.g., insurance
contract under R.A. 1161 or the Social Security
Act), in which case, the Insurance Code
governs subsidiarily.
Matters not expressly provided for in the
Insurance Code and special laws are
regulated by the Civil Code.
D. PARTIES TO AN INSURANCE
CONTRACT
Sec. 6 Every person, partnership, association,
or corporation duly authorized to transact
insurance business as elsewhere provided in
this code, may be an insurer.
Sec. 7 Anyone except a public enemy may be
insured.
There is no definition of what a public enemy
is, but a definition that is generally accepted
and in keeping with the nature of an
insurance contract is one where a person
possesses the nationality of the state which
another is at war [Carale (2014)]
UP LAW BOC INSURANCE
E. BANCASSURANCE
RA 10607 introduced provisions governing
bancassurance.
Sec. 375. The term bancassurance shall mean
the presentation and sale to bank customers
by an insurance company of its insurance
products within the premises of the head office
of such bank duly licensed by the Bangko
Sentral ng Pilipinas or any of its branches
under such rules and regulations which the
Commissioner and the Bangko Sentral ng
Pilipinas may promulgate.
To engage in bancassurance arrangement, a
bank is not required to have equity ownership
of the insurance company. No insurance
company shall enter into a bancassurance
arrangement unless it possesses all the
requirements as may be prescribed by the
Commissioner and the Bangko Sentral ng
Pilipinas.
No insurance product, whether life or non-life,
shall be issued or delivered pursuant to a
bancassurance arrangement, unless in the
form previously approved by the
Commissioner.
Sec. 376. Personnel tasked to present and sell
insurance products within the bank premises
shall be duly licensed by the Commissioner
and shall be subject to the rules and
regulations of this Act.
F. PRE-NEED PLANS
RA 9829 (Pre- Need Code), Sec. 4(B). Pre-need
plans are contracts, agreements, deeds or
plans for the benefit of the planholders which
provide for the performance of future
services, payment of monetary considerations
or delivery of other benefits at the time of
actual need or agreed maturity date, as
specified therein, in exchange for cash or
installment amounts with or without interest
or insurance coverage and includes life,
pension, education, interment and other
plans, instruments, contracts or deeds.
PAGE 61 OF 320
MERCANTILE LAW
Pre-need plans are governed by the Pre-Need
Code (RA 9829). They are not considered as
insurance contracts because
1) Pre-need plans can have insurance
coverage, implying that they are separate
contracts
2) Pre-need plans do not involve unknown or
contingent events but events certain to
happen at a certain time.
However, all Pre-need plans are under the
primary and exclusive power supervision and
regulation of the Insurance Commission [Sec.
5, RA 9829]. In addition, the Insurance
Commissioner shall have the primary and
exclusive power to adjudicate any and all
claims involving pre-need plans. If the
amount of benefits does not exceed
P100,000, which decision shall be final and
executory[Sec. 55, RA 9829].
G. HEALTH CARE AGREEMENTS
For purposes of determining the liability of
a health care provider to its members,
jurisprudence holds that a health care
agreement is in the nature of non-life
insurance, which is primarily a contract of
indemnity. Once the member incurs hospital,
medical or any other expense arising from
sickness, injury or other stipulated contingent,
the health care provider must pay for the
same to the extent agreed upon under the
contract. [Fortune Medicare Inc. v. David
Amorin, G.R. No. 195872 (2014)]
In Mitsubishi Motors Philippines Salaried
Employees Union v. Mitsubishi Motors
Philippines Corp. [G.R. 175773(2013)], the
Court held that there can be no recovery from
an insurance clause under a CBA if there was
already recovery under a Health Care
agreement since the court considered the
agreement as a non-life insurance contract.
NOTE: In the earlier case of Philippine Health
Care Providers Inc. v. CIR [G.R. No. 167330
(2009)], the Court held that Health
Maintenance Organizations, which enter into
Healthcare agreements are not in the
business of insurance
UP LAW BOC INSURANCE
II. Elements of an
Insurance Contract
A. IN GENERAL
(1) Subject matter what the insured has an
insurable interest in;
(2) Cause event or peril insured against;
(3) Risk of loss or damage being assured
by the Insurer
(4) Consideration premium payments
paid by the insured
(5) Risk-Distributing Schem e
distribute and transfer by the insurer of
risk of loss, damage or liability among
persons having similar risks;
(6) A Meeting of Minds of the parties
upon all the foregoing essentials.
B. SUBJECT MATTER
The insured must have an insurable interest
in the subject matter of the insurance
contract or else, it shall be void [Sec. 25]
Insurable interest is the interest which the
law requires the owner of an insurance policy
to have in the person or thing insured.
Insurable interest is not required in industrial
life insurance. [Sec. 235-237]
C. CAUSE AND RISK OF LOSS OR
DAMAGE
Cause refers to an event or peril insured
against.
Peril is the contingent or unknown event
which may cause a loss. Its existence creates
a risk and its occurrence results in loss.
The event or peril insured against must be
such that its happening will:
(1) Damnify or cause loss to a person having
insurable interest; or
(2) Create liability against him. [Sec. 3]
PAGE 62 OF 320
MERCANTILE LAW
D. CONSIDERATION
An insurance premium is the agreed price for
assuming and carrying the risk. It is the
consideration paid to the insurer for
undertaking to indemnify the insured against
a designated peril. It is based on probability
of loss and extent of liability. [43 Am. Jur. 2d
326]
Premiums are different from assessments. An
assessment, in insurance law, is a sum
specifically levied by mutual insurance
companies or associations, upon a fixed and
definite plan, to pay losses and expenses.
[Sec. 403] While premiums are levied and
paid to meet anticipated loss, assessments
are collected to meet actual loss. [Vance on
Insurance (1951)]
E. RISK-DISTRIBUTING SCHEME
Insurance contracts serve to distribute the
risk of economic loss, damage or liability
among as many as possible of those who are
subject to the same kind of risk. The payment
of premiums by all will inure to a general
fund, out of which payment will be made for
anyone who has suffered an economic loss.
Hence, each member contributes to a small
degree toward compensation for losses
suffered by any member of the group.
The unknown event may be past or future.
Even if the proximate cause of the loss is a
fortuitous event, the insurer may still be liable
if it is the event or peril insured against [De
Leon (2014)]
F. MEETING OF THE MINDS
The two parties to a contract of insurance
whose minds need to meet regarding the
essential elements are:
The insurer or the party who assumes or
accepts the risk of loss and undertakes for
consideration to indemnify the insured or to
pay a certain lump sum on the happening of
the event or peril insured against, and
The insured or the person in whose favor the
contract is operative and whose loss is the
occasion for the payment of the insurance
proceeds by the insurer. [De Leon (2014)]
UP LAW BOC INSURANCE MERCANTILE LAW

The insured is not always the person whom Exceptions: Insurance contracts particularly
the proceeds are paid. Such person is the liability insurance, may be required by law in
beneficiary. [Vance (1951)] certain instances:
(1) For motor vehicles [Compulsory
Motor Vehicle Liability Insurance,
Secs 386-402, Insurance Code);
III. Characteristics of an (2) For employees [Compulsory Coverage
Insurance Contract in State Insurance Fund, Articles 168-
184, Labor Code];
(3) As a condition to granting a license to
A. IN GENERAL conduct business or calling affecting
the public safety or welfare [De Leon
An insurance contract is:
(2014)].
(1) Consensual;
(4) Social Insurance for members of the
(2) Voluntary; Government Service Insurance
System (GSIS) and for the employees
(3) Aleatory;
of the private Sector covered by the
(4) Executory and unilateral, but Social Security System (SSS).
synallagmatic;
(5) Conditional;
D. ALEATORY
(6) Contract of indemnity;
It is aleatory because it depends upon some
(7) Contract of adhesion; contingent event. The obligation of the
(8) Personal contract; insurer to pay depends on the happening of
an event which is uncertain, or though certain,
(9) Property; is to occur at an indeterminate time [Article
(10) Uberrimae fides contract (a contract of the 2010, Civil Code].
highest degree of good faith).
E. EXECUTORY AND UNILATERAL BUT
B. CONSENSUAL SYNALLAGMATIC
It is perfected by the meeting of the minds of Once the insured pays the premium, the
the parties. There must be concurrence of contract already takes effect. After the
offer and acceptance. Unless otherwise payment of premiums, the insurance imposes
stipulated, the policy is not essential to the a unilateral obligation on the insurer who
existence of the contract. It merely evidences promise to indemnify in case of loss.
the terms and conditions thereof [Campos, It is also synallagmatic and reciprocal such
Insurance (1983)] that even if the contingent event or
designated peril does not occur, the insurer
has still provided protection against the risk
C. VOLUNTARY for the period covered by the insurance
General rule: In general, contracts of contract.
Insurance are not compulsory and the parties
are free to incorporate such terms and
conditions they may deem convenient F. CONDITIONAL
provided they are not contrary to law, morals, It is conditional because the insurer incurs
good customs, public order, or public policy. liabilityonly upon the happening of the event
[De Leon (2014)] insured against. However, many other
conditions are usually required (such as
payments of premium or performance of
PAGE 63 OF 320
UP LAW BOC INSURANCE MERCANTILE LAW

other act) as precedent to the right of the J. PROPERTY (FOR LIFE INSURANCE)
insured to claim benefit under the insurance.
Life insurance policies, unlike property
insurance, are generally assignable or
transferrable (Sec. 81) as they are in the
G. CONTRACT OF INDEMNITY (FOR
nature of property.
NON-LIFE INSURANCE)
The insured who has insurable interest over
the property is only entitled to recover the K. UBERRIMAE FIDES CONTRACT
amount of actual loss sustained. The burden
Each party is required to deal with each other
is upon him to establish the amount of such
in utmost good faith and disclose conditions
loss.
affecting the risk, of which he is aware, or any
General rule: Only non-life insurance or material fact which the applicant knows and
property insurance contracts are contracts of those which he ought to know. Violation of
indemnity. Life insurance contracts are not this duty gives the aggrieved party the right
contracts of indemnity because the value of a to rescind the contract. Where the aggrieved
life is immeasurable. party is the insured, the bad faith of the
insurer will preclude it from denying liability
Exception: Where the basis of the insurable
on the policy based on breach of warranty
interest of the policy owner on the life of the
[Campos (1983)].
insured is a commercial relationship (e.g.,
creditor-debtor, mortgagor/guarantor-
mortgagee, supporter and supportee), then
such contract is an indemnity contract.

H. CONTRACT OF ADHESION (FINE

PRINT RULE)
Insurance contracts are already presented to
the insured in its printed form on a take it or
leave it basis. The insured merely has to
agree to its terms. Such contracts of adhesion
are valid. However, ambiguity in such
contracts shall be interpreted liberally in
favor of the insured and strictly against the
insurer who prepared the same.

I. PERSONAL CONTRACT
The contract of insurance is basically
between the insurer and the insured.
The insured cannot assign, before the
happening of the loss, his rights under a
property policy to others without the consent
of the insurer (Secs 20, 58, and 83).
Property insurance is personal in the sense
that it is the damage to the personal interest
not the property that is being reimbursed.

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IV. Classes of Insurance
A. MARINE INSURANCE
A.1. DEFINITION
Marine insurance is a type of transportation
insurance which is concerned with the perils
of property in, or incidental to, transit as
opposed to property perils at a generally
fixed location.
Sec. 101. Marine insurance includes:
(1) Insurance against loss of or damage to:
(a) Vessels, craft, aircraft, vehicles,
goods, freights, cargoes,
merchandise, effects, disbursements,
profits, moneys, Securities, choses in
action, instruments of debts, valuable
papers, bottomry, and respondentia
interests and all other kinds of
property and interests therein, in
respect to, appertaining to or in
connection with any and all risks or
perils of navigation, transit or
transportation, or while being
assembled, packed, crated, baled,
compressed or similarly prepared for
shipment or while awaiting shipment,
or during any delays, storage,
transhipment, or reshipment incident
thereto, including war risks, marine
builders risks, and all personal
property floater risks;
(b) Person or property in connection with
or appertaining to a marine, inland
marine, transit or transportation
insurance, including liability for loss
of or damage arising out of or in
connection with the construction,
repair, operation, maintenance or use
of the subject matter of such
insurance (but not including life
insurance or surety bonds nor
insurance against loss by reason of
bodily injury to any person arising out
of ownership, maintenance, or use of
automobiles);
(c) Precious stones, jewels, jewelry,
precious metals, whether in course of
transportation or otherwise; and
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INSURANCE MERCANTILE LAW
(d) Bridges, tunnels and other
instrumentalities of transportation
and communication (excluding
buildings, their furniture and
furnishings, fixed contents and
supplies held in storage); piers,
wharves, docks and slips, and other
aids to navigation and transportation,
including dry docks and marine
railways, dams and appurtenant
facilities for the control of waterways.
(2) Marine protection and indemnity
insurance, meaning insurance against, or
against legal liability of the insured for
loss, damage, or expense incident to
ownership, operation, chartering,
maintenance, use, repair, or construction
of any vessel, craft or instrumentality in
use of ocean or inland waterways,
including liability of the insured for
personal injury, illness or death or for loss
of or damage to the property of another
person
A.2. DIVISIONS
Marine insurance has two major divisions:
(1) Ocean marine insurance insures against
risk connected with navigation, to which a
ship, cargo, freightage, profits or other
insurable interest in movable property,
may be exposed during a certain voyage
or a fixed period of time. Its scope
includes:
(a) Ships or hulls;
(b) Goods or cargoes;
(c) Earnings such as freight, passage
money, commissions, or profits; and
(d) Liability (protection and indemnity
insurance).
(2) Inland marine insurance covers the land
or over the land transportation perils of
property shipped by railroads, motor
trucks, airplanes, and other means of
transportation. Italso covers risks of lake,
river or other inland waterway
transportation and other waterborne
perils outside those covered by ocean
marine insurance.
UP LAW BOC INSURANCE
A.3. BOTTOMRY AND RESPONDENTIA
DISTINGUISHED
A Bottomry loan is a loan that is obtained for
the value of the vessel on a voyage and the
lender is repaid only if the vessel subject of
the loan arrives safely at its destination. The
insurable interest of a ship owner on its
bottomed boat is the difference between the
amount of the loan and the value of the boat.
Thus, if the amount of the loan does not cover
the total value of the boat, the owner can still
insure the boat.
A Respondentia loan is a loan that is obtained
as Security for the value of the cargo to be
transported and the lender is repaid only if
the cargo arrives safely at its destination.
A.4. RISKS
A.4.A. PERILS OF THE SEA
Ocean marine insurance protects ships at sea
and the cargo or freight on such ships from
standard perils of the sea or perils of
navigation which includes casualties arising
from the violent action of the elements and
does not cover ordinary wear and tear or
other damage usually incident to the voyage.
The mere fact that an injury is due to violence
of some marine force does not necessarily
bring it within the protection of the policy if
such violence was not unusual or unexpected.
General Rule: The term perils of the sea
extends only to losses caused by sea damage,
or by the violence of the elements, and does
not embrace all losses happening at sea.
They insure against losses from extraordinary
occurrences only. It thus includes only such
losses as are of extraordinary nature or arise
from some overwhelming power which
cannot be guarded against by the ordinary
exertion of human skill or prudence, as
distinguished from the ordinary wear and tear
of the voyage and from injuries suffered by
the vessel in consequence of her not being
unseaworthy [Roque v. IAC, G.R. No. L-66935,
(1985)]
The phrase also extends to barratry which
refers to the willful and intentional act on the
part of the master or the crew, in pursuance
of some unlawful or fraudulent purpose,
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MERCANTILE LAW
without the consent of the owner, and to the
prejudice of his interest (e.g., burning the ship,
unlawfully selling the cargo).
No honest error of judgment or mere
negligence, unless criminally gross, can be
considered as barratry [Roque v. IAC, (1985)]
Exception: The exception to a perils of the
sea condition for insurer liability is when
there is an all-risk policy [Malayan
Insurance Corp v. CA, G.R. No. 119599 (1997)]
A.4.B. PERILS OF THE SHIP
Perils of the ship are those which cause a loss
which in the ordinary course of events,
results:
(1) From the ordinary, natural and inevitable
action of the sea;
(2) From ordinary wear and tear of the ship;
and
(3) From the negligent failure of the ships
owner to provide the vessel with the
proper equipment to convey the cargo
under ordinary conditions. [De Leon
(2014)]
A.4.C. RULE ON RISKS COVERED
General Rule: In the absence of stipulation,
the risks insured against are only perils of the
sea [Go Tiaco y Hermanos v. Union Ins. Society
of Canton, G.R. No. 13983(1919)]
Exception: However, in an all risk policy, all
risks are covered unless expressly excepted.
The burden rests on the insurer to prove that
the loss is caused by a risk that is excluded
[Filipino Merchants Ins. Co. v. CA, G.R. No.
85141(1989)]
A.5. LOSS
Loss may be total or partial.
Total loss may be actual or constructive.
Sec. 132. An actual total loss is caused by:
(a) A total destruction of the thing insured;
(b) The irretrievable loss of the thing by
sinking, or by being broken up;
UP LAW BOC
(c) Any damage to the thing which renders it
valueless to the owner for the purpose for
which he held it;
(d) Any other event which effectively deprives
the owner of the possession, at the port of
destination of the thing insured.
Sec. 133. A constructive total loss is one which
gives to a person insured a right to abandon,
under Sec. 141.
Sec. 134. An actual loss may be presumed
from the continued absence of a ship without
being heard of. The length of time which is
sufficient to raise this presumption depends
on the circumstances of the case.
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 policy, or otherwise
separately insured, and recover for a total
loss thereof, when the cause of the loss is a
peril insured against:
(1) If more than three-fourths thereof in
value is actually lost, or would have to be
expended to recover it from the peril;
(2) If it is injured to such an extent as to
reduce its value more than three-fourths;
(3) If the thing insured is a ship, and the
contemplated voyage cannot be lawfully
performed without incurring either an
expense to the insured of more than
three-fourths the value of the thing
abandoned or a risk which a prudent man
would not take under the circumstances;
or
(4) If the thing insured, being cargo or
freightage, and the voyage cannot be
performed, nor another ship procured by
the master, within a reasonable time and
with reasonable diligence, to forward the
cargo, without incurring either an
expense to the insured of more than
three-fourths the value of the thin
abandoned or a risk which a prudent man
would not take under the circumstances.
But freightage cannot in any case be
abandoned unless the ship is also
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INSURANCE MERCANTILE LAW
abandoned.
Actual total loss exists when the subject
matter of the insurance is wholly destroyed or
lost or when it is so damaged as no longer to
exist in its original character. [Vance (1951)]
Constructive total loss or technical total loss
is one in which the loss, although not actually
total, is of such character that the insured is
entitled, if he thinks fit, to treat it as total by
abandonment. [45 CJS 1150]
As to when a constructive total loss exists,
three rules exist:
(1) English rule: there is constructive total
loss when the subject matter of the
insurance, while still existent in specie, is
so damaged as not to be worth, when
repaired, the cost of the repairs;
(2) American rule: there is constructive total
loss when it is so damaged that the costs
of repairs would exceed one-half of the
value of the thing as acquired; also
known as the fifty percent rule;
(3) Philippine rule: the insured may not
abandon the thing insured unless the loss
or damage is more than three-fourths of
its value. [De Leon (2014)]
A.6. ABANDONMENT
A.6.A. DEFINITION
Sec. 140. Abandonment, in marine insurance,
is the act of the insured by which, after a
constructive total loss, he declares the
relinquishment to the insurer of his interest in
the thing insured.
A.6.B. CONDITIONS
Aside from the requirement under Sec 141
already mentioned:
(1) An abandonment must be neither partial
nor conditional [Sec 142];
(2) An abandonment must be made within a
reasonable time after receipt of reliable
information of the loss, but where the
information is of a doubtful character, the
UP LAW BOC INSURANCE
insured is entitled to a reasonable time to
make inquiry [Sec 142];
(3) Abandonment is made by giving notice
thereof to the insurer, which may be done
orally, or in writing: Provided, That if the
notice be done orally, a written notice of
such abandonment shall be submitted
within seven days from such oral notice
[Sec 145];
(4) Abandonment must be absolute and
total.
No notice of abandonment is required for
recovery of loss in cases of actual total loss.
Where the information upon which an
abandonment has been made proves
incorrect, or the thing insured was so far
restored when the abandonment was made
that there was in fact no total loss, the
abandonment becomes ineffectual.
A.6.C. CHARACTERISTICS
A valid abandonment has the following
characteristics:
(1) There must be an actual relinquishment
by the person insured of his interest in the
thing insured;
(2) There must be a constructive total loss;
(3) The abandonment be neither partial nor
conditional [Sec. 142];
(4) It must be made within a reasonable time
after receipt of reliable information of the
loss [Sec. 143];
(5) It must be factual [Sec. 144];
(6) It must be made by giving notice thereof
to the insurer which may be done orally or
in writing [Sec. 145]; and
(7) The notice of abandonment must be
explicit and must specify the particular
cause of the abandonment [Sec. 146].
A.6.D. EFFECTS
(1) An abandonment is equivalent to a
transfer by the insured of his interest to
the insurer, with all the chances of
recovery and indemnity [Sec 148];
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MERCANTILE LAW
(2) If a marine insurer pays for a loss as if it
were an actual total loss, he is entitled to
whatever may remain of the thing
insured, or its proceeds or salvage, as if
there had been a formal abandonment
[Sec 149];
(3) Upon an abandonment, acts done in
good faith by those who were agents of
the insured in respect to the thing
insured, subsequent to the loss, are at the
risk of the insurer, and for his benefit [Sec
150].
A.7. AVERAGE
An Average is defined as the extraordinary or
accidental expense incurred during the
voyage for the preservation of the vessel,
cargo or both and all the damages to the
vessel and cargo from the time it is loaded
and the voyage commenced until it ends and
the cargo is unloaded. [Art. 806, Code of
Commerce]
There are two kinds of averages:
(1) Gross or general averages; and
(2) Simple or particular averages.
Gross averages include damages and
expenses which are deliberately caused by
the master of the vessel or upon his authority,
in order to save the vessel, her cargo, or both
at the same time from a real and known risk.
[Art. 811, Code of Commerce] This must be
borne equally by all of the interests
concerned in the venture.
To claim general average contributions, the
requisites are:
(1) There must be a common danger to the
vessel or cargo;
(2) Part of the vessel or cargo was sacrificed
deliberately;
(3) The sacrifice must be for the common
safety or for the benefit of all;
(4) It must be made by the master or upon
his authority;
(5) It must not be caused by any fault of the
party asking contribution;
UP LAW BOC INSURANCE
(6) It must be successful (i.e., resulted in the
saving of the vessel and/or cargo)
(7) It must be necessary. [Vance (1951),
Magsaysay v Agan, G.R. No. L-6393
(1955), Intl. Harvester v Hamburg-
American Line, G.R. No. L-11515 (1918)]
Particular averages include damages and
expenses caused to the vessel or her cargo,
which have not inured to the common benefit
and profit of all the persons interested in the
vessel and her cargo. [Art. 809, Code of
Commerce] A particular average loss is
suffered by and borne alone by the owner of
the cargo or of the vessel, as the case must
be.[De Leon (2014)]
A.8. WARRANTIES
Marine Insurance is unique in that it has
certain implied warranties
(1) Implied Warranty of Seaworthiness. - 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 that the ship is
seaworthy. [Sec. 115]
A vessel is seaworthy if:
(a) It is proper laden
(b) It is provided with a competent
master
(c) It is provided with a sufficient number
of competent officers and seamen
(d) It is provided with the requisite
appurtenances and equipment
[Sec.118]
Where different portions of the voyage
contemplated by a policy differ in respect
to the things requisite to make the ship
seaworthy therefor, a warranty of
seaworthiness is complied with if, at the
commencement of each portion, the ship
is seaworthy with reference to that
portion [Sec. 119]
(2) Implied Warranty Against Improper
deviation A Deviation is a departure
from the course of the voyage insured, or
an unreasonable delay in pursuing the
voyage or the commencement of an
entirely different voyage [Sec.125]
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Deviation is proper:
(a) When caused by circumstances over
which neither the master nor the owner of
the ship has any control;
(b) When necessary to comply with a
warranty, or to avoid a peril, whether or
not the peril is insured against;
(c) When made in good faith, and upon
reasonable grounds of belief in its
necessity to avoid a peril; or
(e) When made in good faith, for the
purpose of saving human life or
relieving another vessel in distress
[Sec. 126]
(3) Implied Warranty of Proper documentation
- Where the nationality or neutrality of a
ship or cargo is expressly 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 which cast
reasonable suspicion thereon [Sec. 122]
B. FIRE INSURANCE
B.1. DEFINITION
Sec. 169. Fire insurance includes insurance
against loss by fire, lightning, windstorm,
tornado or earthquake and other allied risks,
when such risks are covered by extension to
fire insurance policies or under separate
policies.
A fire insurance is a contract of indemnity by
which the insurer, for a stipulated premium,
agrees to indemnify the insured against loss
of, or damage to, a property caused by hostile
fire.
Fire or other so-called allied risks
enumerated in Sec. 169 must be the
proximate cause of the damage or loss.
Fire is oxidation which is so rapid as to
produce either a flame or a glow.
Spontaneous combustion is usually rapid
oxidation. Fire is always caused by
combustion, but combustion does not always
UP LAW BOC INSURANCE
cause fire. [Western Woolen Mills Co. v
Northern Assurance Co., 139 Fed 637 (1905)]
The presence of heat, steam, or even smoke is
evidence of fire, but taken by itself will not
prove the existence of fire.
Fire cannot be considered a natural disaster
or calamity since it almost always arises from
some acts of man or by human means. It
cannot be an act of God unless caused by
lightning or a natural disaster or casualty not
attributable to human agency [Phil. Home
Assurance Corp. v. CA, G.R. No. 106999
(1996)]
B.2. RISKS
A Hostile fire is one that escapes from the
place where it was intended to burn and
ought to be, or one which remains completely
within its proper place but because of the
unsuitable materials used to light it, becomes
inherently dangerous and uncontrollable.
This kind of fire will make the insurer liable.[De
Leon (2014)]
A Friendly fire is one that burns in a place
where it is intended to burn and ought to be
like fire burning in a stove or a lamp. [De
Leon (2014)]
Rule: The risk assumed by the insurer is the
loss and damage caused by hostile fire and
not friendly fire.
B.3. ALTERATIONS IN USE OR CONDITION
Sec. 170. An alteration in the use or condition
of a thing insured from that to which it is
limited by the policy made without the
consent of the insurer, by means within the
control of the insured, and increasing the
risks, entitles an insurer to rescind a contract
of fire insurance
Sec. 171. An alteration in the use or condition
of a thing insured from that to which it is
limited by the policy, which does not increase
the risk, does not affect a contract of fire
insurance.
Sec. 172. A contract of fire insurance is no
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affected by any act of the insured subsequent
to the execution of the policy, which does not
violate its provisions, even though it increases
the risk and is the cause of the loss.
Thus, in order that the insurer may rescind a
contract of fire insurance for any alteration
made in the use or condition of the thing
insured, the following requisites must be
present:
(1) The use or condition of the thing is
specifically limited or stipulated in the
policy;
(2) Such use or condition as limited by the
policy is altered;
(3) The alteration is made without the
consent of the insurer;
(4) The alteration is made by means within
the control of the insured; and
(5) The alteration increased the risk. [De
Leon (2014)]
Every contract of insurance is made with
reference to the conditions surrounding the
subject matter of the risk [25 CJS 129]. Thus,
there is an implied promise or undertaking on
the part of the insured that he will not change
the premises or the character of the business
carried there so as to increase the risk of loss
by fire [44 AmJur 2d 138].
The rule on alteration was strictly applied in
the case of Malayan Insurance Co, Ltd v. Pap
Co, Ltd [G.R. No. 200784 (2013)]: The court
held that transferring machinery to another
location, despite a provision in the policy
stating that the machine cannot be
transferred without the consent of the insurer
is considered an alteration in the condition
and location of the thing insured. Hence,
Malayan was not liable to Pap.
B.4. MEASURE OF INDEMNITY
(1) In an open policy, only the expense
necessary to replace the thing lost or
injured in the condition it was at the time
of the injury will be paid;
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(2) In a valued policy, the parties are
bound by the valuation, in the absence of
fraud or mistake, similar to marine
insurance. [Sec. 173]
If there is a valuation, the effect shall be
similar to a marine insurance policy wherein
the valuation is conclusive between the
parties in adjusting the loss [Sec. 158]
In the absence of express valuation in a fire
insurance policy, the insured is only entitled
to recover the amount of actual loss
sustained and the burden of proof is upon
him to establish the amount of such loss by
preponderance of evidence.
Where the face value of the policy is less than
the agreed valuation, then even in case of
total loss, the insured can only recover up to
the policys face value, which is always the
maximum limit of the insurers liability [Tan
Chuco v. Yorkshire Fire & Life Ins. Co.G.R. No.
L-5069(1909)]
In an open policy, the actual loss, as
determined, will represent the total
indemnity due the insured except only that
the total indemnity shall not exceed the total
value of the policy [Devt. Ins. Corp. v. IAC, G.R.
No. 71360 (1986)]
C. CASUALTY INSURANCE
C.1. DEFINITION
Sec. 176. Casualty insurance is insurance
covering loss or liability arising from accident
or mishap, excluding certain types of loss
which by law or custom are considered as
falling exclusively within the scope of other
types of insurance such as fire or marine. It
includes, but is not limited to, employers
liability insurance, motor vehicle liability
insurance, plate glass insurance, burglary
and theft insurance, personal accident and
health insurance as written by non-life
insurance companies, and other substantially
similar kinds of insurance.
Casualty insurance includes all forms of
insurance against loss or liability arising from
accident or mishap excluding certain types of
loss or liability which are not within the scope
of other types of insurance such as fire,
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marine, suretyship and life. It includes, but is
not limited to, employers liability insurance,
workmens compensation insurance, public
liability insurance, motor vehicle liability
insurance, plate glass insurance, burglary
and theft insurance, personal accident and
health insurance as written by non-life
insurance companies, and other substantially
similar kinds of insurance (e.g., robbery and
theft insurance).
It is governed by the general provisions
applicable to all types of insurance plus
stipulations in the insurance contract
[Fortune Insurance & Surety Co v. CA G.R. No.
115278 (1995)]
C.2. INTENTIONAL AND ACCIDENTAL
INJURY DISTINGUISHED
Intentional implies the exercise of the
reasoning faculties, consciousness and
volition. Where a provision of the policy
excludes intentional injury, it is the intention
of the person inflicting the injury that is
controlling. If the injuries suffered by the
insured clearly resulted from the intentional
act of the third person, the insurer is relieved
from liability as stipulated.
Accidental means that which happens by
chance or fortuitously, without intention or
design, which is unexpected, unusual and
unforeseen. The terms do not, without
qualification, exclude events resulting in
damage due to fault, recklessness or
negligence of third parties. The concept is not
necessarily synonymous with no fault. It
may be utilized simply to distinguish
intentional or malicious acts from negligent
or careless acts of man.
C.3. DIVISIONS
Casualty insurance has two general divisions:
liability and indemnity insurance.
C.3.A. LIABILITY INSURANCE
Under policies of this type, the insurer
assumes the obligation to pay the third party
in whose favor the liability of the insured
arises. The liability of the insurer attaches as
soon as the liability of the insured to the third
UP LAW BOC INSURANCE
party is established. It covers liability incurred
from quasi-delict or criminal negligence but
cannot cover deliberate criminal acts. [De
Leon (2014)]
C.3.B. INDEMNITY INSURANCE
Under this kind of insurance, no action will lie
against the insurer unless brought by the
insured for loss actually sustained and paid
by him. Liability of the insurer attaches only
after the insured has paid his liability to the
third party. [De Leon (2014)]
C.4. NO ACTION CLAUSE
A no action clause is a requirement in a policy
of liability insurance which provides that a
suit must first be instituted and a final
judgment be first obtained against the
insured; that only thereafter can the person
injured recover on the policy [Guingon v. Del
Monte, G.R. No. L-22042(1967)]
But, the no-action clause cannot prevail over
the Rules of Court provisions which are aimed
at avoiding multiplicity of suits. Parties (the
insured and the insurer) may be joined as
defendants in a case commenced by the third
party claiming under a liability insurance, as
the right to relief in respect to the same
transactions is alleged to exist [See Sec 5,
Rule 2 and Sec 6, Rule 3, 1997 Rules of Civil
Procedure]
D. SURETYSHIP
Sec. 177. A contract of suretyship is an
agreement whereby a party called the surety
guarantees the performance by another party
called the principal or obligor of an obligation
or undertaking in favor of a third party called
the obligee. It includes official recognizances,
stipulations, bonds or undertakings issued by
any company by virtue of and under the
provisions of Act. No 536, as amended by
2206.
A suretyship is an agreement whereby a
surety guarantees the performance or
undertakes to answer, under specified terms
and conditions, for the debt, default or
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miscarriage of the principal or obligor, such
as failure to perform, or breach of trust,
negligence and the like, in favor of a third
party.
It shall be deemed as insurance contract if
the suretys main business is that of
suretyship, and not where the contract is
merely incidental to any other legitimate
business or activity of the surety.
The contract of a surety is evidenced by a
document called surety bond which is
essentially a promise to guarantee the
obligation of the obligor. In turn, the obligor
executes an indemnity agreement in favor
of the insurer. [De Leon (2014)]
It is an accessory contract unlike a contract of
insurance which is the principal contract itself.
The liability of the surety or sureties under a
bond is joint and several, or solidary[Sec. 178].
This means that upon the default of the
principal obligor, the surety becomes
primarily liable. Unlike a guarantor, a surety
is not entitled to the benefit of exhaustion of
the principal obligors assets and assumes a
regular party to the undertaking.
It is limited or fixed to the amount of the bond.
What is unique to a contract of suretyship is
that when the obligee accepts the bond, the
bond becomes valid and enforceable whether
or not the premium has been paid by the
obligor unlike in an insurance contract where
payment of premium is necessary for the
contract to be valid. If the obligee has not yet
accepted, then payment of premium is still
necessary for the contract of suretyship to be
valid.
E. LIFE INSURANCE
E.1. DEFINITION
Sec. 181. Life insurance is insurance on human
lives and insurance appertaining thereto or
connected therewith.
Every contract or undertaking for the
payment of annuities including contracts for
the payment of lump sums under a
retirement program where a life insurance
company manages or acts as a trustee for
such retirement program shall be considered
UP LAW BOC INSURANCE
a life insurance contract for purposes of the
Insurance Code.
Sec. 182. An insurance upon life may be made
payable on the death of the person, or on his
surviving a specified period, or otherwise
contingently on the continuance or cessation
of life.
Every contract or pledge for the payment of
endowments or annuities shall be considered
a life insurance contract for purposes of the
Insurance Code.
E.2. TYPES
E.2.A. INDIVIDUAL LIFE
Insurance on human lives and insurance
appertaining thereto or connected therewith.
It may be made payable on the death of the
person, or after his surviving a specified
period (as an annuity or endowment), or
otherwise contingently on the continuation or
cessation of life.
E.2.B. GROUP LIFE
It is a blanket policy covering a number of
individuals who are usually a cohesive group
(e.g., employees of a company) and subjected
to a common risk. No medical examination is
usually required of each person insured (in
contrast to individual life insurance).
Group insurance is a single insurance
contract that provides coverage for many
individuals. The employer-policy holder is the
agent of the insurer in collecting the premium.
[Pineda v. CA, G.R. No. 105562 (1993)]
Typically, the policy owner is an employer and
the policy covers the employees or members
of the group, with one master contract kept
by the employer. Where the employee is
required to pay a portion of the premium, the
arrangement is called a contributory plan,
wherein his share is deducted from his wages
[Carale (2014)]
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MERCANTILE LAW
E.2.C. INDUSTRIAL LIFE
Sec. 235. The term Industrial life insurance as
used in this code shall mean that form of life
insurance under which the premiums are
payable either monthly or oftener, if the face
amount of insurance provided in any policy is
not more than 500 times that of the current
statutory minimum daily wage in the City of
Manila, and if the words industrial policy are
printed upon the policy as part of the
descriptive matter.
Industrial life insurance refers to an insurance
policy which provides insurance coverage to
industrial workers or people who are unable
to afford insurance for bigger amounts.
Unlike an ordinary life insurance policy, this
kind of insurance shall not lapse after non-
payment of premiums in 3 months after the
expiration of the grace period, if such non-
payment is due to the failure of the company
to send its representatives to the insured to
collect premium. (Sec. 235 & Carale [2014])
E.2.D. M ICROINSURANCE
Sec. 187. Microinsurance is a financial product
or service that meets the risk protection
needs of the poor, where:
The amount of contributions, premiums, fees
or charges, computed on a daily basis, does
not exceed 7.5% of the current daily
minimum wage rate for nonagricultural
workers in Metro Manila; and
The maximum sum of guaranteed benefits is
not more than 1,000 times of the said current
daily minimum wage rate.
Sec. 188. No insurance company or mutual
benefit association shall engage in the
business of Microinsurance unless it
possesses all the requirements as may be
prescribed by the Commissioner, who shall
issue such rules and regulations governing
microinsurance.
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E.3. EXAMPLES OF LIFE INSURANCE
POLICIES
(1) Ordinary or whole life policy, where
the insurer agrees to pay the face value of
the policy upon the death of the insured;
Distinct variations of Whole Life Policy:
(A) Ordinary Life Insurance Premiums
are paid throughout the lifetime of
the person insured or until the person
reaches a predetermined specified
age at which point the coverage
continues without the payment of
additional premiums.
(B) Limited Payment Life Insurance
Premiums are paid only during a
specified number of years or until a
specified event occurs.
(C) Single Premium Life Insurance the
coverage is acquired by the payment
of a single premium.
(D) Joint Life Insurance coverage is
payable upon the first death among
two or more insured (normally
purchased by business partners or
spouse) and paid to the survivor.
(E) Universal Life Insurance
emphasizes the separation of the
portion of the premium that is used to
cover the insurance protection from
the portion of the premium allocated
to an investment.
(F) Variable Life Insurance some
amount of death benefit provided by
a variable life insurance policy is
guaranteed by the insurer, but the
total death benefit and the cash value
of the insurance before death depend
on the investment performance of
that portion of the premium which is
allocated to a separate fund.
(G) Pure endowment policy where
theinsurer pays the insured if the
insured survives a specified period. If
the insured dies within the period, the
insurer is released from liability and
unless the contract otherwise
provides, need not reimburse any part
of the premiums paid;
(H) Endowment policy where the
insured is paid the face value of the
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INSURANCE MERCANTILE LAW
policy if he outlives the designated
period. If he dies within said period,
the insurer pays the proceeds to the
beneficiary. This is a combination of
term policy and pure endowment
policy.
(2) Term Life Insurance,which provides for
the payment of a specified amount if
death occurs within the time period
designated in the policy, usually for
periods of one to five years.
(3) Modified Life Insurance, which is a
policy that combines terms and whole life
insurance into a single insurance policy.
Premiums paid by the insured are
substantially less during the first few
years then later on increases during the
remaining term of the policy.
(4) Group Life Insurance, which is a type
of life insurance in which a single contract
covers an entire group of people.
[Carale(2014)]
E.4. RISKS
E.4.A. DEATH OR SURVIVAL
Life insurance may be made payable on the
death of the person, or on his surviving a
specified period, or otherwise contingently on
the continuation or cessation of life [Campos
(1983)]
Death of the insured must be proven by the
beneficiary before the insurer can be made to
pay.
E.4.B. SUICIDE
Insurer is liable in any of the following cases:
(1) If committed after two years from the date
of the policys issue or its last
reinstatement. Unless the policy provides
for a shorter period. Any stipulation
extending the 2-year period is void;
(2) If committed in a state of insanity
regardless of the date of the commission
unless suicide is an excepted peril;[Sec.
183]
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Since suicide is contrary to the laws of
nature and the ordinary rules of conduct, it is
never presumed. The burden of proving lies
with the insurer who seeks to avoid liability
under a life policy excepting it from coverage
[Campos (1983)]
E.4.C. DEATH AT THE HANDS OF THE
LAW
Death at the hands of the law (e.g., legal
execution) is one of the risks assumed by the
insurer under a life insurance policy in the
absence of a valid policy exception [Vance
(1951)]
E.4.D. KILLING BY THE BENEFICIARY
General rule: The interest of a beneficiary
in a life insurance policy shall be forfeited
when the beneficiary is the principal
accomplice or accessory in willfully bringing
about the death of the insured. In such event,
the other beneficiaries so named shall receive
their share and divide among them the
forfeited share of the guilty beneficiary. In
the absence of other beneficiaries, proceeds
shall be paid according to the policy contract,
and if silent, it shall be paid to the estate of
the insured[Sec. 12]
Exceptions:
(1) Accidental killing;
(2) Self-defense;
(3) Insanity of the beneficiary at the time he
killed the insured;
(4) Negligence.
Note: Conviction of the beneficiary is
necessary before his interest in the insurance
policy is forfeited in favor of the others
indicated in Sec 12.
E.4.D. ACCIDENTAL DEATH
The terms accident and accidental means
have yet to acquire a technical meaning. In
general they have been taken to mean that
they happen by chance or fortuitously,
without intention and design and are
unexpected, unusual, and unforeseen. Where
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INSURANCE MERCANTILE LAW
the death or injury is not the natural or
probable result of the insureds voluntary act,
or if something unforeseen occurs in the
doing of the act which produces the injury,
the resulting death is within the protection of
the policies insuring against death or injury
from accident [Carale(2014)]
F. COMPULSORY MOTOR VEHICLE
LIABILITY INSURANCE
Sec. 387. It shall be unlawful for any land
transportation operator or owner of a motor
vehicle to operate the same in the public
highways unless there is in force in relation
thereto a policy of insurance or guaranty in
cash or surety bond issued in accordance with
the provisions of this chapter to indemnity the
death, bodily injury and/or damage to
property of a third-party or passenger, as the
case may be, arising from the use thereof.
Compulsory motor vehicle liability insurance
is a policy of insurance or guaranty in cash or
surety bond to indemnify the death, bodily
injury, and/or damage to property of a third-
party or passenger arising from the use of a
motor vehicle.
It is a requisite for registration or renewal of
registration of a motor vehicle by every land
transportation operator or owner [Sec. 390].
It is the only type of compulsory insurance
provided for under the Insurance Code.
It is a species of compulsory insurance that
provides for protection coverage that will
answer for legal liability for losses and
damages for bodily injuries or property
damage that may be sustained by another
arising from the use and operation of motor
vehicle by its owner. It applies to all vehicles
whether public or private vehicles.
To the extent that motor vehicle insurance is
compulsory, it must be a liability policy, and
the provision making it merely an indemnity
insurance contract cannot have any effect
[Campos (1983)]
The insurers liability is direct and primary so
the insurer need not wait for final judgment
in the criminal case to be liable. The purpose
UP LAW BOC INSURANCE
is to give immediate financial assistance to
victims of motor vehicle accidents and/or
their dependents, especially if they are poor,
regardless of the financial capability of motor
vehicle owners or operators responsible for
the accident sustained [Shafer v. Judge, RTC
Olongapo, G.R. No. 78848 (1988)]
The claimants/victims may be a passenger or
a third party. The insured may be the party at
fault as against claims of third parties (third
party liability) or the victim of the contingent
event.
The following clauses are relevant to
compulsory motor vehicle liability insurance:
(1) Authorized driver clause is a stipulation in
a motor vehicle insurance policy which
provides that the driver, other than the
insured owner, must be duly licensed to
drive the motor vehicle, otherwise the
insurer is excused from liability;
(2) Theft clause is a stipulation including
theft as one of the risks insured against. If
there is such a provision and the vehicle
was unlawfully taken, the insurer is liable
under the theft clause and the authorized
driver clause does not apply. The insured
can recover even if the thief has no
drivers license.
(3) No Fault Clause is a provision required in
every compulsory motor vehicle liability
insurance regarding claims for death or
injury to a passenger or third party on a
liability insurance policy covering the
vehicle.
Any claim for death or injury to any passenger
or third party shall be paid without the
necessity of proving fault or negligence of any
kind, provided the total indemnity in respect
of any person shall not exceed P15,000.
The claim shall be made against only one
motor vehicle. It shall lie against the insurer
of the vehicle in which the occupant is riding,
and no other. The claimant is not free to
choose from which insurer he will claim the
no fault indemnity. [Perla Compania de
Seguros v. Ancheta, G.R. No. L-49699 (1988)]
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MERCANTILE LAW
V. Insurable Interest
A. IN GENERAL
In general, an insurable interest is that
interest which a person is deemed to have in
the subject matter insured, where he has a
relation or connection with or concern in it,
such that the person will derive pecuniary
benefit or advantage from the preservation of
the subject matter insured and will suffer
pecuniary loss or damage from its destruction,
termination, or injury by the happening of the
event insured against. The existence of an
insurable interest gives a person the legal
right to insure the subject matter of the policy
of insurance [Lalican v. Insular Life Ins., G.R.
No. 183526 (2009)]
An insurable interest is one of the most basic
and essential requirements in an insurance
contract. As such, it may NOT be waived by
stipulation. Absence of insurable interest
renders the insurance contract void. [See Sec.
25]
The insurable interest need not always be
pecuniary in nature (such as by insuring the
life of a person) [Lucena v Crawford, 2Bos &
PNR 269 (1806)].
Rationale:
(1) As a deterrence to the insured. A policy
issued to a person without interest is a
mere wager policy or contract and is void
for illegality. A wager policy is obviously
contrary to public interest. [De Leon
(2014)]
There is a moral hazard in removing
insurable interest as a requirement for
the validity of an insurance policy It
allows the insured to have an interest in
the destruction of the subject matter
rather than in its preservation.
(2) As a measure of limit of recovery. The
insurable interest is the measure of the
upper limit of his provable loss under the
contract. Sound public policy requires
that insurance should not provide the
insured means of making a net profit
from the happening of the event insured
against. [De Leon (2014)]
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A.1. WHEN INSURABLE INTEREST SHOULD
EXIST
Policy Insurable interest required
Intervening Occurrence
Inception
period of loss
Life or
P policy. It does not affect the policy except
health
Property P P
For Life Insurance:Insurable interest over
life/health mustexist at the time of the
inception of the contract but may be lost
after.[Sec. 19]
For Property Insurance: Insurable
interest must exist at the time of the
inception of the contractand at the
occurrence of the loss. But it need not exist
during the intervening period or from the
time between when the policy takes effect
and the loss occurs. The alienation of insured
property will not defeat a recovery if the
insured has subsequently reacquired the
property and possesses an insurable interest
at the time of loss [Sec. 19 and Womble v.
Dubuque Fire &Marine Ins. Co.310 Mass. 142,
144-145 (1941)]
A.2. CHANGE OF INTEREST
Change of interest means the absolute
transfer of the property insured.
General rule:A change of interest in the
thing insured does not transfer the policy, but
suspends the insurance to an equivalent
extent until the interest in the thing and the
interest in the insurance policy are vested in
the same person. Thus, the contract is not
rendered void but is merely suspended [Sec.
20]
Exceptions:
(1) Life, health, and accident insurance;
(2) A change of interest in the thing insured
after the occurrence of an injury which
results in a loss does not affect the policy
[Sec. 21];
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INSURANCE MERCANTILE LAW
(3) A change in the interest in one or more of
several things, separately insured by one
policy, such as a conveyance of one or
more things, does not affect the policy
with respect to the others not so
conveyed [Sec. 22];
(4) A change of interest by will or succession
on the death of the insured. The death of
the insured does not avoid insurance
his interest passes to his heir or legal
representative who may continue the
insurance policy on the property by
continuing paying premiums [Sec. 23];
(5) A transfer of interest by one of several
partners, joint owners, or owners in
common, who are jointly insured, to the
others. This does not avoid the insurance.
It will avoid the policy only as to the
selling partners or co-owners but not as
to others. The rule applies even though it
has been agreed that the insurance cease
upon alienation of the thing [Sec. 24];
(6) Automatic transfers of interest in cases in
which the policy is so framed that it will
inure to the benefit of whosoever may
become the owner of the interest insured
during the circumstance of the risk [Sec.
57]. It is an exception to the general rule
that upon maturity, the proceeds of a
policy shall be given exclusively to the
proper interest if the person in whose
name or for whose benefit it is made.
(7) An express prohibition against alienation
in the policy [Article 1306, Civil Code], in
which case alienation will not merely
suspend the contract but avoid it entirely.
B. IN LIFE/HEALTH INSURANCE
Sec. 10.Every person has an insurable interest
in the life and health:
(1) Of himself, of his spouse and of his
children;
(2) Of any person on whom he depends
wholly or in part for education or
support, or in whom he has a
pecuniary interest;
(3) Of any person under a legal
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obligation to him for the payment of
money, or respecting property or
services, of which death or illness
might delay or prevent the
performance; and
(4) Of any person upon whose life any
estate or interest vested in him
depends.
Unless the interest of a person insured is
susceptible of exact pecuniary measurement,
the measure of indemnity under a policy of
insurance upon life or health is the sum fixed
in the policy. [Sec. 186]
Life insurance policies may be divided into
two general classes:
(1) Insurance upon ones life;
(2) Insurance upon life of another.
B.1. IN LIFE INSURANCE
B.1.A. INTEREST IN ONES OWN
LIFE
The Cestui que vie is the insured himself. The
insured can designate anyone to be the
beneficiary of the policy.
Each person has unlimited interest in his own
life, whether the insurance is for the benefit of
himself or another. [40 CJS 909]
The beneficiary designated need not have any
interest in the life of the insured when person
takes out policy on his own life. But if a person
obtains a policy on the life of another and
names himself as the beneficiary, he must
have insurable interest therein. [De Leon
(2014)]
B.1.B. INTEREST IN LIFE OF
ANOTHER
In life insurance, unless based on commercial
relationship, the policy owner does not
necessarily have pecuniary interest on the
life of the cestui que vie. A mere relationship is
a sufficient interest to be insured.
The insurable interest must be based on
moral and legal grounds. Such interest exists
PAGE 78 OF 320
MERCANTILE LAW
whenever the insured has a responsible
expectation of deriving benefit from the
continuation of the life of the other person or
of suffering detriment through its termination.
There is no insurable interest in the life of an
illegitimate spouse.
A creditor may take out insurance on the life
of his debtor but his insurable interest is only
up to the amount of the debt and only when
the debt is unsecured. [Carale (2014)]
An assignee of the insurance contract is not
required to have insurable interest in the life
of the insured. To require such interest in him
is to diminish the investment value of the
contract to the owner.
Note: An assignment of the insurance
contract is different from a change in the
designated beneficiary.
B.1.C. BENEFICIARY
A beneficiary is the person named or
designated in a contract of life, health, or
accident insurance as the person who is to
receive the proceeds or benefits which
become payable, according to the terms of
the contract, if the insured risk occurs.
General rule: A person may designate a
beneficiary, irrespective of the beneficiarys
lack of insurable interest, provided he acts in
good faith and without intent to make the
transaction merely a cover for a forbidden
wagering contract [De Leon (2014)]
Exceptions:Any person who is forbidden
from receiving any donation under Article 739,
Civil Code cannot be named beneficiary of a
life insurance policy by the person who
cannot make any donation to him. [Article
2012, Civil Code]
Sec. 739, Civil Code: The following donations
are void:
(1) Those made between persons who were
guilty of adultery or concubinage at the
time of the donation;
(2) Those made between persons found
guilty of the same criminal offense, in
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consideration thereof;
(3) Those made to a public officer or his wife,
descendants and ascendants, by reason
of his office.
General Rule: The insured shall have the
right to change the beneficiary he designated
in the policy [Sec. 11]
Exception: If the insured expressly waived
his right to change the beneficiary, this
makes the latter an irrevocable beneficiary.
But despite the waiver, he can still change
the beneficiary, provided he obtained the
beneficiarys consent. [Sec. 11]
Under the Slayer Statute, when the
beneficiary is the principal, accomplice or
accessory in willfully bringing about the death
of the insured, interest of beneficiary in life
insurance policy is forfeited [Sec. 12]
B.2. INTEREST IN HEALTH INSURANCE
General rule: Interest in the life or health of
a person must exist at the inception of the
insurance contract but need not exist
thereafter or when the loss occurs. [Sec. 19]
Exceptions:
(1) In the case of a creditors insurance taken
on the life of the debtor, insurable
interest disappears once the debt has
been paid. At this point, the
creditor/insured can no longer recover on
the policy;
(2) In the case of a companys insurance
taken on the life of an employee,
insurable interest disappears once the
employee leaves the company, in which
case, the company can no longer recover
on the policy.
B.3. TRANSFER OF POLICY
The life insurance policy can be transferred
whether the transferee has insurable interest
or not. Notice of the transfer to the insurer is
not required for the validity of the same. [Sec.
184 and 185]
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MERCANTILE LAW
There is no right of subrogation in life
insurance, because it is not a contract of
indemnity.
C. IN PROPERTY INSURANCE
Sec. 13. Every interest in property, whether
real or personal, or any relation thereto, or
liability in respect thereof, of such nature that
a contemplated peril might directly damnify
the insured, is an insurable interest.
Sec. 14. An insurable interest in property may
consist in:
(1) An existing interest;
(2) An inchoate interest founded on an
existing interest; or
(3) An expectancy, coupled with an
existing interest in that out of which
the expectancy arises.
A person has an insurable interest in property
when he sustains such relation with respect
to it that he has a reasonable expectation of
benefit to be derived from its continued
existence, or of loss or liability from its
destruction [Carale, (2014)]
The insurable interest may be in the property
itself (e.g., ownership), or any relation thereto
(e.g., interest of a trustee or a commission
agent), or liability in respect thereof (e.g.,
interest of a carrier or depository of goods).
(1) An existing interest - may be a legal title
or equitable title. Examples of those
having existing interest are owners as
regards their properties, trustees in the
case of the seller of property not yet
delivered, mortgagors over the property
mortgaged, and lessor, lessee and sub-
lessee over the property leased.
(2) An inchoate interest must be founded on
existing interests. It exists but is
incomplete or unripe until the happening
of an event. Examples of inchoate
interests are the interest of stockholders
with respect to dividends in case of profits
and shares in the assets, and the interest
UP LAW BOC INSURANCE
of a partner in the properties belonging
to the partnership.
(3) An expectancy must be coupled with an
existing interest out of which the
expectancy arises. For example, a farmer
who planted crops has insurable interest
over his harvest which can be expected.
[De Leon (2014)]
A mere contingent or expectant interest in
anything, not founded on an actual right to
the thing, nor upon any valid contract for it, is
not insurable. [German Insurance v. Hyman,
34 Neb. 704, 52 N.W. 401 (1982)]
A son has no insurable interest over the
property of his father because such is just a
mere expectancy and has no legal basis
before he inherits such property.
Insurable interest in property may be based
on a perfected contract of sale, vesting an
equitable title even before delivery of the
goods. [Filipino Merchants Ins. Co. v. CA,
(1989)]
When the seller retains ownership only to
ensure that the buyer will pay its debt, the
risk of loss is borne by the buyer. Insurable
interest in property does not imply a property
interest in, or a lien upon, or possession of the
subject matter of the insurance, and neither
ownership nor a beneficial interest is requisite
to the existence of such an interest. Anyone
has an insurable interest in property who
derives a benefit from its existence or would
suffer loss from its destruction [Gaisano
Cagayan Ins. v. Ins. Co. of North America, G.R.
No. 14379(2006)]
C. 1. TIME OF EXISTENCE
General rule:Interest in property insured
must exist both at inception and at time of
loss, but not in the intervening period. [Sec.
19]
Exceptions:
(1) A change in interest over the thing
insured after the loss contemplated. The
insured may sell the remains without
prejudice to his right to recover [Sec. 21];
(2) A change of interest in one or more
several distinct things, separately insured
PAGE 80 OF 320
MERCANTILE LAW
by one policy. This does not avoid the
insurance as to the others [Sec. 22];
(3) A change in interest by will or succession
upon the death of the insured [Sec. 23]
(4) A transfer of interest by one of several
partners, joint owners, or owners in
common who are jointly insured. The
acquiring co-owner has the same
interest; his interest merely increases
upon acquiring other co-owners interest
(Sec. 24).
C.2. TRANSFER OF POLICY
The policy cannot be transferred without the
insurers consent, because the insurer has
approved the policy based on the personal
qualifications and insurable interest of the
insured.
When there is an express prohibition against
alienation in the policy, and there is
alienation, the contract of insurance is not
merely suspended but avoided.
C.3. MEASURE OF INDEMNITY
Being a contract of indemnity, the measure of
insurable interest in property is the extent to
which the insured might be damnified by the
loss of injury thereof. [Sec. 17] The insured
cannot recover a greater value than that of
his actual loss because it would be a
wagering policy contrary to public policy and
void.
C.4. INTEREST IN PROPERTY AND LIFE
DISTINGUISHED
Property Life
Extent
Limited to actual Unlimited (save in
value of the interest life insurance
thereon effected by a
creditor on the life
of the debtor
amount of debt
only)
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Property Life (4) The same interest insured; and

(5) The same risk or peril insured against
Existence [Malayan Insurance v Philippine First
Must exist when the Must exist at the Insurance, G.R. No. 184300 (2012)]
insurance takes time the insurance
effect and when the takes effect, BUT
Double insurance is not prohibited under the
loss occurs, BUT need not exist
law, unless the policy contains a stipulation to
need not exist in the thereafter
the contrary. Usually, insurance policies
meantime
contain other insurance clause which
Expectation of benefit to be derived requires disclosure of other existing insurance
policy. In such case, non-disclosure will avoid
Must have legal Need not have legal the policy. Such clause is intended to prevent
basis basis over insurance and thus avert the
perpetration of fraud.
Interest of beneficiary If there is double insurance and loss occurs,
each of the insurers will be liable only up to
Must have insurable Need not have
the face value of their respective policies and
interest over the insurable interest
the insured has the option of choosing the
thing insured over the life of the
order by which he will claim from the insurers.
insured if the
insured himself Over-insurance occurs when the value of the
secured the policy. insurance exceeds the value of the insurable
But if the insurance interest. Over-insurance is not per se void but
was obtained by the recovery is allowed only to the extent of the
beneficiary, the loss or damage incurred by the insured
latter must have [Carale (2014)]
insurable interest
If there is over-insurance and loss occurs,
over the life of the
then the insurers will pay pro-rata (or in the
insured [Sundiang
order as stated in contract or excess clause)
and Aquino,
in case of loss.
Reviewer on
Commercial Law Nonetheless, under Sec. 64(f), an insurer may
(2013)] cancel an insurance policy, other than life,
based on a discovery of other insurance
coverage that makes the total insurance in
excess of the value of the property insured
D. DOUBLE AND OVER INSURANCE;
subject to the requirement of prior notice.
REINSURANCE
Also, under Sec. 83, in case of an over
insurance by several insurers other than life,
D.1. DOUBLE INSURANCE the insured is entitled to a ratable return of
the premium, proportioned to the amount by
Sec. 95. Double insurance exists where the which the aggregate sum insured in all the
same person is insured by several insurers policies exceeds the insurable value of the
separately in respect to the same subject and thing at risk.
interest.

Requisites: D.2. RULES FOR PAYMENT

(1) The same person is insured; Sec. 96 enunciates the principle of
(2) Two or more insurers insuring contributionwhich requires each insurer to
separately; contribute ratably to the loss or damage
considering that the several insurances cover
(3) The same subject matter; the same subject matter and interest against
PAGE 81 OF 320
UP LAW BOC INSURANCE MERCANTILE LAW

the same peril. If the loss is greater than the D.4.B. REINSURANCE TREATY AND
sum total of all the policies issued, each POLICY DISTINGUISHED
insurer is liable for the amount of his policy.
A reinsurance treaty is an agreement
between two insurance companies whereby
one agrees to cede and the other to accept
D.3. DOUBLE AND OVER INSURANCE
reinsurance business pursuant to provisions
DISTINGUISHED
specified in the treaty. [De Leon (2014)]
Double insurance Over insurance
A reinsurance policy is a contract of
Amount of Amount of indemnity one insurer makes with another to
protect the first insurer from a risk it has
insurance may or insurance exceeds
may not exceed the the value of the already assumed.
value of the insureds insurable Reinsurance treaties and reinsurance policies
insureds insurable interest are not synonymous. Treaties are contracts
interest for insurance; policies are contracts of
insurance. [Philamlife v. Auditor General, G.R.
There are always There may be one or No. 19255(1968)]
several insurers more insurers

D.5. DOUBLE INSURANCE AND

D.4. REINSURANCE REINSURANCE DISTINGUISHED

Sec. 97. A contract of reinsurance is one by Double insurance Reinsurance

which an insurer procures a third person to
Same interest Different interest
insure him against loss or liability by reason
of such original insurance. Insurer remains as Insurer becomes the
the insurer insured in relation
to the reinsurer
Sec. 99. A reinsurance is presumed to be a
contract of indemnity against liability, and Insured is a party in The original insured
not merely against damage. interest in the is not a party in the
insurance contracts reinsurance contract
Sec. 100. The original insured has no interest Property is the The original
in a contract of reinsurance. subject matter insurer's risk is the
subject matter

Reinsurance has been referred to as an Insured has to give Insureds consent is

insurance of an insurance. his consent not necessary

D.4.A. ORIGINAL INSURANCE E. MULTIPLE OR SEVERAL INTERESTS

CONTRACT AND REINSURANCE ON SAME PROPERTY
CONTRACT DISTINGUISHED
The Insurance Code recognizes that both the
The original insurance contract is separate mortgagor and mortgagee have each
and distinct from the reinsurance contract. separate and distinct insurable interest in the
An original insurance contract covers mortgaged property and that they may take
indemnity against damages, while out separate policies with the same or
reinsurance covers indemnity against liability. different insurance companies. Consequently,
insurance taken by one on his own name only
does not inure to the benefit of the other. [Sec.
53]

PAGE 82 OF 320
UP LAW BOC INSURANCE MERCANTILE LAW

Thus, a mortgagor has an insurable interest E.2. UNION MORTGAGE OR STANDARD

equal to the value of the mortgaged property MORTGAGE CLAUSE
and a mortgagee, only to the extent of the
This clause is similar to an open loss payable
debt Secured by the mortgage. [Geagonia v.
clause, except that it is stipulated that the
CA, G.R. No. 114427(1995)]
acts of the mortgagor cannot invalidate the
When a mortgagee insures his own interest in insurance, provided that if the mortgagor
the mortgaged property without reference to fails to pay the premiums due, the mortgagee
the right of the mortgagor, mortgagee is shall, on demand, pay said premiums. [De
entitled to the proceeds of the policy in case Leon (2014)]
of loss to the extent of his credit. [De Leon
When a mortgagee insured his own interest
(2014)]
and a loss occurs, he is entitled to recover on
If the proceeds are more than the total the insurance. However, he may no longer
amount of credit, then mortgagee has no claim against the mortgagor, for his claim is
right to the excess. If the proceeds are equal discharged up to the amount the insurer has
to the credit, then insurer is subrogated to the paid him. [Palileo v. Cosio G.R. No. L-7677
mortgagees rights and mortgagee can no (1955)]
longer recover the mortgagors indebtedness.
If the proceeds are less than the credit, then
the mortgagee may recover from the
mortgagor the deficiency. Upon payment, the
insurer is subrogated to the rights of the
mortgagee against the mortgagor to the
extent of the amount paid.
When a mortgagor takes out an insurance for
his own benefit, he can only recover from the
insurer but the mortgagee has a lien on the
proceeds by virtue of the mortgage. A
mortgagor can make the proceeds payable to
or assigned to the mortgagee. [De Leon
(2014)]

E.1. OPEN LOSS PAYABLE MORTGAGE

CLAUSE
An open loss payable clause states that the
proceeds of the insurance contract is payable
to the mortgagee as beneficiary.
The contract, however, is procured by the
mortgagor for his interest in the property. He
is the party to the contract, not the
mortgagee.
The acts of the mortgagor prior to the loss,
which would otherwise avoid the insurance,
affects the mortgagee, even if the property is
in the hands of said mortgagee.

PAGE 83 OF 320
UP LAW BOC INSURANCE
VI. Perfection of the
Insurance Contract
A. OFFER AND
ACCEPTANCE/CONSENSUAL
An insurance contract is consensual. It is
therefore perfected by mere consent. Consent
is manifested by the meeting of the offer and
the acceptance upon the object or the cause
which are to constitute the contract.
There is an offer when the insured submits an
application to the insurer. There is acceptance
when the insurer approves the
application.The insurance contract becomes
effective upon payment of first premium,
provided there has been an approval of the
application.
A contract of insurance must be assented to
by both parties, either in person or through
their agents and so long as an application for
insurance has not been either accepted or
rejected, it is merely a proposal or an offer to
make a contract. [Perez v. CA,G.R. No. 112329
(2000)]
Also, according to Enriquez v. Sun Life
Assurance Co.G.R. No. L-15895 (1920):
(1) Submission of application, even with
premium payment is a mere offer on the
part of the applicant, and does not bind
the insurer;
(2) An insurance contract is also not
perfected where the applicant dies before
the approval of his application or it does
not appear that the acceptance of the
application ever came to the knowledge
of the applicant;
(3) An acceptance made by letter shall not
bind the person making the offer except
from the time it came to his knowledge.
The parties may impose additional conditions
precedent to the validity of the policy as a
contract as they see fit. Usually, it is
stipulated in the application that contract
shall not become binding until the policy is
delivered and the first premium is paid [De
Leon (2014)]
PAGE 84 OF 320
MERCANTILE LAW
A.1. DELAY IN ACCEPTANCE
Delay in acting on the application does not
constitute acceptance even though the
insured has forwarded his first premium with
his application. [Perez v. CA, G.R. No.
112329(2000)]
When there is delay in acceptance due to the
negligence of the insurance company which
takes unreasonably long time before the
application is processed and the applicant
dies, the contract is not perfected. In this case,
the insurer can be liable for damages in
accordance with the tort theory. The
insurance business is imbued with public
interest, thus it is the duty of the insurer to
act with reasonable promptness in acting on
applications submitted to it [Wallace v.
Hartford Fire Insurance Co, 31 Idaho 48r,(1918)]
A.2. DELIVERY OF POLICY
Delivery is the act of placing the insurance
policy (the physical document) into the
possession of the insured. The delivery can be
a proof of the acceptance of the insurer of the
offer of the insured. It is not, however, a pre-
requisite of a valid contract of insurance.
Actual manual delivery is not necessary for
the validity of the contract. Constructive
delivery may be sufficient.
Actual delivery to the insured is not essential
to give the policy binding effect as long as the
insured has complied with every condition
required of him. [New York Life Ins. Co. v.
Babcock, 30 S. E. 273 (1898)]
In Bradley v. New York Life Ins., 275 F. 657
(1921),the agent of the insurance company is
not the agent of the insured. Thus delivery to
the agent cannot be considered delivery to
the insured.
B. PREMIUM PAYMENT
An insurance premium is the agreed price for
assuming and carrying the risk, that is, the
consideration paid an insurer for undertaking
to indemnify the insured against the specified
peril.
General rule: No insurance policy issued or
renewal is valid and binding until actual
UP LAW BOC
payment of the premium (Sec 77). Any
agreement to the contrary is void.
Sec. 77. Notwithstanding any agreement to
the contrary, no policy or contract of
insurance issued by an insurance company is
valid and binding unless and until the
premium thereof 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
agreements with duly licensed
intermediaries, a 90 day credit extension is
given. No credit extension to a duly licensed
intermediary should exceed 90 days from the
date of issuance of the policy.
Sec. 79. An acknowledgment in a policy or
contract of insurance or the receipt of
premium is conclusive evidence of its
payment, so far as to make the policy
binding, notwithstanding nay stipulation
therein that it shall not be binding until the
premium is actually paid.
Note: Under RA 10607, the exceptions
provided by law are as follows:
(1) Life and industrial life policy [Sec. 77]
(2) 90 day credit extensions covered by
broker or agency agreements with
licensed intermediaries [Sec. 77]
(3) Acknowledgment in the contract that
premium has been paid [Sec. 79)]
Jurisprudence decided before RA 10607
provides two further exceptions:
(1) Agreement to grant payment of premium
in installment basis and partial payment
has been made [Makati Tuscany v. CA,
G.R. No. 95546, (1992)]
(2) When parties are barred by Estoppel
[UCPB v. Masagana Telemart, G.R. No.
137172(2001)]
PAGE 85 OF 320
INSURANCE MERCANTILE LAW
B.1. AUTHORITY OF AGENT TO RECEIVE
PREMIUM
Where an insurer authorizes an insurance
agent or broker to deliver a policy to the
insured, it is deemed to have authorized said
agent to receive the premium in its behalf.
The insurer is bound by its agents
acknowledgement of receipt of payment of
premium [American Home Assurance Co. v.
Chua, G.R. No. 130421 (1999)]
B.2. PAYMENT BY POST-DATED CHECK
The payment of premium by a postdated
check at a stated maturity subsequent to the
loss is insufficient to put the insurance into
effect.
But payment by a check bearing a date prior
to the loss, assuming availability of funds,
would be sufficient, even if it remains
unencashed at the time of the loss. The
subsequent effects of encashment would
retroact to the date of the instrument and its
acceptance by the creditor [Vitug, Commercial
Laws and Jurisprudence (2006)]
B.3. NON-PAYMENT OF PREMIUM
Non-payment of first premium, unless waived,
prevents the contract from becoming binding
notwithstanding the acceptance of the
application nor the issuance of the policy.
[Philippine Phoenix Surety and Insurance v
Woodworks, G.R. No. L-25317 (1979)]
Non-payment of subsequent premiumsdoes
not affect the validity of the contracts unless,
by express stipulation, it is provided that the
policy shall in that event be suspended or
shall lapse. In case of individual life insurance,
the policy holder is entitled a grace period of
either 30 days or one month within which
payment of any premium after the first may
be made. [Sec. 233] In cases of industrial life
insurance, the grace period is four weeks, and
where premiums are paid monthly, either 30
days or one month. [Sec. 236]
UP LAW BOC INSURANCE
B.4. EXCUSES FOR NON-PAYMENT
(1) Fortuitous events which render payment
by the insured wholly impossible will not
prevent forfeiture of the policy when the
premium remains unpaid. In other words,
it is not an excuse.
(2) Non-payment of premiums occasioned by
war causes an insurance to be not merely
suspended, but is completely abrogated. It
would be unjust to allow the insurer to
retain the reserve value of the policy,
which is the excess of the premiums paid
over the actual risk carried during the
years when the policy had been in force in
time of war [Constantino v. Asia Life Ins.
Co. G.R. No. L-1669 (1950)]
C. COVER-NOTES
Sec. 52. Cover notes may be issued to bind
insurance temporarily pending the 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 insurance bound under the cover
note and the premium therefor.
Cover notes may be extended or renewed
beyond such sixty (60) days with the written
approval of the Commissioner if he
determines that such extension is not
contrary to and is not for the purpose of
violating any provisions of this Code. The
Commissioner may promulgate rules and
regulations governing such extensions for the
purpose of preventing such violations and
may by such rules and regulations dispense
with the requirement of written approval by
him in the case of extension in compliance
with such rules and regulations.
Cover notes are in effect interim policies that
bind the parties until a formal policy is issued,
but the rule is that the cover note will not
amount to a contract unless there is
agreement on the material terms. If the cover
note was issued following the expiration of a
policy, the presumption will be that the cover
is on the same terms as the old policy. [Carale
(2014)]
PAGE 86 OF 320
MERCANTILE LAW
D. NON-DEFAULT OPTIONS IN LIFE
INSURANCE
Sec. 227 (f) The law requires that in case of
life or endowment insurance, the policy shall
contain a provision specifying the options to
which the policy holder is entitled in the event
of default in a premium payment after three
full annual premiums shall have been paid:
(1) Receive the cash surrender value
(2) Apply such value as the premium for
an extended insurance
(3) Apply such value as the premium for
a paid-up insurance
(4) Secure from such value an automatic
premium loan before the expiration of
the grace period.
D.1. CASH SURRENDER VALUE (CSV)
It is the amount that the insured is entitled to
receive if he surrenders the policy and
releases his claims upon it. The right to CSV
accrues only after three full annual premium
payments. The insured is given the right to
claim the amount less than the reserve,
reduced by surrender charge. [Sec. 233(f)]
The cash value or cash surrender value is an
amount which the insurance company holds
in trust for the insured to be delivered to him
upon demand. When the companys credit for
advances is paid out of the cash value or cash
surrender value, that value and the
companys liability is diminished.
[Manufacturers Life Ins. v. MeerG.R. No. L-
2910(1951)]
Rationale: The premium is uniform
throughout a lifetime, but the risk is varied
(i.e., higher risk when older, lower when
young). Thus, the cost of protection is more
expensive during the early years of the policy.
UP LAW BOC INSURANCE
D.2. ALTERNATIVE TO CSV
(1) Extended insurance/term insurance -
where the insured, after having paid three
full annual premiums, is given the right to
have the policy continued in force from
date of default for a time either stated or
equal to the amount of the CSV, taken as
a single premium. The face value of the
policy remains the same but only within
the term. It is also called term insurance
where CSV is taken as a single premium
(no further payments) to extend the
policy for a fixed period of time. If death
occurs during this period, the beneficiary
can recover the face value of the policy,
but if the insured survives, the beneficiary
gets nothing. Reinstatement is allowed if
made within the term purchased; no
reinstatement after the lapse of the term
purchased.
(2) Paid-up insurance - where, after the
insurance is paid-up, the insured who
has paid three full annual premiums is
given the right, upon default, to have the
policy continued from the date of default
for the whole period of insurance without
further payment of premiums. It is also
called reduced paid-up because in
effect the policy, terms and conditions are
the same but the face value is reduced to
the paid-up value. The terms and
conditions of the original policy remain
the same, however, the amount will be
less than the original face value.
(3) Automatic premium loan (APL) - where,
upon default, the insurer lends/advances
to the insured without any need of
application on his part, the amount
necessary to pay overdue premium, but
not to exceed the CSV of the policy. It only
applies if requested in writing by the
insured either in the application or at any
time before expiration of the grace period.
In effect, the insurance policy continues in
force for a period covered by the payment.
After the period, if insured still does not
resume paying his premiums, policy
lapses, unless CSV still remains. If there
is still CSV, APL continues until CSV is
exhausted. This is beneficial for the
insured because it continues the contract
and all its features with full force and
effect.
PAGE 87 OF 320
MERCANTILE LAW
E. REINSTATEMENT OF A LAPSED LIFE
INSURANCE POLICY
Reinstatement of a lapsed life insurance
policy is not a non-default option. It does not
create a new contract, but merely revives the
original policy so insurer cannot require a
higher premium than the amount stipulated
in the contract. It does not apply to
group/industrial life insurance.
Requisites: [Sec. 233(j)]
(1) It must be exercised within three years
from date of default;
(2) The insured must present evidence of
insurability satisfactory to the insurer;
(3) He must pay all back premiums and all
indebtedness to the insurer (with interest)
(4) The CSV must not have been duly paid to
the insured nor the extension period
expired;
(5) The application must be filed during the
insureds lifetime. [Andres v. Crown Life
Ins. G.R. No. L-10874 (1958)]
F. REFUND OF PREMIUMS
Return of premiums can be made in the
following cases:
(1) If the thing insured was never exposed to
the risks insured against, the whole
premium should be refunded [Sec. 80(a)];
(2) When the contract is voidable due to the
fraud or misrepresentation of insurer or
his agent, the whole premium should be
refunded [Sec. 82]
(3) When by any default of the insured other
than actual fraud, the insurer never
incurred any liability under the policy, the
whole premium should be refunded [Sec.
82];
(4) When the contract is voidable because of
the existence of facts of which the insured
was ignorant without his fault, the whole
premium should be refunded [Sec. 82];
(5) Where the insurance is for a definite
period and the insured surrenders his
policy, the portion of the premium that
corresponds to the unexpired time at a
pro rata rate, unless a short period rate
UP LAW BOC INSURANCE
has been agreed upon and appears on
the face of the policy should be return
[Sec. 80(b)];
(6) When there is over-insurance by several
insurers, the return premiums should be
proportioned to the amount by which the
aggregate sum insured in all the policies
exceeds the insurable value of the thing
at risk [Sec. 83];
(7) When rescission is granted due to the
insurers breach of contract.
PAGE 88 OF 320
MERCANTILE LAW
VII. Rescission of
Insurance Contracts
Sec. 26. A neglect to communicate that which
a party knows and ought to communicate, is
called a concealment.
Sec. 27. A concealment whether intentional or
unintentional entitles the injured party to
rescind a contract of insurance.
Requisites:
(1) A party knows a fact which he neglects to
communicate or disclose to the other;
(2) Such party concealing is duty bound to
disclose such fact to the other;
(3) Such party concealing makes no warranty
of the fact concealed;
(4) The other party has not the means of
ascertaining the fact concealed;
(5) The fact concealed is material.
Concealment may be committed by either the
insurer or the insured [Qua Chee Gan v. Law
Union & Rock Ins. Co. G.R. No. l-4611(1955)]
A.1. PROOF OF FRAUD IN CONCEALMENT
General rule: Fraud need not be proven in
order to prove concealment. Good faith is not
a defense. [Saturnino v Phil. American Life
Insurance, G.R. No. L-16163 (1963)]
Exception: When the concealment is made
by the insured in relation to the falsity of a
warranty, the non-disclosure must be
intentional and fraudulent in order that the
contract may be rescinded [Sec. 29]
A.2. TEST OF MATERIALITY
Sec. 31. Materiality relates rather to the
probable and reasonable influence of the
facts upon the party to whom the
communication should have been made, in
assessing the risk involved in making or
UP LAW BOC INSURANCE MERCANTILE LAW

(d) The want of necessary documents;

omitting to make further inquiries and in
and
accepting the application for insurance.
(e) The use of false and simulated papers
[Sec 112].
The test is the effect which the knowledge of
the fact in question would have on the
contract. It is sufficient if the knowledge of it A.4. CONCEALMENT IN MARINE AND
would influence the party in making the ORDINARY PRIVATE INSURANCE
contract. [De Leon (2014)] DISTINGUISHED

The test of materiality is whether the insurer Marine Ordinary

would have agreed to issue the policy had it insurance insurance
known of the facts concealed or impose
additional terms or require higher premium Required Exact and Substantial
[Carale (2014)] disclosure whole truth truth

Effect of Concealment of Any kind of

A.3. EFFECTS
General rule: Concealment vitiates the
contract and entitles the insurer to rescind,
even if the death or loss is due to a cause not
related to the concealed matter. [Sec. 27]
Exceptions:
(1) Incontestability clause: stipulates that the
policy shall be incontestable after two
years from its date of issue or of its last
reinstatement. The incontestability
clause is a mandatory provision in life and
endowment policies.[Sec. 233 (b) and Sec.
48];
(2) Concealment after the contract has
become effective, because concealment
must take place at the time the contract is
entered into in order that the policy may
be avoided. [Vance (1951)] Information
obtained after the perfection of the
contract is no longer necessary to be
disclosed by the insured, even if the policy
has not been issued.
(3) Waiver or estoppel;
(4) In Marine insurance, where concealment
of the following matters does not vitiate
the entire contract, but merely exonerates
the insurer from a loss resulting from the
risk concealed:
(a) The national character of the insured;
(b) The liability of the thing insured to
capture and detention;
(c) The liability to seizure from breach of
foreign laws of trade;
PAGE 89 OF 320
concealment the matters concealmen
specified in Sec. t will make
112 will not the insurer
entirely avoid not liable.
the contract
but will merely
exonerate the
insurer from
losses resulting
from the risk
concealed.
A.5. CONCEALMENT IN NON-MEDICAL
INSURANCE
The waiver of medical examination in a non-
medical insurance contract renders the
information required of the applicant
concerning the previous conditions of health
and diseases suffered more important. The
cause of death is not important because it is
well settled that the insured need not die of
the disease he had failed to disclose to the
insurer. It is sufficient that his nondisclosure
misled the insurer in forming his estimates of
the risks of the proposed policy or in making
inquiries. [Sunlife v. Sps. Bacani G.R. No.
105135 (1995)]
Where matters of opinion or judgment are
called for, answers made in good faith and
without intent to deceive will not avoid the
policy even though they are untrue. Reason:
The insurer cannot simply rely on those
statements. He must make further inquiry
[Philamcare Health Systems v. CA, G.R. No.
125678 (2002)]
UP LAW BOC
A.6. MATTERS WHICH MUST BE
DISCLOSED EVEN IN THE ABSENCE OF
INQUIRY
Sec. 28. Each party to a contract of insurance
must communicate to the other, in good
faith, all facts within his knowledge which are
material to the contract and as to which he
makes no warranty, and which the other has
not the means of ascertaining.
Note:If the applicant is aware of the existence
of some circumstance which he knows would
influence the insurer in acting upon his
application, good faith requires him to
disclose that circumstance, though unasked.
[Vance (1951)]
The fact of being a mongoloid is a material
fact that needs to be disclosed [Great Pacific
Life v. CA, G.R. No. L-31845(1979)].
Mere possibility of previous hypertension is
not enough to establish concealment [Great
Pacific Life v. CA, G.R. No. 113899(1999)].
A.7. MATTERS WHICH NEED NOT BE
DISCLOSED
(1) Matters already known to the insurer [Sec
30(a)];
(2) Matters which each party are bound to
know [Sec 30(b) and Sec 32];
(3) Matters of which the insurer waives
communication [Sec 30(c) and Sec 33];
(4) Matters which prove or tend to prove the
existence of a risk excluded by a warranty
and which are not otherwise material [Sec
30(d)];
(5) Matters which relate to a risk excepted in
the policy, and which are not otherwise
material [Sec 30(e)];
(6) Information of the nature or amount of
the interest of one insured unless if
inquired upon by the insurer, except if
required by Sec 51[Sec 34]
(7) Matters of opinion [Sec 35]
Sec. 32. Each party to a contract of insurance
is bound to know all the general causes which
PAGE 90 OF 320
INSURANCE MERCANTILE LAW
are open to his inquiry, equally with that of
the other, and which may affect the political
or material perils contemplated; and all
general usages of trade.
B.MISREPRESENTATION/OMISSIONS
Sec. 41. A representation may be altered or
withdrawn before the insurance is effected
but not afterwards.
Sec. 42. A representation must be presumed
to refer to the date on which the contract
goes into effect.
Sec. 44. A representation is to be deemed
false when the facts fail to correspond with its
assertions or stipulations.
Sec. 45. If a representation is false in a
material point, whether affirmative or
promissory, the injured party is entitled to
rescind the contract from the time when the
representation becomes false.
Representations are factual statements
made by the insured at the time of, or prior to,
the issuance of the policy, which give
information to the insurer and induce him to
enter into the insurance contract.
There is false representation if the matter is
true at the time it was made/represented but
false at the time the contract takes effect(Sec
44). There is no false representation if the
matter is true at the time the contract takes
effect although false at the time it was
made/represented.
B.1. KINDS OF REPRESENTATIONS
(1) Affirmative, which refers to any allegation
as to the existence or non-existence of a
fact when the contract begins [De Leon
(2014)].
(2) Promissory, which is any promise to be
fulfilled after the contract has come into
UP LAW BOC
existence; or any statement concerning
what is to happen during the existence of
the insurance [Sec 39]. A promissory
representation is substantially a
condition or warranty [De Leon (2014)].
(3) Oral or written [Sec 36].
Requisites:
(1) The insured stated a fact which is untrue;
(2) Such fact was stated with knowledge that
it is untrue and with intent to deceive or
which he states positively as true without
knowing it to be true and which has a
tendency to mislead;
(3) Such fact in either case is material to the
risk.
Like in concealment, fraud or intent is not
essential to entitle the insurer to rescind on
the ground of misrepresentation [Sec 45].
B.2. TEST OF MATERIALITY
Sec. 46. The materiality of a representation is
determined by the same rules as the
materiality of a concealment.
B.3. EFFECTS
General rule:The injured party is entitled to
rescind from the time when the
representation becomes false [Sec 45].
Exceptions:
(1) Incontestability clause;
(2) Misrepresentation after contract takes
effect;
(3) Waiver, made by acceptance of insurer of
premium payments despite knowledge of
the ground for rescission [Sec 45];
(4) A representation of the expectation,
belief, opinion, or judgment of the
insured, although false, and even if
material to the risk [Philamcare Health
Systems, Inc. v. CA, G.R. No. 125678.
(2002)];
PAGE 91 OF 320
INSURANCE MERCANTILE LAW
(5) Representation by insured based on
information obtained from third persons
(not his agent), provided the insured:
(a) Has no personal knowledge of the
facts;
(b) Believes them to be true; and
(c) Explains to the insurer that he does
so on the information of others.
(6) A misrepresentation as to age does not
constitute a ground for rescission. If the
age of the insured was considered in
determining the premium and the
benefits under the policy and the age is
misstated, the amount payable for the
policy shall be as if the policy was
purchased at the correct age [Carale
(2014)].
A representation cannot qualify an express
provision or an express warranty of insurance
(Sec 40) because a representation is not part
of the contract but only a collateral
inducement to it. However, it may qualify as
an implied warranty.
It is sufficient that the representation is
substantially or materially true, and in case of
promissory representation, it is sufficient that
it is substantially complied with [Carale
(2014)].
There is fraud and misrepresentation when
another person takes the place of the insured
in the medical examination [Eguaras v. Great
EasternG.R. No. L-10436(1916)].
The insurer is not entitled to rescission for
misrepresentation of age if the birth date on
the policy leads to the conclusion that the
insured is beyond the age covered and yet the
insurer continued to accept payment and
issued the policy. Insurer is deemed estopped
[Edillon v. Manila Bankers Life G.R. No. L-
34200 (1982)].
Despite not answering the questions and
keeping blank certain questions in the
application regarding ailments he has
suffered, when the insured signed the
pension plan application, he adopted the
written representations and declarations
embodied in as his own. Therefore, it is clear
from these representations that he concealed
his chronic heart ailment and diabetes.
UP LAW BOC INSURANCE MERCANTILE LAW

[Florendo v. Philam PlansG.R. No.

186983(2012)].
Sec. 68. A warranty may relate to the past,
the present, the future, or to all of these.
Concealment Misrepresentation

Who may commit Sec. 69. No particular form of words is

necessary to create a warranty.
May be committed Committed only by
by either insured or insured.
insurer
C.1. WARRANTIES, RIDERS, AND
Act involved ENDORSEMENTS
Sec. 50 The policy shall be in printed form
Passive form Active form which may contain blank spaces; and any
word, phrase, clause, mark, sign, symbol,
Insured withholds Insured makes
signature, number, or word necessary to
information of erroneous
complete the contract of insurance shall be
material facts from statements of facts
written on the blank spaces provided therein.
the insurer; he with the intent of
maintains silence inducing the insurer Any rider, clause, warranty or endorsement
when he ought to to enter into the purporting to be part of the contract of
speak insurance contract insurance and which is pasted or attached to
said policy is not binding on the insured,
Materiality unless the descriptive title or name of the
rider, clause, warranty or endorsement is also
Determined by the same rules mentioned and written on the blank spaces
provided in the policy.
Effect
Unless applied for by the insured or owner,
Same effects on the part of the insured; any rider, clause, warranty or endorsement
insurer has right to rescind issued after the original policy shall be
countersigned by the insured or owner, which
Injured party is entitled to rescind a countersignature shall be taken as his
contract of insurance on ground of agreement to the contents of such rider,
concealment or false representation, clause, warranty or endorsement.
whether intentional or not.
Notwithstanding the foregoing, the policy
may be in electronic form subject to the
pertinent provisions of Republic Act No.
C. BREACH OF WARRANTIES 8792, otherwise known as the Electronic
A Warranty is a statement or promise by the Commerce Act and to such rules and
insured set forth in the policy itself or regulations as may be prescribed by the
incorporated in it by proper reference, the Commissioner.
untruth or nonfulfillment of which in any
respect and without reference to whether the
insurer was in fact prejudiced by such untruth A Rider is a printed or typed stipulation
or non-fulfillment, renders the policy voidable contained in a slip of paper attached to the
by the insurer [Vance (1951)]. policy and forming an integral part thereof.
The signature of the insured is required only if
Statements or promises agreed upon by both
the riders, warranties, or endorsements are
parties to the insurance contract which are
made or issued after the issuance of the
contained in the contract or properly
original policy.
incorporated constitute warranties [Carale
(2014)].
A warranty may also be made by the insurer.
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C.2. KINDS OF WARRANTIES (3) The performance becomes impossible[Sec

73];
(1) Express warranty, which is an agreement
contained in the policy or clearly (4) Waiver or estoppel.
incorporated therein as part thereof
relating to the person or thing insured or
to the risk as a fact[Sec. 71]; C.3.B. IMMATERIAL W ARRANTY
(2) Implied warranty,whichisdeemed General rule: Breach of an immaterial
included in the contract although not provision does not avoid the policy [Sec 75].
expressly mentioned (e.g., implied
Exception: Breach of an immaterial
warranty of seaworthiness of the vessel in
provision avoids the policy when the parties
marine insurance and implied warranty
stipulate that violation of a particular
not to alter the circumstances of the
provision, though immaterial, shall avoid the
thing insured);
policy. In effect, the parties converted the
(3) Affirmative warranty, which asserts the immaterial provision into a material one
existence of a fact or condition at the time [Sundiang and Aquino (2013)].
it is made;
A condition in the policy which requires
(4) Promissory warranty or executory warranty, insured to disclose to the insurer of any
which is one where the insured stipulates insurance that, if violated by the insured,
that certain facts or conditions pertaining would ipso facto avoid the contract [Pioneer v.
to the risk shall exist or that certain Yap, G.R. No. L-36232(1974)].
things with reference thereto shall be
Insurer is barred by waiver (or estoppel) to
done or omitted. It is in the nature of a
claim violation of the so-called hydrants
condition subsequent [Secs 72 and 73].
warranty when, despite knowing fully that
only 2 fire hydrants existed (out of the 11
hydrants required), it still issued the
C.3. EFFECT
insurance policies and received the premiums
C.3.A. MATERIAL W ARRANTY [Qua Chee Gan v. Law Union, G.R. No. L-4611
(1955)].
Sec. 74. The violation of a material warranty,
or other material provision of the policy, on
the part of either the insured or insurer, Warranty Representation
entitles the other to rescind.
Nature
Part of the contract Mere collateral
inducement
Breach of a material warranty may either be:
Form
(1) Without fraud, in which case, the insurer
will be exonerated from the time it occurs. Written on the May be written in
If made during the inception, it will policy, actually or by the policy or may be
prevent the policy from taking effect [Sec reference oral
76]. Materiality
(2) With fraud, in which case, the policy is Presumed material Must be proved to
avoided ab initio and the insured is not be material
entitled to the return of the premiums
Compliance
paid. [De Leon (2014)]
Must be strictly Requires only
Exceptions: complied with substantial truth
(1) Loss occurs before the time of and compliance
performance of the warranty [Sec 73]; Applicability of incontestability clause
(2) The performance becomes unlawful[Sec Does not apply Applies
73];
PAGE 93 OF 320
UP LAW BOC INSURANCE MERCANTILE LAW

VIII. Claims Settlement A.2. LIABILITY FOR LOSS

Loss for which the Loss for which the
and Subrogation insurer is liable insurer is not liable

Loss the proximate Loss by insureds

A. CONCEPT OF LOSS cause of which is the willful act
Loss in insurance law embraces injury or peril insured against
damage [Sec 86]
Requisites: Recovery upon a loss requires Loss the immediate Loss due to
that: cause of which is the connivance of the
(1) The insured must have insurable interest peril insured against insured [Sec 89]
in the subject matter; exceptwhere the
proximate cause is
(2) The interest is covered by the policy; an excepted peril
(3) There be a loss; and
Loss through Loss where the
(4) The loss must be one for which the negligence of excepted peril is the
insurer is liable; insured except proximate cause
(5) Notice and proof of loss must be given if where there was
policy is fire insurance or when the same gross negligence
is stipulated in the policy. amounting to willful
acts

A.1. CAUSES OF LOSS Loss caused by

efforts to rescue the
(1) Remote cause is an event preceding thing from peril
another in a causal chain, but separated insured against if,
from it by other events; during the course of
(2) Proximate cause is that cause, which, in the rescue, the thing
natural and continuous sequence, is exposed to a peril
unbroken by any efficient intervening not insured against,
cause, produces the injury, and without which permanently
which the result would not have occurred deprives the insured
[Vda. De Bataclan v. Medina, G.R. No. L- of its possession in
10126 (1957)]. whole or in part (Sec
87)
(3) Immediate cause isthe cause, not the
proximate cause, which immediately
precedes the loss. B. NOTICE AND PROOF OF LOSS

B.1. NOTICE OF LOSS

This refers to the formal notice given the
insurer by the insured or claimant under a
policy of the occurrence of the loss insured
against.

B.1.A. PURPOSE
Its purpose is to apprise the insurance
company so that it may make proper

PAGE 94 OF 320
UP LAW BOC INSURANCE
investigation and take such action as may be
necessary to protect its interest.
In fire insurance, an insurer is exonerated, if
notice thereof be not given to him by an
insured, or some person entitled to the
benefit of the insurance, without unnecessary
delay [Sec 90].
In other types of insurance, failure to give
notice will not exonerate the insurer, unless
there is a stipulation in the policy requiring
the insured to do so.
However, it has been held that formal notice
of loss is not necessary if insurer has actual
notice of loss [Fidelity Phoenix Insurance v
Friedman, 174 SW 215] but there is a ruling to
the contrary [Col. Sav. Bank v American
Surety 87 P 118]
B.1.B. FORM
In case of loss as regards fire insurance, there
must be a written notice thereof. [Sec. 90]
But as to other non-life insurance policies,
the law does not provide for a necessity of
written notice [De Leon (2014)]
The notice of loss may be in the form of an
informal or provisional claim containing a
minimum of information as distinguished
from a formal claim which contains the full
details of the loss, computations of the
amounts claimed, and supporting evidence,
together with a demand or request for
payment [De Leon (2014)].
B.1.C. Tim e for Giving Notice
Notice of loss must be given within
reasonable time. [Bachrach v Britain
American Assurance, G.R. No. L-5715 (1910)]
For compulsory motor vehicle insurance, the
notice must be given within six months from
the date of the accident. [Sec. 397]
For other non-life insurance, the
Commissioner may specify the period for the
submission of the notice of loss [Sec. 90]
PAGE 95 OF 320
MERCANTILE LAW
B.2. PROOF OF LOSS
It is the formal evidence given to the
insurance company by the insured or
claimant, under a policy, of: the occurrence of
the loss, the particulars thereof, and the data
necessary to enable the company to
determine its liability and the amount. [De
Leon (2014)]
B.2.A. PURPOSE
Its purpose is to give the insurer information
by which he may determine the extent of his
liability but also; to afford him a means of
detecting any fraud that may have been
practiced upon him, and to operate as a
check upon extravagant claims.
Like a notice of loss, in the absence of any
stipulation in the policy, proof may be given
orally or in writing.
The insured is not bound to give such proof as
would be necessary in a court of justice; but it
is sufficient for him to give the best evidence
which he has in his power at the time [Sec 91].
B.2.B. RULES FOR RECOVERY
General rule: Timely compliance with the
notice and proof of loss is a condition
precedent to the right to recover if the policy is
fire insurance, or when the same is stipulated
in the policy. [Sec. 90]
Exceptions:
(1) For both notice and proof of loss, waiver:
(a) Defects in a notice or proof of loss
may be waived when such defects,
which the insured might remedy, are
not specified, without unnecessary
delay, to him as ground of objection
by the insurer [Sec 92];
(b) Delay in presentation to an insurer of
notice or proof of loss is waived if
caused by any act of his, or if he omits
to take objection promptly and
specifically upon that ground [Sec.
93];
(2) For notice of loss, a formal notice of loss is
not necessary if insurer has actual notice
of loss.
UP LAW BOC INSURANCE MERCANTILE LAW

C. GUIDELINES ON CLAIMS In case of litigation, it is the duty of the

SETTLEMENT Commissioner or the Court to determine
whether the claim has been unreasonably
Claims settlement is the indemnification of denied or withheld. Failure to pay any such
the loss suffered by the insured. The claimant claim within the time prescribed shall be
may be the insured or reinsured, the insurer considered prima facie evidence of
who is entitled to subrogation, or a third unreasonable delay in payment. [Sec. 250]
party who has a claim against the insured
Where a policy gives the insurer the control of
the decision to settle claim or litigate it, the
insurer nevertheless is required to observe a
certain measure of consideration for the
interest of the insured.

Claims Life insurance Non-life insurance

Maturity Either: (1) Upon happening of event insured

against; and
(a) Upon death of the person insured;
(2) Event must occur within the
(b) Upon his surviving a specific
period specified in policy,
period; or
otherwise insurer has no liability
(c) Otherwise contingently on the
continuance or cessation of life
[Sec 180]

Delivery General rule:The proceeds should be (1) Within 30 days after:

delivered immediately upon maturity
of proceeds (a) Proof of loss is received by
of policy.
insurer; and
(b) Ascertainment of loss or
Exceptions: damage is made either by
agreement between the
1. If payable ininstallments or as an
insured and insurer or by
annuity, when such installments
arbitration
or annuities become due;
(2) If ascertainment is not made
2. If maturity is upon death, within 60
within 60 days after such receipt
days after presentation of claim
by insurer of proof of loss, then
and filing of proof of death of
loss or damage shall be paid
insured. [Sec. 248]
within 90 days after such receipt.
[Sec. 249]

Effect of refusal 1. This entitles the beneficiary to collect interest on the proceeds of policy for
or failure to pay the duration of the delay at rate of twice the ceiling prescribed by the
claim within monetary board (unless refusal to pay is based on ground that claim is
time prescribed fraudulent)
2. In case damages are awarded, this includes attorneys fees and other
expenses incurred due to delay (plus the interest) [Sec. 248 and 249]

PAGE 96 OF 320
UP LAW BOC
C.1. UNFAIR CLAIMS SETTLEMENT;
SANCTIONS
Sec. 247. No insurance company doing
business in the Philippines shall refuse,
without just cause, to pay or settle claims
arising under coverages provided by its
policies, nor shall any such company engage
in unfair claim settlement practices.
Any of the following acts by an insurance
company, if committed without just cause and
performed with such frequency as to indicate a
general business practice, shall constitute
unfair claim settlement practices:
Knowingly misrepresenting to claimants
pertinent facts or policy provisions relating to
coverage at issue;
Failing to acknowledge with reasonable
promptness pertinent communications with
respect to claims arising under its policies;
Failing to adopt and implement reasonable
standards for the prompt investigation of
claims arising under its policies;
Not attempting in good faith to effectuate
prompt, fair and equitable settlement of
claims submitted in which liability has
become reasonably clear; or
Compelling policyholders to institute suits to
recover amounts due under its policies by
offering without justifiable reason
substantially less than the amounts
ultimately recovered in suits brought by
them.
Evidence as to numbers and types of valid
and justifiable complaints to the
Commissioner against an insurance
company, and the Commissioners complaint
experience with other insurance companies
writing similar lines of insurance shall be
admissible in evidence in an administrative or
judicial proceeding for the purpose of
determining whether unfair claim settlement
practices have been committed.
If it is found, after notice and an opportunity
to be heard, that an insurance company has
violated this section, each instance of
noncompliance may be treated as a separate
violation and shall be considered sufficient
cause for the suspension or revocation of the
companys certificate of authority
PAGE 97 OF 320
INSURANCE MERCANTILE LAW
Sec. 247 lists the grounds which are sufficient
cause for the suspension or revocation of the
insurers certificate of authority [Sec. 247(c)].
C.2. PRESCRIPTION OF ACTION
In the absence of an express stipulation in the
policy, it being based on a written contract,
the action prescribes in ten years [Article 1144,
Civil Code].
However, the parties may validly agree on a
shorter period provided it is not less than one
year from the time the cause of action
accrues [Sec 63].
In compulsory motor vehicle insurance, the
action prescribes in one year from the denial
of the claim [Sec. 397]
C.3. SUBROGATION
Subrogation is a process of legal substitution.
The insurer, after paying the amount covered
by the insurance policy, steps into the shoes
of the insured and avails himself of the
latter's rights that exist against the
wrongdoer at the time of loss.
The insurer becomes entitled to recover from
the wrongdoer the amount of the loss it may
have paid to the insured.
The Right of Subrogation stems from Art.
2207 of the Civil Code.
Note:Subrogation applies only to property
insurance and non-life insurance.
C.3.A. RIGHTS TRANSFERRED
The subrogee-insurer cannot acquire any
claim, Security, or remedy the subrogor did
not have (or a greater claim than the original
insured). In other words, a subrogee cannot
succeed to a right not possessed by the
subrogor. A subrogee can recover only if the
insured likewise could have recovered.
[Sulpicio Lines, Inc. v. First Lepanto-Taisho Ins.
Corp. G.R. No. 140349 (2005)]
The insured can no longer recover from the
offended party what was paid to him by the
insurer but he can recover any deficiency if
the damages suffered are more than what
UP LAW BOC INSURANCE
was paid. The deficiency is not covered by the
right of subrogation.
The insurer must present the policy as
evidence to determine the extent of its
coverage. [Wallem Phil. Shipping v. Prudential
GuaranteeG.R. No. 152158 (2003)]
C.3.B. W HEN THERE IS NO RIGHT OF
SUBROGATION
(1) Where the insured by his own act releases
the wrongdoer or third party liable for the
loss or damage;
(2) Where the insurer pays the insured the
value of the loss without notifying the
carrier who has in good faith settled the
insureds claim for loss;
(3) Where the insurer pays the insured for a
loss or risk not covered by the policy [Pan
Malayan Ins. Co. v. CA, G.R. No.
81026(1990)];
(4) In life insurance;
(5) For recovery of loss in excess of insurance
coverage [De Leon (2014)].
The right of subrogation is not dependent
upon, nor does it grow out of, any privity of
contract or upon written assignment of claim.
It accrues simply upon payment of the
insurance claim by the insurer [Pan Malayan
Ins. Co v. CA, G.R. No. 81026 (1990)].
Since the insurer can be subrogated to only
such rights as the insured may have, should
the insured, after receiving payment from the
insurer, release the wrongdoer who caused
the loss, the insurer loses his rights against
the latter. But in such a case, the insurer will
be entitled to recover from the insured
whatever it has paid to the latter, unless the
release was made with the consent of the
insurer [Manila Mahogany v. CA G.R. No. L-
52576 (1987)].
PAGE 98 OF 320
MERCANTILE LAW
IX. Insurance
Commissioner
A. JURISDICTION AND ADJUDICATORY
POWERS
The Insurance Commissioner has the power
to adjudicate disputes relating to an
insurance companys liability to an insured
under a policy. [Sec. 437] A complaint or
claim filed with such official is considered an
action or suit the filing of which would
have the effect of tolling the suspending the
running of the prescriptive period.
(1) Concurrent jurisdiction (with regular civil
courts) over cases where any single claim
does not exceed P5,000,000 involving
liability arising from:
(a) Insurance contract;
(b) Contract of suretyship;
(c) Reinsurance contract;
(d) Membership certificate issued by
members of mutual benefit
association [Sec 439];
(2) Primary and exclusive jurisdiction over
claims for benefits involving pre-need
plans where the amount of benefits does
not exceed P100,000 [Sec. 55, RA 9829].
For the purpose of proceeding under its
adjudicatory powers under the Insurance
Code, the Commissioner or any officer thereof
designated by him, is empowered to
administer oaths and affirmation, subpoena
witnesses, compel their attendance, take
evidence and require the production of any
books, papers, documents or contracts or
other records which are relevant or material
to the inquiry [Sec 439].
Note: However, the Insurance Commission
has no jurisdiction to decide the legality of a
contract of agency entered into between an
insurance company and its agent. The same
is not covered by the term doing or
transacting insurance business under Sec 2,
neither is it covered by Sec 439, which grants
the Commissioner adjudicatory powers
[Sundiang and Aquino (2013)].
UP LAW BOC INSURANCE MERCANTILE LAW

B. REVOCATION OF CERTIFICATE OF C. LIQUIDATION OF INSURANCE

AUTHORITY COMPANY
The Certificate of Authority issued to the If the company is determined by the
domestic or foreign company by the Commissioner to be insolvent or cannot
Commission may be revoked or suspended by resume business, he shall, if public interest
the Insurance Commissioner for any of the requires, order its liquidation [Sec 256].
following grounds:
This should be distinguished from a situation
(1) The company is in an unsound condition; where a conservator is appointed when the
Commissioner finds that a company is in a
(2) That it has failed to comply with the
state of continuing inability or unwillingness
provisions of law or regulations
to maintain a condition of solvency or
obligatory upon it;
liquidity adequate to protect the
(3) That its condition or method of business policyholders and creditors. The conservator
is such as to render its proceedings will take charge of the management of the
hazardous to the public or its insurance company [Sec 255].
policyholders;
(4) That its paid-up capital stock, in the case
of a domestic stock corporation, or its
available cash assets, in the case of a
domestic mutual company, or its Security
deposits, in the case of a foreign company,
is impaired or deficient;
(5) That the margin of solvency required of
such company is deficient.
[Sec. 254]

The Commissioner is authorized to suspend

or revoke all certificates of authority granted
to such insurance company, its officers and
agents, and no new business shall thereafter
be done by such company or for such
company by its agents in the Philippines
while such suspension, revocation, or
disability continues or until its authority to do
business is restored by the Commissioner.
[Sec. 254]
Before restoring such authority, the
Commissioner shall require the company
concerned to submit to him a business plan
showing the companys estimated receipts
and disbursements, as well as the basis
therefor, for the next succeeding three years.
[Sec. 254]

PAGE 99 OF 320
UP LAW BOC TRANSPORTATION LAW MERCANTILE LAW

MERCANTILE LAW
TRANSPORTATION
LAW

PAGE 100 OF 320

UP LAW BOC TRANSPORTATION LAW
I. Common Carriers
(Reference is to the Civil Code, unless
otherwise indicated)
A. CONCEPT
A contract of transportation is one
whereby a certain person or association of
persons obligate themselves to transport
persons, things, or news from one to
another for a fixed price.
Parties to the contract:
(1) Shipper - one who gives rise to the
contract of transportation by agreeing
to deliver the things or news to be
transported, or to present his own
person or those of other or others in the
case of transportation of passengers.
(2) Carrier or conductor - one who binds
himself to transport person, things, or
news, as the case may be, or one
employed in or engaged in the business
of carrying good for others for hire.
(3) Consignee - the party to whom the
carrier is to deliver the things being
transported; to whom the carrier may
lawfully make delivery in accordance
with its contract of carriage. The shipper
and the consignee may be the same
person.
Carriers are persons or corporations who
undertake to transport or convey goods,
property or persons, from one place to
another, gratuitously or for hire, and are
classified as:
(1) Private or special carriers, who
transport or undertake to transport in a
particular instance for hire or reward
[Agbayani, Commercial Laws of the
Philippines (1987)]; and
(2) Common or public carriers, defined in
Art. 1732.
PAGE 101 OF 320
MERCANTILE LAW
Common carriers are:
(1) Persons, corporations, firms or
associations;
(2) Engaged in the business of carrying or
transporting;
(3) Passengers or goods or both;
(4) By land, water, or air;
(5) For compensation;
(6) Offering their services to the public [Art.
1732].
Art. 1732 makes no distinction:
(1) Between one whose principal business
activity is the carrying of persons or
goods or both, and one who does such
carrying only as an ancillary activity
[Fabre v. CA (1996)];
(2) Between a person or enterprise offering
transportation service on a regular or
scheduled basis and one offering such
service on an occasional, episodic, or
unscheduled basis [Loadstar Shipping
Co., Inc. v. CA (1999)];
(3) Between a carrier offering its services to
the general public and one who offers
services or solicits business only from a
narrow segment of the general
population [De Guzman v. CA (1988)].
The true test for a common carrier is not the
quantity or extent of the business actually
transacted, or the number and character of
the conveyances used in the activity, but
whether the undertaking is a part of the
activity engaged in by the carrier that he has
held out to the general public as his
business or occupation. If the undertaking is
a single transaction, not a part of the
general business or occupation engaged in,
as advertised and held out to the general
public, the individual or the entity rendering
such service is a private, not a common,
carrier. The question must be determined by
the character of the business actually
carried on by the carrier, not by any secret
intention or mental reservation it may
entertain or assert when charged with the
UP LAW BOC TRANSPORTATION LAW MERCANTILE LAW

duties and obligations that the law imposes Common carrier Private carrier
[Teodoro v. Nicolas (2012)].
Governing law
A common carrier need not have fixed and
Civil Code; Code of Law on obligations
publicly known routes. Neither does it have
Commerce and and contracts
to maintain terminals or issue tickets [Asia
special laws, if not
Lighterage and Shipping v. CA (2003)].
regulated by the
One engaged in the business of Civil Code (Art.
transporting petroleum products from 1766); law of the
refineries via pipeline is a common carrier. country to which the
It is engaged in the business of transporting goods are to be
or carrying goods, i.e., petroleum products, transported, if
for hire as a public employment. It regarding liability
undertakes to carry for all persons for loss, destruction,
indifferently, that is, to all persons who or deterioration of
choose to employ its services, and goods
transports the goods by land and for Regulation
compensation. The fact that it has a limited
clientele does not exclude it from the A public service, Not subject to
definition of a common carrier [First Phil. therefore subject to regulation as a
Industrial v. CA (1998)]. provisions common carrier
governing common
A travel agency is not a common carrier. carriers and public
It is not an entity engaged in the business of utilities.
transporting either passengers or goods
and is therefore neither a private nor a
common carrier. Its covenant with its It is not necessary that the carrier be issued
customers is simply to make travel a certificate of public convenience [Loadstar
arrangements on their behalf [Crisostomo v. Shipping Co., Inc. v. CA (1999)].
CA (2003)].

Kabit system:
Common carrier Private carrier (1) It is an arrangement whereby a person
Availability who has been granted a certificate of
convenience allows another person who
Holds himself out in Agrees in some
owns motor vehicles to operate under
common, that is, to special case with
such franchise for a fee [Lita Enterprises,
all persons who some private
Inc. v. IAC (1984)].
choose to employ individual to carry
him, as ready to for hire (2) It is invariably recognized as being
carry for hire contrary to public policy and therefore
Binding effect void and inexistent under Art. 1409.
Thus, for the safety of passengers and
Bound to carry all Not bound to carry the public, the registered owner of the
who offer and for any reason, such vehicle is not allowed to prove that
tender reasonable goods as it is another person has become the owner
compensation for accustomed to so that he may be thereby relieved of
carrying them carry, unless it responsibility [Lim v. CA (2002)].
enters into a special
agreement to do so (3) One of the primary factors considered in
the granting of a certificate of public
Diligence required convenience for the business of public
Extraordinary Ordinary transportation is the financial capacity

PAGE 102 OF 320

UP LAW BOC TRANSPORTATION LAW
of the holder of the license, so that
liabilities arising from accidents may be
duly compensated. The kabit system
renders illusory such purpose and,
worse, may still be availed of by the
grantee to escape civil liability caused
by a negligent use of a vehicle owned by
another and operated under his license.
[Dizon v. Octavio (1955)].
(4) However, one who has availed of the
kabit system is not precluded from filing
for damages against another who
caused the injury, as the policy against
the kabit system will not be defeated by
giving such person standing to sue. [Lim
v CA (2002)]
Uber/Grab:
Transport Network Company or TNC
is defined as an organization whether a
corporation, partnership, or sole
proprietorship, that provides pre-arranged
transportation services for compensation
using an internet-based technology
application or a digital platform technology
to connect passengers with drivers using
their personal vehicles [DOTC D.O. No.
2015-011]. e.g. Uber and Grab.
The TNC may or may not have been granted
a Certificate of Public Convenience (CPC). If
it is a holder of a valid and current CPC, it is
known as a common carrier. Otherwise, it is
classified as a land transportation service
contractor.
The Partners (owners of the vehicles used in
transporting passengers) forming part of
the network of a TNC, may or may not be a
common carrier, depending on whether the
Partner(s) itself/themselves are holders of a
CPC. A mere Accreditation given by LTFRB
is not an equivalent to a CPC and will not
make said holder a common carrier. If the
Partner is a holder of a CPC, said Partner is
a common carrier. However, if the Partner
is not a holder of a CPC, said Partner is
merely a land transportation service
contractor [BIR RMC 70-2015].
PAGE 103 OF 320
MERCANTILE LAW
Note: Please be guided by the
requirements under Art. 1732.
B. DILIGENCE REQUIRED
B.1. STANDARD OF DILIGENCE
Common carriers, from the nature of their
business and for reasons of public policy,
are bound to observe extraordinary
diligence, according to all the
circumstances of each case:
(1) In the vigilance over the goods; and
(2) For the safety of the passengers
transported by them [Art. 1733].
Extraordinary diligence in the vigilance over
the goods is expressed in Arts 1734, 1735,
and 1745, Nos. 5, 6, and 7, while the
extraordinary diligence for the safety of
the passengers is further set forth in Art.s
1755 and 1756.
As stated in Art. 1733, extraordinary
diligence is required because of the (1)
nature of the business of common carriers
and (2) for reasons of public policy.
Extraordinary diligence:
(1) Requires rendering service with the
greatest skill and utmost foresight
[Agbayani (1987)];
(2) Requires carrying passengers safely as
far as human care and foresight can
provide, using the utmost diligence of
very cautious persons, with a due regard
for all the circumstances [Art. 1755];
(3) Does not require common carriers to
exercise all the care, skill, and diligence
of which the human mind can conceive,
nor such as will free the transportation
of passengers from all possible perils.
Note: A common carrier is not an insurer of
the safety of its passengers and is not
bound absolutely and at all events to carry
them safely and without injury [Yobido v. CA
(1997)].
UP LAW BOC TRANSPORTATION LAW
B.2. PRESUMPTION OF NEGLIGENCE
The mere proof of delivery of goods in good
order to a carrier, and of their arrival at the
place of destination in bad order, makes out
a prima facie case against the carrier, so
that if no explanation is given as to how the
injury occurred, the carrier must be held
responsible. It is incumbent upon the carrier
to prove that the loss was due to accident or
some other circumstance inconsistent with
its liability [Ynchausti Steamship v. Dexter
and Unson (1920)].
Note: While delay in the delivery of goods
is a breach of contract of carriage, it does
not raise the presumption of negligence
because the goods are not lost,
deteriorated, or destroyed [see Art. 1735].
In case of death of or injuries to passengers,
common carriers are presumed to have
been at fault or to have acted negligently,
unless they prove that they observed
extraordinary diligence as prescribed in Arts
1733 and 1755 [Art. 1756].
Note: Mere failure to reach ones
destination, without injury or death, does
not raise the presumption of negligence
because it does not involve safety of the
passengers.
C. LIABILITIES
The obligation of the common carrier
consists in the transportation of passengers
or goods or both [Art. 1732].
The liabilities of a common carrier arises
from a contract of carriage. Thus, the cause
of action, when there is failure on its part to
exert extraordinary diligence according to
all circumstances, is for breach of contract
[Isaac v. A.L. Ammen (1957)].
In what follows, these liabilities in case of
breach, both with respect to vigilance over
the goods and safety of the passengers
transported, will be discussed.
PAGE 104 OF 320
MERCANTILE LAW
II. Vigilance over
Goods
A. LIABILITY, IN GENERAL
The law of the country to which the goods
are to be transported shall govern the
liability of the common carrier for their loss,
destruction or deterioration [Art. 1753].
Under Philippine law, the liability of the
common carrier with respect to vigilance
over goods, in general, are as follows:
(1) Common carriers are responsible for the
loss, destruction, or deterioration of the
goods [Art. 1734]. In fact, they are liable
even in those cases where the cause of
the loss or damage is unknown
[Agbayani (1987)].
(2) Moreover, if the goods are lost,
destroyed, or deteriorated, common
carriers are presumed to have been at
fault or to have acted negligently [Art.
1735].
Note: Two-pronged analysis in
determining liability:
(1) Whether or not the cause of the loss,
destruction, or deterioration is included
under Art. 1734;
(2) If not, whether or not the common
carrier exercised extraordinary diligence.
B. EXEMPTING CAUSES
General Rule: Common carriers are
responsible for the loss, destruction, or
deterioration of the goods
Exception: The same is due to any of the
following causes only:
(1) Flood, storm, earthquake, lightning, or
other natural disaster or calamity;
(2) Act of the public enemy in war, whether
international or civil;
UP LAW BOC TRANSPORTATION LAW
(3) Act of omission of the shipper or owner
of the goods;
(4) The character of the goods or defects in
the packing or in the containers;
(5) Order or act of competent public
authority [Art. 1734].
In all other cases of loss, destruction, or
deterioration, the common carrier is
presumed to have been at fault or to have
acted negligently, unless they prove that
they observed extraordinary diligence [Art.
1735].
Thus, in De Guzman v. CA (1988), it was held
that hijacking, not being included in Art.
1734, must be dealt with under the
provisions of Art. 1735, and thus, the
common carrier is presumed to have been
at fault or negligent.
B.1. NATURAL DISASTER OR CALAMITY
Requisites:
(1) The natural disaster must have been the
proximate and only cause of the loss;
(2) The common carrier must exercise due
diligence to prevent or minimize the
loss before, during and after the
occurrence of the flood, storm or
natural disaster [Art. 1739];
(3) The common carrier must not have
negligently incurred delay [Art. 1740];
In order that a common carrier may be
absolved from liability where the loss,
destruction or deterioration of the goods is
due to a natural disaster or calamity, it must
be shown that such natural disaster or
calamity was the proximate and only cause
of the loss; there must be an entire
exclusion of human agency from the cause
of the injury of the loss [Philippine American
General Insurance Co., Inc. v. MGG Marine
Services, Inc. (2002)].
Moreover, even in cases where a natural
disaster is the proximate and only cause of
the loss, a common carrier is still required
to exercise due diligence to prevent or
minimize loss before, during and after the
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MERCANTILE LAW
occurrence of the natural disaster, for it to
be exempt from liability under the law for
the loss of the goods [Art. 1739].
Fire may not be considered a natural
disaster or calamity. This must be so as it
arises almost invariably from some act of
man or by human means. It does not fall
within the category of an act of God unless
caused by lightning or by other natural
disaster or calamity. It may even be caused
by the actual fault or privity of the carrier
[Eastern Shipping Lines v. IAC (1987)].
Note: If the common carrier negligently
incurs in delay in transporting the goods, a
natural disaster shall not free such carrier
from responsibility [Art. 1740].
B.2. ACT OF PUBLIC ENEMY
Requisites:
(1) The act of the public enemy was
committed either in an international or
civil war [Art. 1734];
(2) The act of the public enemy must have
been the proximate and only cause;
(3) The common carrier must exercise due
diligence to prevent or minimize the
loss before, during and after the act of
the public enemy causing the loss,
destruction or deterioration of the
goods [Art. 1739].
B.3. ACT OR OMISSION OF SHIPPER OR
OWNER
The act or omission of the shipper must
have been the proximate and only cause of
the loss, destruction, or deterioration of the
goods.
If the shipper or owner merely contributed
to the loss, destruction or deterioration of
the goods, the proximate cause being the
negligence of the common carrier, the latter
shall be liable for the damages, which shall,
however, be equitably reduced [Art. 1741].
UP LAW BOC TRANSPORTATION LAW
B.4. CHARACTER OF THE GOODS
Requisites:
(1) The loss, destruction, or deterioration of
the goods is due to the character of the
goods or defects in the packing or in the
containers [Art. 1739];
(2) The common carrier must exercise due
diligence to forestall or lessen the loss
[Art. 1741].
If the fact of improper packing is known to
the carrier or its servants or apparent upon
ordinary observation, but it accepts the
goods notwithstanding such condition, it is
not relieved of liability for loss or injury
resulting therefrom [Southern Lines v. CA
(1962)].
B.5. ORDER OF COMPETENT AUTHORITY
Requisites:
(1) There must be an order or act of
competent public authority through
which the goods are seized or destroyed
[Art. 1734];
(2) The said public authority must have had
the power to issue the order [Art. 1743].
The intervention of the municipal officials
was not of a character that would render
impossible the fulfillment by the carrier of
the obligation. A carrier is not duty bound to
obey an illegal order (of a mayor) to dump
into the sea the scrap iron. There is absence
of sufficient proof that the issuance of the
order was attended with such force or
intimidation as to completely overpower the
will of the carriers employees [Ganzon v. CA
(1988)).
B.6. FORCE MAJEURE
Force majeure in general, has also been
invoked as an exempting cause based on
Art. 1174, which states that no person shall
be responsible for a fortuitous event which
could not be foreseen, or which, though
foreseen, was inevitable.
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MERCANTILE LAW
A fortuitous event has the following
characteristics:
(1) The cause of the unforeseen and
unexpected occurrence, or the failure of
the debtor to comply with his
obligations, must be independent of
human will;
(2) It must be impossible to foresee the
event which constitutes the caso
fortuito, or if it can be foreseen, it must
be impossible to avoid;
(3) The occurrence must be such as to
render it impossible for the debtor to
fulfill his obligation in a normal manner;
and
(4) The obligor must be free from any
participation in the aggravation of the
injury resulting to the creditor.
There must be an entire exclusion of human
agency from the cause of injury or loss.
Moreover, a common carrier may not be
absolved from liability in case of force
majeure or fortuitous event alone. The
common carrier must still prove that it was
not negligent in causing the death or injury
resulting from an accident [Yobido v. CA
(1997)].
Loss of a ship and of its cargo, in a wreck
due to accident or force majeure must, as a
general rule, fall upon their respective
owners, except in cases where the wrecking
or stranding of the vessel occurred through
the malice, carelessness, or lack of skill on
the part of the captain or because the vessel
put to sea is insufficiently repaired and
prepared.
In order that the exemption due to force
majeure would apply, the carrier must prove
that the loss or destruction of the
merchandise was due to accident and force
majeure and not to fraud, fault, or
negligence on the part of the captain or
owner of the ship [Tan Chiong Sian v.
Inchausti (1912)].
UP LAW BOC TRANSPORTATION LAW
C. CONTRIBUTORY NEGLIGENCE
The liability of the common carrier shall be
equitably reduced when the loss,
destruction, or deterioration of the goods
when:
(1) The negligence of the common carrier
was the proximate cause thereof; and
(2) The shipper or owner merely
contributed to such loss, destruction, or
deterioration [Art. 1741].
D. DURATION OF EXTRAORDINARY
RESPONSIB ILITY FOR GOODS
The responsibility to exercise extraordinary
diligence begins from the time the goods
are unconditionally placed in the possession
of and received by the carrier for
transportation [Art. 1736].
The carriers responsibility terminates in any
of the following cases:
(1) When the goods are delivered actually
or constructively by the carrier to the
consignee or to the person who has a
right to receive them [Art. 1736];
(2) When the goods are temporarily
unloaded or stored in transit by reason
of the exercise of the shipper or owner
of his right of stoppage in transitu;
(3) When the consignee has been advised
of the arrival of the goods at the place
of destination and has had reasonable
opportunity to remove them or dispose
of them from the warehouse of the
carrier at the place of destination [Art.
1738].
In dealing with the contract of common
carriage of passengers, for purpose of
accuracy, there are two (2) aspects of the
same, namely:
(a) contract to carry (at some future time),
which contract is consensual and is
necessarily perfected by mere consent; and
(b) contract of carriage or of common
carriage, which should be considered as a
real contract for not until the carrier is
PAGE 107 OF 320
MERCANTILE LAW
actually used can the carrier be said to have
already assumed the obligation of a carrier
[Paras, Civil Code Annotated, 11th Ed].
Note: The distinction is important in
determining when the common carrier is
required to exercise extraordinary
responsibility. The birth of the contract is
not necessarily the birth of the duty to
exercise extraordinary responsibility.
D.1. DELIVERY OF GOODS TO COMMON
CARRIERS
Under Art. 1736, delivery means
unconditionally placing the goods in the
possession of the carrier and the carrier
receiving them for transportation.
Thus, if the common carrier received the
goods not for transportation but only for
safekeeping, then the duty of extraordinary
diligence has not yet started.
Unconditionally placing the goods in the
possession of the carrier means the shipper
cannot get them back from the common
carrier at will.
The liability of the carrier as common carrier
begins with the actual delivery of the
goods for transportation and not merely
with the formal execution of a receipt or bill
of lading; the issuance of a bill of lading is
not necessary to complete delivery and
acceptance. Even where it is provided by
statute that liability commences with the
issuance of the bill of lading actual delivery
and acceptance are sufficient to bind the
carrier [Cia. Maritima v. Ins. Co. of North
America (1964)].
D.2. ACTUAL/CONSTRUCTIVE DELIVERY
The extraordinary responsibility of the
common carrier ends when, subject to Art.
1738, the goods are delivered actually or
constructively by the carrier to:
(1) The consignee; or
(2) The person who has a right to receive
them (Art. 1736), such as agents, brokers,
and the like.
UP LAW BOC TRANSPORTATION LAW
Art. 1738 provides that the extraordinary
liability of the common carrier continues to
be operative even during the time the goods
are stored in a warehouse of the carrier at
the place of destination, until the consignee
has:
(1) Been advised of the arrival of the goods;
and
(2) Had reasonable opportunity thereafter
to remove them or otherwise dispose of
them.
Delivery of the cargo to the customs
authorities is not delivery to the consignee
or to the person who has a right to receive
them as contemplated in Art. 1736 because
in such case the goods are still in the hands
of the government and the owner cannot
exercise dominion over them. However, the
parties may agree to limit the liability of the
carrier considering that the goods still have
to go through the inspection of the customs
authorities before they are actually turned
over to the consignee. This stipulation is not
contrary to morals or public policy. This is a
situation where it may be said that the
carrier loses control of the goods because of
a custom regulation and it is unfair that it
be made responsible for what may happen
during the interregnum [Lu Do v. Binamira
(1957)].
D.3. TEMPORARY UNLOADING OR
STORAGE
The common carriers duty to observe
extraordinary diligence over the goods
remains in full force and effect even when
they are temporarily unloaded or stored in
transit, unless the shipper or owner has
made use of the right of stoppage in
transitu [Art. 1737].
General rule: Extraordinary diligence over
the goods remains even when the goods are
temporarily unloaded or stored in transit.
Exception: The duty to observe such
diligence ceases when shipper or owner
made use of the right of stoppage in
transitu.
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MERCANTILE LAW
Stoppage in transitu is the act by which
the unpaid vendor of goods stops their
progress and resumes possession of them
constructively while they are in the course of
transit from him to the purchaser, and not
yet actually delivered to the latter [Agbayani
(1987)].
Basis: Under Art. 1530, when the buyer of
the goods becomes insolvent, the unpaid
seller who has parted with the possession of
the goods at any time while they are in
transit, may resume the possession of the
goods as he would have had if he had never
parted with the possession.
When the right of stoppage in transitu is
exercised, the common carrier holds the
goods in the capacity of an ordinary bailee
or warehouseman upon the theory that the
exercise of the right of stoppage in transitu
terminates the contract of carriage. Hence,
only ordinary diligence is required
[Agbayani (1987)].
E. STIPULATION FOR LIMITATION OF
LIABILITY
There are two possible stipulations limiting
the liability of the common carrier:
(1) Stipulation limiting the common
carriers liability as to the diligence
required; and
(2) Stipulation limiting the common
carriers liability as to the amount of
liability.
An agreement limiting the common carriers
liability for delay on account of strikes or
riots is also valid [Art. 1748].
E.1. AS TO DILIGENCE REQUIRED
A stipulation between the common carrier
and the shipper or owner limiting the
liability of the former for the loss,
destruction, or deterioration of the goods to
a degree less than extraordinary diligence
shall be valid, provided it be:
UP LAW BOC TRANSPORTATION LAW MERCANTILE LAW

(1) In writing, signed by the shipper or (2) Stipulation providing for an unqualified
owner; limitation of such liability to an agreed
stipulation [Heacock v. Macondray
(2) Supported by a valuable
(1921)].
consideration other than the service
rendered by the common carrier;
and
E.2. LIMITATION OF LIABILITY TO FIXED
(3) Reasonable, just and not contrary to AMOUNT
public policy [Art. 1744].
A stipulation that the common carriers
liability is limited to the value of the goods
appearing in the bill of lading, unless the
Any of the following or similar stipulations
shipper or owner declares a greater value, is
shall be considered unreasonable, unjust
binding [Art. 1749].
and contrary to public policy:
A contract fixing the sum that may be
(1) That the goods are transported at the
recovered by the owner or shipper for the
risk of the owner or shipper;
loss, destruction or deterioration of the
(2) That the common carrier will not be goods is valid if:
liable for any loss, destruction, or
(1) It is reasonable and just under the
deterioration of the goods;
circumstances; and
(3) That the common carrier need not
(2) It has been fairly and freely agreed upon
observe any diligence in the custody of
[Art. 1750].
the goods;
While a passenger may not have signed the
(4) That the common carrier shall exercise
plane ticket, he is nevertheless bound by
a degree of diligence less than that of a
the provision thereof; such provisions have
good father of a family, or of a man of
been held to be part of the contract of
ordinary prudence in the vigilance over
carriage and valid and binding upon the
the movables transported;
passenger regardless of the latters lack of
(5) That the common carrier shall not be knowledge or assent to the regulation. It is
responsible for the acts or omission of what is known as a contract of adhesion
his or its employees; wherein one party imposes a ready-made
form of contract on the other. The one who
(6) That the common carriers liability for
adheres to the contract is in reality free to
acts committed by thieves, or of robbers
reject it entirely. A contract limiting liability
who do not act with grave or irresistible
upon an agreed valuation does not offend
threat, violence or force, is dispensed
against the policy of the law forbidding one
with or diminished;
from contracting against his own
(7) That the common carrier is not negligence [Ong Yiu v. CA (1979)].
responsible for the loss, destruction, or
[However], the fact that the conditions are
deterioration of goods on account of the
printed at the back of the ticket stub in
defective condition of the car, vehicle,
letters so small that they are hard to read
ship, airplane or other equipment used
would not warrant the presumption that the
in the contract of carriage [Art. 1745].
[shipper] was aware of those conditions
such that he had fairly and freely agreed
The following stipulations are also void: to those conditions [Shewaram v. PAL
(1966)].
(1) Stipulation exempting the common
carrier from any and all liability for loss
or damage occasioned by its own
negligence;

PAGE 109 OF 320

UP LAW BOC TRANSPORTATION LAW
Factors Affecting Agreement
The effect of these stipulations is subject to
the following provisions:
(1) An agreement limiting the common
carriers liability may be annulled by the
shipper or owner if the common carrier
refused to carry the goods unless the
former agreed to such stipulation [Art.
1746].
(2) If the common carrier, without just
cause, delays the transportation of the
goods or changes the stipulated or
usual route, the contract limiting the
common carriers liability cannot be
availed of in case of the loss,
destruction, or deterioration of the
goods [Art. 1747]. The limitation may be
availed of if the delay or change of route
was due to a just cause.
(3) The fact that the common carrier has no
competitor along the line or route, or a
part thereof, to which the contract
refers shall be taken into consideration
on the question of whether or not a
stipulation limiting the common
carriers liability is reasonable, just and
in consonance with public policy [Art.
1751].
(4) Even when there is an agreement
limiting the liability of the common
carrier in the vigilance over the goods,
the common carrier is disputably
presumed to have been negligent in
case of their loss, destruction or
deterioration [Art. 1752].
E.3. LIMITATION OF LIABILITY IN
ABSENCE OF DECLARATION OF
GREATER VALUE
A stipulation that the common carriers
liability is limited to the value of the goods
appearing in the bill of lading, unless the
shipper or owner declares a greater value, is
binding [Art. 1749].
PAGE 110 OF 320
MERCANTILE LAW
F. LIABILITY FOR BAGGAGE OF
PASSENGERS
Baggage are things that a passenger will
bring with him consistent with a temporary
absence from where he lives. Passengers
baggage must have a direct relationship
with the passenger who is traveling.
For instance, a balikbayan box or suitcase is
passengers baggage. However, 10,000
cans of corned beef is not considered as
passenger baggage. They are considered as
goods. They are not part of the contract of
carriage [of passenger]. A separate contract
of carriage [or bill of lading] must be
entered into in order to transport them.
These goods will then be transported
whether or not a person is physically
traveling with them [Agbayani (1987)].
There are two kinds of passengers baggage,
which are governed differently:
(1) Passenger baggage in the custody of
the passenger (or carry-on luggage);
and
(2) Passenger baggage not in the
custody of the passenger (or
checked-in luggage).
The liability is greater for baggage that is in
the custody of the carrier, or checked-in
baggage, as compared to those in the
possession of the passenger.
F.1. CHECKED-IN BAGGAGE
The provisions of Arts 1733-1753 shall apply
to passengers baggage which is not in his
personal custody or in that of his employee
[Art. 1754].
In other words, the rules governing the
responsibility of a common carrier in the
transportation of goods just discussed apply.
Thus, extraordinary diligence is required.
UP LAW BOC TRANSPORTATION LAW MERCANTILE LAW

F.2. BAGGAGE IN POSSESSION OF The following provisions also figure in

PASSENGERS
As to baggage other than checked-in
baggage, they are governed by Arts 1998,
and 2000-2003, concerning the
responsibility of hotel-keepers [Art. 1754].
Art. 1998, as applied by analogy, the
baggage of passengers in their personal
custody or in that of their employees, while
being transported, are regarded as
necessary deposits. The common carriers
are responsible as depositaries, provided
that:
(1) Notice was given to them, or to their
employees, of the effects brought by the
passengers; and
(2) The passengers take the precautions
which the common carrier advised
relative to the care and vigilance of their
baggage.
determining the liability of the common
carrier:
(1) The fact that passengers are
constrained to rely on the vigilance of
the common carrier shall be considered
in determining the degree of care
required of him [Art. 2000).
(2) The common carrier cannot free himself
from responsibility by posting notices to
the effect that he is not liable for the
articles brought by the passenger.
(3) Any stipulation whereby the
responsibility of the common carrier as
set forth in Articles 1998-2001 is
suppressed or diminished shall be void
[Art. 2003].

In case of loss or injury to the baggage of

passengers in their personal custody, or in
that of their employees, while being
transported, the carrier is liable if the loss
or injury is caused by:
(1) His servants;
(2) His employees;
(3) Strangers [Art. 2000]; or
(4) A thief or robber done without the use
of arms or irresistible force [Art. 2001].

The carrier is not liable if loss or injury is

caused by:
(1) Force majeure [Art. 2000);
(2) Theft or robbery with the use of arms or
irresistible force [Art. 2001);
(3) The acts of the passenger, his family,
servants, or visitors;
(4) The character of the baggage [Art.
2002).

PAGE 111 OF 320

UP LAW BOC TRANSPORTATION LAW
III. Safety of
Passengers
A. LIABILITY, IN GENERAL
Under Philippine law, the liability of the
common carrier with respect to the safety of
passengers, in general, are as follows:
(1) A common carrier is bound to carry the
passengers safely as far as human care
and foresight can provide, using the
utmost diligence of very cautious
persons, with a due regard for all the
circumstances [Art. 1755].
(2) In case of death of or injuries to
passengers, common carriers are
presumed to have been at fault or to
have acted negligently, unless they
prove that they observed extraordinary
diligence [Art. 1756].
Note: It is not enough that the accident
was caused by force majeure, the common
carrier must still prove that it was not
negligent in causing the injuries resulting
from such accident. [Bachelor Express v. CA
(1990)] Bachelor Express illustrates that
force majeure is not itself a defense; the
exercise of the diligence required by law is
the defense.
B. VOID STIPULATIONS
General rule: The responsibility of a
common carrier for the safety of passengers
cannot be dispensed with or lessened by
stipulation by the posting of notices, by
statements on tickets, or otherwise [Art.
1757].
Exception: When a passenger is carried
gratuitously, a stipulation limiting the
common carriers liability for negligence is
valid.
Exception to the exception: Even when
a passenger is carried gratuitously, a
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stipulation limiting the common carriers
liability for willful acts or gross negligence is
invalid.
The reduction of fare does not justify any
limitation of the common carriers liability
[Art. 1758].
C. DURATION OF LIABILITY
As in the contract of carriage for goods, the
perfection of the contract of carriage of
passengers does not necessarily coincide
with the commencement of the duty of
extraordinary diligence. It may occur at the
same time or later.
Based on jurisprudence, the duty that the
carrier of passengers owes to its patrons
extends to persons boarding the cars as
well as those alighting therefrom [Del Prado
v. Manila Railroad (1929)].
This is also reflected in Art. 17, Warsaw
Convention, which applies to international
air carriage. It provides that the liability of a
common carrier for injury to the passenger
lasts from embarkation to disembarkation,
including the period when the passenger is
on board the aircraft.
In maritime commerce, Art. 698, Code of
Commerce relates to the period of the
voyage:
(1) In case a voyage already begun should
be interrupted:
(a) The passengers shall be obliged to
pay the fare in proportion to the
distance covered; and
(b) If the interruption is due to a
fortuitous event, without right to
recover for losses and damages; if
caused by the captain exclusively,
with a right to indemnity.
(2) If the interruption should be caused by
the disability of the vessel, and a
passenger should agree to await the
repairs:
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(a) He may not be required to pay any
increased price of passage; but
(b) His living expenses during the stay
shall be for his own account.
(3) In case of delay in the departure of
the vessel, the passengers have:
(a) The right to remain on board;
(b) If the delay is not due to a fortuitous
event or force majeure, with the right
to be furnished with food for the
account of the vessel;
(c) If the delay should exceed ten days:
(i) Passengers requesting the
same shall be entitled to the
return of the fare; and
(ii) If it is due exclusively to the
fault of the captain or ship
agent, they may also demand
indemnity for losses and
damages.
A vessel exclusively devoted to the
transportation of passengers must take
them directly to the port or ports of
destination, no matter what the number of
passengers may be, making all the stops
indicated in its itinerary.
C.1. WAITING FOR CARRIER OR
BOARDING OF CARRIER
As to the commencement of the duty of the
common carrier, in Del Prado v. Manila
Railroad (1929), it was held that the duty
extends to persons boarding the cars as
well as those alighting therefrom.
Thus, it is the duty of common carriers of
passengers to stop their conveyances at a
reasonable length of time in order to afford
passengers an opportunity to board and
enter, and they are liable for injuries
suffered by boarding passengers resulting
from the sudden starting up or jerking of
their conveyances while they are doing so
[Dangwa Transportation v. CA (1991)].
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In this connection, however, a person
boarding a moving car must be taken to
assume the risk of injury from boarding the
car under the conditions open to his view,
but he cannot fairly be held to assume the
risk that the motorman, having the situation
in view, will increase the peril by
accelerating the speed of the car before he
is planted safely on the platform [Del Prado
v. Manila Railroad (1929)].
C.2. ARRIVAL AT DESTINATION
As to the termination of the duty of the
common carrier, it has been held that the
relation of carrier and passenger does not
cease at the moment the passenger alights
from the carriers vehicle at a place selected
by the carrier at the point of destination, but
continues until the passenger has had a
reasonable time or a reasonable
opportunity to leave the carriers premises.
What is a reasonable time or a reasonable
delay within this rule is to be determined
from all the circumstances:
(1) A person who, after alighting from a
train, walks along the station platform
is considered still a passenger;
(2) A passenger, who has alighted at his
destination and is proceeding by the
usual way to leave the companys
premises, but before actually doing so is
halted by the report that his brother, a
fellow passenger, has been shot, and he
in good faith and without intent of
engaging in the difficulty, returns to
relieve his brother, is deemed
reasonably and necessarily delayed and
thus continues to be a passenger
entitled as such to the protection of the
railroad and company and its agents [La
Mallorca v. CA (1966)].
The reasonableness of time should be made
to depend on the attending circumstances
of the case, such as the kind of common
carrier, the nature of its business, the
customs of the place, and so forth, and
therefore precludes a consideration of the
time element per se without taking into
account such other factors. The primary
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factor to be considered is the existence of a
reasonable cause as will justify the presence
of the victim on or near the petitioners
vessel.
In the case of a shipper, the passengers of
vessels are allotted a longer period of time
to disembark from the ship than other
common carriers such as a passenger bus,
since such vessels are capable of
accommodating a bigger volume of both
passenger and baggage as compared to the
capacity of a regular commuter bus.
Consequently, a ship passenger will need at
least an hour as is the usual practice, to
disembark from the vessel and claim his
baggage whereas a bus passenger can
easily get off the bus and retrieve his
luggage in a very short period of time
[Aboitiz Shipping v. CA (1989)].
The relation of carrier and passenger
continues until the latter has been landed
at the port of destination and has left the
carriers premises. Hence, the carrier
necessarily would still have to exercise
extraordinary diligence in safeguarding the
comfort, convenience and safety of its
stranded passengers until they have
reached their final destination [PAL v. CA
(1993)].
Note: Despite the Courts pronouncement
in PAL v. CA, note that common carriers are
bound to observe extraordinary diligence in
the safety of its passengers. The law does
not mention the words comfort and
convenience.
D. LIABILITY FOR ACTS OF OTHERS
D.1. EMPLOYEES
Common carriers are liable for the death of
or injuries to passengers through the
negligence or willful acts of the formers
employees, although such employees may
have acted beyond the scope of their
authority or in violation of the orders of the
common carriers.
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This liability does not cease even upon proof
that they exercised all the diligence of a
good father of a family in the selection and
supervision of their employees [Art. 1759].
Also, this liability cannot be eliminated or
limited by stipulation, by the posting of
notices, by statements on the tickets or
otherwise [Art. 1760].
Ratio: The servant is clothed with
delegated authority and charged with the
duty to execute the carriers undertaking to
carry the passenger safely [Agbayani (1987)].
Also, the defense of diligence in the
selection and supervision of employees
does not obtain because the liability is not
based on quasi-delict, but on culpa
contractual. However, there must be a
reasonable connection between the act and
the contract of carriage.
Note: The employee must be on duty at the
time of the act.
It is enough that the assault happens
within the course of the employees
duty. It is no defense for the carrier that the
act was done in excess of authority or in
disobedience of the carriers orders. The
carriers liability here is absolute in the
sense that it practically secures the
passengers from assaults committed by its
own employees [Maranan v. Perez (1967)].
D.2. OTHER PASSENGERS AND
STRANGERS
A common carrier is responsible for injuries
suffered by a passenger on account of the
willful acts or negligence of other
passengers or of strangers, if the common
carriers employees through the exercise of
the diligence of a good father of a
fam ily could have prevented or stopped
the act or omission [Art. 1763].
Note: The law speaks of injuries suffered by
the passenger but not death. However,
there appears to be no reason why the
common carrier should not be held liable
under such circumstances. The word
injuries should be interpreted to include
death [Agbayani (1987)].
UP LAW BOC TRANSPORTATION LAW
Under Art. 1763, a tort committed by a
stranger which causes injury to a passenger
does not accord the latter a cause of action
against the carrier. The negligence for
which a common carrier is held responsible
is the negligent omission by the carriers
employees to prevent the tort from being
committed when the same could have been
foreseen and prevented by them. Further,
when the violation of the contract is due to
the willful acts of strangers, as in the
instant case, the degree of care essential to
be exercised by the common carrier for the
protection of its passenger is only that of a
good father of a family [Pilapil v. CA
(1989)].
D.3. MANUFACTURERS OF EQUIPMENT
While the carrier is not an insurer of the
safety of the passengers, it should
nevertheless be held answerable for the
flaws of its equipment, if such flaws were
discoverable. The rationale for the common
carriers liability for manufacturing defects
is the fact that the passenger has neither
choice nor control over the carrier in the
selection and use of the equipment and
appliances in use by the carrier. Having no
privity whatever with the manufacturer or
vendor of the defective equipment, the
passenger has no remedy against him
[Necesito v. Paras (1958)].
E. CONTRIBUTORY NEGLIGENCE
The passenger must observe the diligence
of a good father of a family to avoid injury to
himself [Art. 1762].
The contributory negligence of the
passenger does not bar recovery of
damages for his death or injuries, if the
proximate cause thereof is the negligence of
the common carrier, but the amount of
damages shall be equitably reduced [Art.
1762].
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It is negligence per se for a passenger on a
railroad to voluntarily or inadvertently
protrude his arm, hand, elbow, or any other
part of his body through the window of a
moving car beyond the outer edge of the
window or outer surface of the car, so as to
come in contact with objects or obstacles
near the track; no recovery can be had for
an injury which but for such negligence
would not have been sustained [Isaac v. A. L.
Ammen Transportation (1975)]. In this case,
the negligence of the passenger was not
contributory, but was the proximate cause
of the injury. Hence, the common carrier
was exempted from liability.
F. EXTENT OF LIABILITY FOR
DAMAGES
Damages recoverable from common
carriers, both in cases of carriage of
passengers and goods, shall be awarded in
accordance with Title XVIII concerning
Damages.
Art. 2206, on liability, in case of death, for
loss of earning capacity, support, and moral
damages for mental anguish, shall also
apply to the death of a passenger caused by
the breach of contract by a common carrier
[Art. 1764].
Thus, the damages recoverable are:
(1) Actual or compensatory damages;
(2) Moral damages;
(3) Exemplary damages;
(4) Nominal, temperate, and liquidated
damages;
(5) Attorneys fees.
F.1. ACTUAL OR COMPENSATORY
DAMAGES
Actual or compensatory damages
refer to adequate compensation for such
pecuniary loss suffered as duly proved
(Art. 2199].
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Under Art. 2201, the liability for damages
include:
(1) In case the common carrier acted in
good faith:
(a) The natural and probable
consequence of the breach of the
obligation; and
(b) Those which the parties have
foreseen or could have reasonably
foreseen at the time the obligation
was constituted;
(2) In case of fraud, bad faith, malice or
wanton attitude, all damages which
may be reasonably attributed to the
non-performance of the obligation.
In case of death, actual damages also
include:
(1) Loss of earning capacity, unless the
deceased had no earning capacity at the
time of death; and
(2) Support for a period not exceeding five
years [Art. 2206].
Note: Art. 2206 applies only in case of
death of the passenger.
In the absence of a showing that common
carriers attention was called to the special
circumstances requiring prompt delivery of
a passengers luggage, the common carrier
cannot be held liable for the cancellation of
passengers contracts [for exhibition of
films] as it could not have foreseen such an
eventuality when it accepted the luggage
for transit [Pan-Am World Airways v. IAC
(1988)].
F.2. MORAL DAMAGES
Moral damages, though incapable of
pecuniary computation, if they are the
proximate result of the common carriers
wrongful act or omission, may be recovered
[Art. 2217].
In cases of breach of contract of carriage,
moral damages may be recovered where:
(1) The common carrier acted fraudulently;
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(2) The common carrier acted in bad faith
[Art. 2220];
(3) Death of a passenger resulted even in
the absence of bad faith or fraud [Art.
2206].
Bad faith contemplates a state of mind
affirmatively operating with furtive design
or with some motive of self-interest or will
or for ulterior purpose [Air France v.
Carrascoso (1966)].
When it comes to contracts of common
carriage, inattention and lack of care on the
part of the carrier resulting in the failure of
the passenger to be accommodated in the
class contracted for amounts to bad faith or
fraud which entitles the passenger to the
award of moral damages in accordance
with Art. 2220 [Ortigas v. Lufthansa (1975)].
Willful and deliberate overbooking on the
part of the airline carrier constitutes bad
faith. Under Section 3, Economic
Regulations No. 7 of the Civil Aeronautics
Board, overbooking, which does not exceed
ten percent, is not considered as deliberate
and therefore does not amount to bad
faith [United Airlines v. CA (2001)].
F.3. EXEMPLARY DAMAGES
In a contract of carriage, exemplary
damages may be awarded if the common
carrier acted in wanton, fraudulent, reckless,
oppressive, or malevolent manner [Art.
2232].
Exemplary damages serves as an
instrument to serve the ends of law and
public policy by reshaping socially
deleterious behaviors, specifically, in the
case, to compel the common carrier to
control their employees, to tame their
reckless instincts, and to force them to take
adequate care of human beings and their
property [Mecenas v. CA].
UP LAW BOC TRANSPORTATION LAW
F.4. NOMINAL, TEMPERATE,
LIQUIDATED DAMAGES
AND
Nominal dam ages are adjudicated in
order that a right of the plaintiff, which has
been violated by the defendant, may be
vindicated or recognized, not for the
purpose of indemnifying the plaintiff for any
loss suffered by him [Art. 2221]. It may be
awarded in case of breach of contract of
carriage and in every case where any
property right has been invaded [Art. 2222].
A violation of the passengers right to be
treated with courtesy in accordance with the
degree of diligence required by law to be
exercised by every common carrier entitles
the passenger to nominal damages [Saludo
v. CA].
Temperate or moderate damages,
which are more than nominal but less than
compensatory damages, may be recovered
when some pecuniary loss has been
suffered but its amount cannot, from the
nature of the case, be proved with certainty
[Art. 2224].
Liquidated damages are those damages
agreed upon by the parties to a contract, to
be paid in case of breach thereof [Art. 2226].
F.5. ATTORNEYS FEES
Under Art. 2208, as applicable to a contract
of carriage, attorneys fees and expenses of
litigation may be recovered in the following
cases:
(1) When exemplary damages are awarded;
(2) When the common carriers act or
omission has compelled the plaintiff to
litigate with third persons or to incur
expenses to protect his interest;
(3) Where the common carrier acted in
gross and evident bad faith in refusing
to satisfy the plaintiffs valid, just and
demandable claim;
(4) In any other case where the court deems
it just and equitable that attorneys fees
and expenses of litigation should be
recovered.
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IV. Bill of Lading
(Reference is to the Code of Commerce,
unless otherwise indicated)
Definition
Bill of lading a written
acknowledgement, signed by the master of
a vessel or other authorized agent of the
carrier, that he has received the described
goods from the shipper, to be transported
on the expressed terms to the described
place of destination, and to be delivered
there to the designated consignee or parties
[70 Am. Jur. 2d 924].
It is not, however, indispensable for the
creation of a contract of carriage. [Cia.
Maritima v. Ins. Co. of North America (1964)].
In the absence of a bill of lading, disputes
shall be determined by the legal proofs
which the parties may present in support of
their respective claims, according to the
general provisions established in the Code
of Commerce for commercial contracts [Art.
354, Code of Commerce].
The bill of lading becomes effective usually
upon its delivery to and acceptance by the
shipper [Aquino, Essentials of Transportation
& Public Utilities Law (2011)].
In the absence of fraud, concealment, or
improper conduct, it is presumed that the
stipulations of the bill are known to the
shipper, and he is generally bound by his
acceptance whether he reads the bill or not
[Magellan Mfg. Marketing Corp. v. CA (1991)].
A. THREE-FOLD CHARACTER:
(1) Receipt as to the quantity and
description of the goods shipped;
(2) Contract to transport and deliver
the goods to the consignee or other
person therein designated, on the terms
specified in such instrument; and
(3) Docum ent of title, which makes it a
symbol of the goods.
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The bill of lading constitutes the legal
evidence of the contract of transportation,
and all disputes between the parties
regarding the execution and performance of
the contract shall be decided by the
contents of the bill of lading issued by the
carrier. The law admits no exceptions other
than the falsity and material error in its
drafting [Art. 353].
B. REFUSAL TO TRANSPORT
General Rule: The carrier cannot refuse
to carry a particular class of goods.
Exception: When the goods are unfit for
transportation.
If transportation is insisted upon in case of
railway transport, the company shall carry
them, but it shall be exempt from all
responsibility if the objections are so stated
in the bill of lading [Art. 356].
C. DELIVERY OF GOODS
The goods should be delivered to the
consignee or any other person to whom the
bill of lading was validly transferred or
negotiated.
The carrier is duty bound to deliver the
goods in the same condition in which,
according to the bill of lading, they were
found at the time of there were received,
without damage or impairment [Art. 363].
C.1. PERIOD OF DELIVERY
Delivery should be made within the period
fixed for the delivery of the goods as
stipulated in the bill of lading [Art. 370].
In case of failure to deliver, the carrier shall
pay the indemnity agreed upon in the bill of
lading, neither the shipper nor consignee
being entitled to anything else.
Should there be no period previously fixed,
the carrier is bound to forward the goods in
the first shipment of the same or similar
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merchandise which he may make to the
point of delivery. Should he not do so, he
shall be liable for damages cause by the
delay [Art. 358].
If no indemnity is fixed and there is delay,
the carrier shall be liable for the damages
which may have been caused by the delay
[Art. 370].
C.2. DELIVERY WITHOUT SURRENDER OF
BILL OF LADING
After the contract has been complied with,
the bill of lading which the carrier has
issued shall be returned to him, and by
virtue of the exchange of this title with the
thing transported, the respective
obligations and actions shall be considered
cancelled, unless in the same act the claim
which the parties may wish to reserve be
reduced to writing, exception being made of
the provisions of Art. 366, on period for
filing claims [Art. 353, 2nd para.].
If, in case of loss or for any other reason
whatsoever, the consignee cannot return,
upon receiving the merchandise, the bill of
lading subscribed by the carrier, he shall
give said carrier a receipt for the goods
delivered. This receipt produces the same
effects as the return of the bill of lading [Art.
353, 3rd para.].
C.3. REFUSAL OF CONSIGNEE TO TAKE
DELIVERY
The consignee may refuse to take delivery in
the following cases:
(1) If only part of the goods transported
should be delivered, when he proves
that he cannot make use thereof
without the others [Art. 363].
(2) When the goods are rendered useless
for purposes of sale or consumption in
the use for which they are properly
destined, in which case the consignee
may demand payment of the goods at
current market prices [Art. 365];
(3) In case part of the goods is in good
condition and separation is possible,
UP LAW BOC TRANSPORTATION LAW
the consignee may refuse to receive only
the damaged goods [Art. 365].
(4) Where the delay is through the fault of
the carrier [Art. 371].
In case of dispute as to the condition of the
goods, the same shall be examined by
experts appointed by the parties, and the
third one, in case of disagreement,
appointed by the judicial authority.
If the persons interested should not agree
with the report, said judicial authority shall
order the deposits of the merchandise in a
safe warehouse, and the parties interested
shall make use of their rights in the proper
manner. [Art. 367].
D. PERIOD FOR FILING CLAIMS
Pursuant to Art. 366, Code of Commerce, a
claim , on account of damage found upon
opening the packages, must be made
against the carrier:
(1) Within 24 hours, if the indications of the
damage cannot be ascertained from the
exterior of the packages (i.e., latent
damage); or
(2) At the time of receipt, if the indications
damage can be so ascertained (i.e.,
patent damage).
But the Court in Aboitiz v Insurance
Company of North America [GR No. 168402,
6 Aug 2008] made a pro hac vice ruling, in
that even if the notice was given more than
24 hrs after the receipt of the goods, the
notice requirement was held nevertheless to
have been complied with, due to the
peculiar circumstances:
Provisions specifying a time to give notice
of damage to common carriers are
ordinarily to be given a reasonable and
practical, rather than a strict construction.
We give due consideration to the fact that
the final destination of the damaged cargo
was a school institution where authorities
are bound by rules and regulations
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governing their actions. Understandably,
when the goods were delivered, the
necessary clearance had to be made before
the package was opened. Upon opening
and discovery of the damaged condition of
the goods, a report to this effect had to pass
through the proper channels before it could
be finalized and endorsed by the institution
to the claims department of the shipping
company.
No claim whatsoever shall be admitted
against the carrier with regard to the
condition in which the goods transported
were delivered:
(1) After the periods mentioned have
elapsed; or
(2) After the transportation charges have
been paid.
The periods mentioned commence upon
delivery of cargo to the consignee at the
place of destination.
Thus, Art. 366 is limited to cases of claims
for damage to goods actually turned over by
the carrier and received by the consignee. It
does not apply to misdelivery of goods.
Failure to file a claim bars recovery (Aquino
(2011)].
Ratio: The rule protects the carrier by
affording it an opportunity to make an
investigation of a claim while the matter is
still fresh and easily investigated so as to
safeguard itself from false and fraudulent
claims [UCPB General Ins. Co., Inc. v. Aboitiz
Shipping (2009)].
However, the periods prescribed may be
subject to modification by agreement of the
parties. [PHILAMGEN v. Sweet Lines, Inc.
(1992)].
The value of the goods stated in the bill of
lading is conclusive between the parties,
and the shipper is not allowed to prove a
higher value [Art. 372]. It is only when the
carriers fault is so gross as to amount to
actual fraud that the actual amount of the
losses an damages suffered may be proved
by the shipper against the carrier.
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Horses, vehicles, vessels and equipment
used by the carrier serves as liens for the
payment of the value of the goods which the
carrier must pay in case of loss or
misplacement [Art. 372].
E. PERIOD FOR FILING ACTIONS
E.1. OVERLAND TRANSPORTATION AND
COASTWISE SHIPPING
The general rules under the Civil Code on
extinctive prescription apply. Thus, action
for damages must be filed in court:
(1) Within 6 years, if a bill of lading was not
issued [Art. 1145, Civil Code].
(2) Within 10 years, if a bill of lading was
issued [Art. 1146, Civil Code].
E.2. INTERNATIONAL CARRIAGE OF
GOODS BY SEA
Suit must be brought within one year:
(1) After delivery of the goods; or
(2) From the date when the goods should
have been delivered.
Otherwise, the carrier and the ship shall be
discharged from all liability in respect of
loss or damage.
The absence of notice shall not affect or
prejudice the right of the shipper to bring
suit within one year after the delivery of the
goods or the date when the goods should
have been delivered [Section 3(6), Carriage
of Goods by Sea Act].
The period for filing the claim is one year, in
accordance with the Carriage of Goods by
Sea Act. The Carriage of Goods by Sea Act,
as adopted and embodied in
Commonwealth Act No. 65, applies
because it is a special law, and, as such,
prevails over the general provisions of the
Civil Code on prescription of actions
[Maritime Agencies & Services, Inc. v. CA].
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FALSE DECLARATION OF CONTENTS
If the carrier has a well-founded suspicion
of falsity in the declaration of the contents
of the package, the carrier may examine it.
If the declaration should be correct,
examination and repacking expenses shall
be defrayed by the carrier, and in the
contrary, by the shipper [Art. 357].
RESPONSIIBILITY OF THE CARRIER
The responsibility of the carrier commences
from the moment he personally or through
his duly authorized agent receives the
merchandise, and at the place indicated for
their reception [Art. 355].
When there is an agreed route, the carrier
shall be liable for losses due not only to the
change of route but also to other causes,
together with the indemnity agreed upon
[Art. 359]. When there is no agreed route,
the carrier must select one which may be
the shortest, least expensive and practically
passable.
All damages and impairment suffered by
the goods during the transportation, by
reason of fortuitous event or by the nature
or defect of the articles, shall be for the
account of the shipper. Proof of these
accidents is incumbent on the carrier [Art.
361].
Note: Common carriers are responsible
for loss, destruction or deterioration of the
goods, unless it exercised extraordinary
diligence, or the loss is due to Art. 1734 of
the Civil Code.
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V. Admiralty and
Maritime Commerce
Concept
The concept of admiralty, as distinguished
from overland transportation, depends on:
(1) Size of the vessel; and
(2) Size of the body of water over which such
vessel traverses.
Under B.P. 129, jurisdiction over admiralty
cases depends on the amount, and not on
the nature of the claim.
A. CHARTER PARTIES
Charter party a contract by virtue of
which the owner or agent of a vessel binds
himself to transport merchandise or
persons for a fixed price.
It is a contract by which the owner or agent
of the vessel leases for a certain price the
whole or portion of a vessel for the
transportation of the goods or persons from
one port to another.
It is a contract whereby the whole or part of
the ship is let by the owner to a merchant or
other person for a specified time or use for
the conveyance of goods, in consideration of
the payment of freight [Caltex v. Sulpicio
Lines (1999)].
Towage is not a charter party. It is a
contract for the hire of services by which a
vessel is engaged to tow another vessel
from one port to another for consideration.
In modern maritime law and usage, there
are three distinguishable types of charter
parties:
(1) Bareboat or demise charter;
(2) Time charter; and
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(3) Voyage or trip charter [Litonjua
Shipping, Inc. v. National Seamen Board
(1989)].
Note: Both time and voyage charters are
said to be contracts of affreightment, where
a common or public carrier is not converted
into a private carrier.
Contract of affreightment one in
which the owner of the vessel leases part or
all of its space to haul goods for others. It is
a contract for special service to be rendered
by the owner of the vessel and under such
contract the general owner retains the
possession, command and navigation of the
ship, the charterer or freighter merely
having use of the space in the vessel in
return for his payment of the charter hire
[Puromines, Inc. v. CA (1993)].
Bill of lading distinguished from a
charter party
A charter party is a complete contract, while
a bill of lading is a private receipt which the
captain gives to accredit that such goods
belong to such persons.
A charter party is a consensual contract
which can be dissolved by means of
indemnity for losses and damages; while a
bill of lading is a real contract which exists
only after delivery of the goods to be
transported is made.
Liabilities arising from breach is identical to
overland transport.
A.1. BAREBOAT OR DEMISE CHARTER
In a bareboat or demise charter, the ship
owner leases to the charterer the whole
vessel, transferring to the latter the entire
command, possession and consequent
control over the vessels navigation,
including the master and the crew, who
thereby become the charterers servants
[Aquino (2011)].
UP LAW BOC TRANSPORTATION LAW
To create a demise, the owner of a vessel
must completely and exclusively relinquish
possession, com m and and
navigation thereof to the charterer,
anything short of such a complete transfer
is a contract of affreightment (time or
voyage charter party) or not a charter party
at all.
Although a charter party may transform a
common carrier into a private one, the same,
however, is not true in a contract of
affreightment on account of the distinctions
between a contract of affreightment and a
demise or bareboat charter [Puromines, Inc.
v. CA (1993)].
Note: In a bareboat or demise charter, the
common carrier is converted to private
carrier.
The charterer, to whom the owner of the
vessel relinquishes, completely and
exclusively, the possession, command and
navigation of the vessel, by virtue of a
demise charter, is considered the owner pro
hac vice. He mans and equips the vessel and
assumes all responsibility for navigation,
management and operation. He thus acts
as the owner of the vessel in all important
aspects during the duration of the charter
[Puromines, Inc. v. CA (1993)].
A.2. TIME CHARTER
Time charter a contract for the use of a
vessel for a specified period of time or for
the duration of one or more specified
voyages.
In this case, the owner of a time-chartered
vessel retains possession and control
through the master and crew, who remain
his employees. What the time charterer
acquires is the right to utilize the carrying
capacity and facilities of the vessel and to
designate her destinations during the term
of the charter [Litonjua Shipping Co., Inc. v.
National Seamen Board (1989)].
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MERCANTILE LAW
A.3. VOYAGE OR TRIP CHARTER
In a voyage charter, the vessel is leased for
a single or particular voyage. The master
and crew remain the employ of the owner of
the vessel [Litonjua Shipping Co., Inc. v.
National Seamen Board (1989)].
B. LIABILITY OF SHIP OWNERS AND
SHIPPING AGENTS
The persons participating in maritime
commerce are the following:
(1) Ship owners or ship agents
(2) Captains and masters
(3) Other officers and crew
(4) Supercargoes
The ship owner has possession, control
and management of the vessel and the
consequent right to direct her navigation
and receive freight earned and paid, while
his possession continues; he is the person
who is primarily liable for damages
sustained in the operation of the vessel,
based on the provisions of the Code of
Commerce.
A ship agent is the person entrusted with
the provisioning of a vessel, or who
represents her in the port in which she
happens to be [Art. 586].
The ship agent, even though he is not the
owner, is liable in every way to the creditor
for losses and damages, without prejudice
to his right against the owner, the vessel
and its equipment and freight [Aquino
(2011)].
Captains are those who govern vessels
that navigate the high seas or ships of large
dimensions and importance, although they
may be engaged in coastwise trade.
Masters are those who command smaller
ships engaged exclusively in coastwise
trade. In maritime commerce, masters and
captains are the same.
UP LAW BOC TRANSPORTATION LAW
A crew is a person on board who is involved
in highly technical tasks and in manning of
the vessel (e.g. master, mate).
A com plem ent is a person, not a crew,
who is not directly involved in the manning
of the vessel (e.g. cook).
Supercargo is a person on board the
vessel, who functions as an agent of the
owner of the goods shipped as cargo on a
vessel, who has charge of the cargo on
board, sells the same to the best advantage
in the foreign markets, buys cargo to be
brought back on the return voyage of the
ship, and comes home with it.
The powers and liabilities of the captain
shall cease, when there is a supercargo,
with regard to that part of the
administration legitimately conferred upon
the latter, but shall continue in force for all
acts which are inseparable from his
authority and office [Art. 649].
The ship owner or ship agent is
liable:
(1) For the acts of the captain, unless the
latter exceeds his authority [Art. 586].
(2) For contracts entered into by the
captain to repair, equip and provision
the vessel, provided that the amount
claimed was invested for the benefit of
the vessel [Art. 586].
(3) For the indemnities in favor of third
persons which may arise from the
conduct of the captain in the care of the
goods transported, as well as for the
safety of passengers transported [Art.
587].
(4) For damages to third persons for tort or
quasi-delict committed by the captain,
except collision with another vessel [Art.
1759, Civil Code].
(5) For damages in case of collision due to
the fault, negligence, or want of skill of
the captain, sailing mate, or any other
member of the complement [Art. 826].
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MERCANTILE LAW
B.1. LIABILIITY FOR ACTS OF CAPTAIN
Three (3) distinct roles of a captain:
(1) General agent of the ship owner;
(2) Commander and technical director of
the vessel;
(3) Representative of the country under
whose flag he navigates [Inter-Orient
Marine Enterprises v. NLRC (1994)].
The captain shall be liable to the
agent, and the latter to third
persons:
(1) For all the damages suffered by the
vessel and his cargo by reason of want
of skill or negligence on his part;
(2) For all the thefts committed by the crew,
reserving his right of action against the
guilty parties;
(3) For the losses, fines, and confiscations
imposed on account of violation of the
laws and regulations of customs, police,
health, and navigation;
(4) For the losses and damages caused by
mutinies on board the vessel, or by
reason of faults committed by the crew
in the service and defense of the same,
if he does not prove that he made full
use of his authority to prevent or avoid
them;
(5) For those arising by reason of an undue
use of powers and non-fulfillment of the
obligations which are his;
(6) For those arising by reason of his going
out of his course or taking a course
which he should not have taken without
sufficient cause, in the opinion of the
officers of the vessel at a meeting with
the shippers or supercargoes who may
be on board;
(7) For those arising by reason of his
voluntarily entering a port other than
that of his destination;
(8) For those arising by reason of non-
observance of the provisions contained
in the regulations on situation of lights
UP LAW BOC TRANSPORTATION LAW MERCANTILE LAW

and maneuvers for the purpose of
preventing collisions [Art. 618].
B.2. EXCEPTIONS TO LIMITED LIABILITY
The Doctrine of Limited Liability
(Hypothecary Rule)
The real and hypothecary nature of
maritime law simply means that the liability
of the carrier in connection with losses
related to maritime contracts is confined to
the vessel, which is hypothecated for such
obligations or which stands as the guaranty
for their settlement.
It has its origin by reason of the conditions
and risks attending maritime trade in its
earliest years when such trade was replete
with innumerable and unknown hazards
since vessels had to go through largely
uncharted waters to ply their trade. It was
designed to offset such adverse conditions
and to encourage people and entities to
venture into maritime commerce despite
the risks and the prohibitive cost of
shipbuilding.
Thus, the liability of the vessel owner and
agent arising from the operation of such
vessel were confined to the vessel itself, its
equipment, freight, and insurance, if any,
which limitation served to induce capitalists
into effectively wagering their resources
against the consideration of the large
profits attainable in the trade [Aboitiz
Shipping Corp. v. General Accident Fire and
Life Assurance Corp. (1993)].
Thus, under the doctrine of abandonment:
(1) The agent shall be civilly liable for the
indemnities in favor of third persons
which arise from the conduct of the
captain in the care of the goods which
the vessel carried, but he may exempt
himself therefrom by abandoning the
vessel with all her equipment and the
freight he may have earned during the
voyage [Art. 587];
(2) The owners of a vessel shall be civilly
liable in the proportion of their
contribution to the common fund, for
the results of the acts of the captain,
referred to in Art. 587. Each part owner
may exempt himself from this liability
by the abandonment before a notary of
the part of the vessel belonging to him
[Art. 590].
(3) In case of collision, the liability of the
ship owner shall be understood as
limited to the value of the vessel with all
her appurtenances and all the freight
earned during the voyage [Art. 837].
(4) If the vessel and her freight should be
totally lost, by reason of capture or
wreck, all rights of the crew to demand
any wages whatsoever shall be
extinguished, as well as the agent for
the recovery of the advances made [Art.
643].
If the ship owner or agent may in any way be
held civilly liable at all for injury to or death
of passengers arising from the negligence
of the captain in cases of collisions or
shipwrecks, his liability is merely co-
extensive with his interest in the vessel such
that a total loss thereof results in its
extinction. This is based on the exclusively
real and hypothecary nature of maritime
law, which operates to limit such liability to
the value of the vessel, or to the insurance
thereon, if any. [Yangco v. Laserna (1941)]
Exceptions:
(1) Claims under the Workmens
Compensation Act [Abueg v. San Diego];
(2) Expenses for repairing, provisioning and
equipping the vessel;
(3) There is an actual finding of negligence
on the part of the vessel owner or agent
[Aboitiz Shipping v. General Accident Fire
and Life Assurance Corp. (1993)];
(4) Vessel is insured, to the extent of the
insurance proceeds [Vasquez v. CA
(1985)];
(5) There was no total loss;
(6) Collision between two negligent vessels.

PAGE 124 OF 320

UP LAW BOC TRANSPORTATION LAW
C. ACCIDENTS AND DAMAGES IN
MARITIME COMMERCE
C.1. AVERAGES
The following shall be considered averages:
(1) All extraordinary or accidental expenses
incurred during the navigation for the
preservation of the vessel or cargo, or
both;
(2) All damages or deterioration the vessel
may suffer from the time she puts to sea
from the port of departure until she
casts anchor in the port of destination,
and those suffered by the merchandise
from the time it is loaded in the port of
shipment until it is unloaded in the port
of consignment [Art. 806].
There are two kinds of averages:
(1) Particular or simple average; and
(2) Gross or general average.
I. SIMPLE AVERAGE
Particular or simple averages shall include
all damages and expenses caused to the
vessel or cargo that did not inure to the
common benefit and profit of all persons
interested in the vessel and her cargo [Art.
809].
The owner of the goods which gave rise to
the expense or suffered the damage shall
bear this average [Art. 810].
II. GENERAL AVERAGE
General or gross averages shall include all
the damages and expenses which are
deliberately caused in order to save the
vessel, her cargo, or both at the same time,
from a real and known risk [Art. 811].
The gross or general average shall be borne
by those who benefited from the sacrifice.
These include the ship owner and the
owners of the cargoes that were saved.
Contribution may also be imposed on the
insurers of the vessel or cargoes that were
PAGE 125 OF 320
MERCANTILE LAW
saved, as well as lenders on bottomry or
respondentia.
1. REQUISITES
(1) There must be a common danger;
(2) That for the common safety, part of the
vessel or of the cargo or both is
sacrificed deliberately;
(3) That from the expenses or damages
caused follows the successful saving of
the vessel and cargo;
(4) That the expenses or damages should
have been incurred or inflicted after
taking proper legal steps and authority
[Magsaysay, Inc. v. Agan [1955]].
Common danger means both the ship
and the cargo, after it has been loaded, are
subject to the same danger, whether during
the voyage, or in the port of loading or
unloading, that the danger arises from the
accidents of the sea, dispositions of the
authority, or faults of men, provided that
the circumstances producing the peril
should be ascertained and imminent or may
rationally be said to be certain and
imminent. This last requirement excludes
measures undertaken against a distant peril
[Magsaysay, Inc. v. Agan [1955]].
Note: When a vessel is stranded
unintentionally, the damages incurred
cannot constitute general averages.
2. CASES OF GENERAL AVERAGE
(1) The goods or cash invested in the
redemption of the vessel or cargo
captured by enemies, privateers, or
pirates, and the provisions, wages, and
expenses of the vessel detained during
the time the arrangement or
redemption is taking place;
(2) The goods jettisoned to lighten the
vessel, whether they belong to the
vessel, to the cargo, or to the crew, and
the damage suffered through said act
by the goods kept;
UP LAW BOC TRANSPORTATION LAW
(3) The cables and masts which are cut or
rendered useless, the anchors and the
chains which are abandoned in order to
save the cargo, the vessel, or both;
(4) The expenses of removing or
transferring a portion of the cargo in
order to lighten the vessel and place her
in condition to enter a port or roadstead,
and the damage resulting therefrom to
the goods removed or transferred;
(5) The damage suffered by the goods of
the cargo through the opening made in
the vessel in order to drain her and
prevent her sinking;
(6) The expenses caused through floating a
vessel intentionally stranded for the
purpose of saving her;
(7) The damage caused to the vessel which
it is necessary to break open, scuttle, or
smash in order to save the cargo;
(8) The expenses of curing and maintaining
the members of the crew who may have
been wounded or crippled in defending
or saving the vessel;
(9) The wages of any member of the crew
detained as hostage by enemies,
privateers, or pirates, and the necessary
expenses which he may incur in his
imprisonment, until he is returned to
the vessel or to his domicile, should he
prefer it;
(10) The wages and victuals of the crew of a
vessel chartered by the month during
the time it should be embargoed or
detained by force majeure or by order of
the Government, or in order to repair
the damage caused for the common
good;
(11) The loss suffered in the value of the
goods sold at arrivals under stress in
order to repair the vessel because of
gross average;
(12) The expenses of the liquidation of the
average [Art. 811];
(13) If in lightening a vessel on account of a
storm, in order to facilitate her entry
into a port or roadstead, part of her
PAGE 126 OF 320
MERCANTILE LAW
cargo should be transferred to lighters
or barges and be lost, the owner of said
part shall be entitled to indemnity, as if
the loss has originated from a gross
average [Art. 817];
(14) If, as a necessary measure to extinguish
a fire in a port; roadstead; creek, or bay,
it should be decided to sink any vessel,
this loss shall be considered gross
average, to which the vessels saved
shall contribute.
(15)
3. JETTISON
The captain shall direct the jettison, and
shall order the goods cast overboard in the
following order:
(1) Goods on deck - beginning with those
which embarrass the maneuver or
damage the vessel, preferring if
possible, the heaviest ones with the
least utility and value;
(2) Goods below the upper deck - always
beginning with those of the greatest
weight and smallest value, to the
amount and number absolutely
indispensable [Art. 815].
To include the goods jettisoned in the
general or gross average, the existence of
the cargo or goods must be proved:
(1) For cargo by means of bill of lading;
(2) For good belonging to the vessel by
means the inventory prepared prior to
departure [Art. 816].
4. JASON CLAUSE
Jason clause is a provision in the contract
of carriage that requires the cargo owners
to contribute in general average though the
event which gave rise to the sacrifice or
expenditure may have been due to the fault
of one of the parties to the adventure [Rule
D, York Antwerp Rules].
UP LAW BOC TRANSPORTATION LAW
5. PROCEDURE FOR RECOVERY
(1) Assembly and deliberation with the
sailing mate and other officers;
(2) Resolution of the captain adopted;
(3) Hearing of the persons interested. In
case an interested person should not be
heard, he shall not contribute to the
gross average [Art. 813, Code of
Commerce];
(4) Resolution to be entered in the log book,
stating the motives and reasons
therefore as well as the votes and
reason for disagreement [Art. 814, Code
of Commerce];
(5) Minutes to be signed by all the persons
present or in urgent cases, the captain;
(6) Captain shall deliver one copy of the
minutes to the maritime judicial
authority of the first port he may make
within 24 hours [Art. 814];
(7) Captain shall ratify the minutes under
oath [Art. 814].
C.2. COLLISIONS
Collision is an impact or sudden contact
between two moving vessels [Aquino (2011)].
Allision is the striking of a moving vessel
against one that is stationary.
The steamers greater facility
maneuvering over a sail vessel means it has
the greater ability to avoid collisions; so as a
general rule, when meeting a sailing vessel,
whether close hauled or with the wind free,
the sail vessel has a right to keep her course,
and it is the duty of the steamer to adopt
precautions as will avoid the sail vessel
Subject to the general rules of evidence in
collision cases as to the burden of proof, in
the case of a collision between a steam
vessel and a sail vessel, the presumption is
against the steam vessel, and she must
show that she took the proper measures to
avoid a collision. [A. Urrutia & Co. v. Baco
River Plantation Co. [1913)].
MERCANTILE LAW
When 2 power-driven vessels are meeting
head on, or nearly head on, so as to involve
risk of collision, each shall alter her course
to starboard (right side), so that each may
pass on the port (left) side of the other.
[Smith Bell and Co. v. CA (1991)].
Note: Liability in collision cases is
negligence-based. The person who caused
the injury is both civilly and criminally liable
[Aquino (2011)].
Classes of Collision:
(1) Fortuitous - none was at fault;
(2) Culpable - one or more vessels were at
fault;
(3) Inscrutable Fault - it cannot be
determined which of the vessels was at
fault.
I. FORTUITOUS
When it is due to a fortuitous event or force
majeure, each vessel and its cargo shall
bear its own damages [Art. 830].
When, by reason of force m ajeure, a
vessel properly anchored and moored
collides with another, the injury occasioned
shall be looked upon as particular average
to the vessel run into [Art. 832].
II. CULPABLE
of
When only one vessel is at fault, the
owner of the vessel at fault shall indemnify
the losses and damages suffered, after an
expert appraisal.
When both vessels are at fault, each
shall suffer its own damages, and both shall
be solidarily responsible for the losses and
damages occasioned to their cargoes [Art.
826].
Note: The ship owners cannot successfully
maintain an action against the other for the
loss or injury to his vessel.
When a third vessel at fault, the owner
of the third vessel shall indemnify the losses
and damages caused, the captain thereof
being civilly liable to said owner [Art. 831].
PAGE 127 OF 320
UP LAW BOC TRANSPORTATION LAW
III. INSCRUTABLE FAULT
In case of inscrutable fault, that is, if it
cannot be decided which of the two vessels
was the cause of the collision, each shall
bear his own damage and both shall be
jointly responsible for the losses and
damages suffered by their cargoes [Art.
828].
C.3. ARRIVAL UNDER STRESS
Arrival under stress is the arrival of a
vessel at the nearest and most convenient
port instead of the port of destination, if
during the voyage the vessel cannot
continue the trip to the port of destination.
It is lawful when the inability to continue
voyage is due to:
(1) Lack of provisions;
(2) Well-founded fear of seizure, privateers,
or pirates; or
(3) Any accident of the sea disabling it to
navigate [Art. 819].
It is unlawful when:
(1) The lack of provisions should arise from
the failure to take the necessary
provisions for the voyage, according to
usage and custom, or if they should
have been rendered useless or lost
through bad stowage or negligence in
their care;
(2) The risk of enemies, privateers, or
pirates should not have been well
known or manifest, and based on
positive and justifiable facts;
(3) The injury to the vessel should have
been caused by reason of her not being
repaired, rigged, equipped, and
arranged in a convenient manner for the
voyage, or by reason of some erroneous
order of the captain; or
(4) Malice, negligence, want of foresight, or
lack of skill on the part of the captain is
the reason for the act causing the
damage [Art. 820].
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MERCANTILE LAW
Note: Expenses for arrival under stress are
particular averages [see Art. 821].
C.4. SHIPWRECKS
Shipwreck denotes loss or wreck of a
vessel at sea as a consequence of running
against another vessel or thing at sea or on
coast where the vessel is rendered
incapable of navigation.
The losses and deterioration suffered by the
vessel and her cargo shall be individually for
the account of the owners [Art. 840].
If the wreck was due to malice, negligence
or lack of skill of the captain, or because the
vessel put to sea was insufficiently repaired
and equipped, the ship agent or the
shippers may demand indemnity from said
captain. [Art. 841].
C.5. SALVAGE
Salvage is defined as the service which one
person renders to the owner of a ship or
goods, by his own labor, preserving the
goods or the ship which the owner or those
entrusted with the care of them have either
abandoned in distress at sea, or are unable
to protect and secure. It is founded on
equity and is compensation for actual
services rendered.
Three elements are necessary to a valid
salvage claim:
(1) A marine peril;
(2) Service voluntarily rendered when not
required as an existing duty or from a
special contract;
(3) Success, in whole or in part, or that the
service rendered contributed to such
success [Erlanger & Galinger v. Swedish
East Asiatic Co. Ltd (1916)].
The goods saved from the wreck shall be
specially bound for the payment of the
expenses of the respective salvage, and the
amount thereof must be paid by the owners
of the former before they are delivered to
them [Art. 842].
UP LAW BOC TRANSPORTATION LAW
Where a personal action is brought by the
salvor against the owner of the ship, the
liability of the latter is limited to such part
of the salvage compensation due for the
entire service as is proportionate to the
value of the ship.
Distinction between salvage and
towage:
Towage a vessel is engaged to tow
another vessel from one port to another for
consideration.
In contract for towage, the crew does not
have any interest or rights with the
remuneration pursuant to the contract; only
the owner of the towing vessel is entitled to
remuneration.
Salvage a person preserves the goods or
the ship which the owner either abandoned
in distress at sea, or is unable to protect and
secure.
In salvage, the crew of the salvaging ship is
entitled to salvage, and can look to the
salvage vessel for its share [Barrios v. Go
Thong (1963)].
D. CARRIAGE OF GOODS BY SEA ACT
(COGSA)
D.1. APPLICATION
COGSA [Commonwealth Act No. 65] is a
special law that governs all contracts of
carriage of goods by sea between or to and
from the Philippine ports.
Its application is according to the following
scheme:
(1) If the com m on carrier is coming to the
Philippines:
(a) First: Civil Code;
(b) Second: COGSA (in foreign
trade);
(c) Third: Code of Commerce;
PAGE 129 OF 320
MERCANTILE LAW
(2) If the private carrier is coming to the
Philippines:
(a) First: COGSA;
(b) Second: Code of Commerce;
(c) Third: Civil Code (excluding
rules on com m on carriers);
(3) If the private or common carrier is from
the Philippines to a foreign country, the
law of the foreign country applies [Art.
1753, Civil Code] unless the parties
make COGSA applicable.
Under Art. 1766, in all matters not regulated
by the Civil Code, the rights and obligations
of common carriers shall be governed by
the Code of Commerce and special laws.
Thus, although a special law, COGSA only
applies when the Civil Code has no provision
dealing with the matter.
D.2. NOTICE OF LOSS OR DAMAGES
Notice of claim and the general nature of
the loss or damage must be given in writing
to the carrier or his agent at the port of
discharge before or at the time of the
removal of the goods [Section 3(6), COGSA].
If damage is not patent or cannot be
ascertained from the package, the shipper
should file the claim with the carrier within
three days from delivery.
Under Section 3(6), COGSA, a failure to file a
notice of claim within three (3) days will not
bar recovery if it is nonetheless filed within
one year. This one-year prescriptive period
also applies to the shipper, the consignee,
the insurer of the goods or any legal holder
of the bill of lading. Inasmuch as the neither
the Civil Code nor the Code of Commerce
states a specific prescriptive period on the
matter, the COGSA may be applied [Belgian
Overseas Chartering and Shipping v.
Philippine First Ins. Co. (2002)].
Note: In the Warsaw Convention, as well
as the Code of Commerce, the notice
requirement is a condition precedent for the
right of action against the shipowner to
accrue.
UP LAW BOC TRANSPORTATION LAW
D.3. PERIOD OF PRESCRIPTION
The carrier and the ship shall be discharged
from all liability in respect of loss or
damage unless suit is brought within one
year after delivery of the goods or the date
when the goods should have been delivered.
The absence of a notice shall not affect or
prejudice the right of the shipper to bring
suit within one year after the delivery of the
goods or the date when the goods should
have been delivered [Section 3 (6)].
COGSA, as a special law, prevails over the
general provisions of the Civil Code on
prescription of actions [Maritime Agencies &
Services, Inc. v. CA (1990)].
D.4. LIMITATION OF LIABILITY
Under Section 4(5], COGSA, the limit is set
at a maximum of $500 per package or
customary freight unit.
This is deemed incorporated in the bill of
lading even if not mention therein [Eastern
Shipping v. IAC (1987)].
The declaration made by the shipper stating
an amount bigger than $500 per package
will make the carrier liable for such bigger
amount, but only if the amount so declared
is the real value of goods [Aquino (2011)].
The Civil Code does not limit the liability of
the common carrier to a fixed amount per
package. In all matters not regulated by the
Civil Code, the right and the obligations of
common carriers shall be governed by the
Code of Commerce and special laws. Thus,
the COGSA, which is suppletory to the
provisions of the Civil Code, supplements
the latter by establishing a statutory
provision limiting the carriers liability in the
absence of a shippers declaration of a
higher value in the bill of lading. [Belgian
Overseas v. Philippine First Ins. Co. (2002)].
VESSEL
Vessels are those engaged in navigation,
whether coastwise or on the high seas
PAGE 130 OF 320
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destined for the services of the industry or
maritime commerce.
The word vessel used in the Code of
Commerce was not intended to include all
ships, craft, or floating structures of every
kind without limitation [Lopez v. Duruelo
(1928)].
Vessels are considered personal or movable
property [Art. 585]; but they partake to a
certain extent, of the nature and conditions
of real property, on account of their value
and importance in the world of commerce.
Vessel of domestic ownership and of more
than 15 tons gross is required to acquire a
certificate of Philippine register. The
purpose of the certificate is declare the
nationality of a vessel engaged in trade with
foreign nations and to enable her to assert
that nationality wherever found.
SPECIAL CONTRACTS OF MARITIME
COMMERCE
LOANS ON BOTTOMRY AND
RESPONDENTIA
Loan on bottom ry is a contract in the
nature of a mortgage, by which the owner of
the ship borrows money for the use,
equipment and repair of the vessel and for a
definite term, and pledges the ship as a
security for its repayment, with maritime or
extraordinary interest on account of the
maritime risks to be borne by the lender, it
being stipulated that if the ship be lost in
the course of the specific voyage or during
the limited time, by any of the perils
enumerated in the contract, the lender shall
also lose his money.
Loan on respondentia is one made on
the goods laden on board the ship, and
which are to be sold or exchanged in the
course of the voyage, the borrowers
personal responsibility being deemed the
principal security for the performance of the
contract, which is therefore called
respondentia. The lender must be paid his
UP LAW BOC TRANSPORTATION LAW MERCANTILE LAW

principal and interest, though the ship
perishes, provided that the goods are saved.
PASSENGERS ON SEA VOYAGE
The right to passage issued to a specified
person is non-transferrable without the
consent of the captain or of the consignee
[Art. 695].
the return of the fare upon request. If
the delay is due to the sole fault of the
captain or ship agent, they may demand
indemnity for losses and damages.
(4) To be taken directly to the port or ports
of destination, making all the stops
indicated in its itinerary [Art. 698].

Rights of passengers include:

(1) In case of suspension of voyage
(a) If through the sole fault of the
captain or ship agent, the
passengers shall be entitled to have
their passage refunded and to
recover for losses and damages.
(b) If due to accidental cause or force
majeure, the passengers shall only
be entitled to the return of the
passage money [Art. 697].
(2) In case of interruption of voyage
(a) If due to fortuitous event or force
majeure, the passengers shall be
obliged to pay only the fare in
proportion to their distance covered,
without right to recover for losses or
damages.
(b) If due to the sole fault of the captain,
the passengers shall be obliged to
pay only the fare in proportion to
their distance covered, with a right
to indemnity.
(c) If due to the disability of the vessel
and the passenger should agree to
await the repairs, he may not be
required to pay any increased price
of passage, but his living expenses
during the delay shall be for his own
account [Art. 698].
(3) In case of delay in the departure, the
passengers have a right to remain on
board and to be furnished food, unless
the delay is due to accidental cause or
to force majeure. If the delay exceeds
10 days, the passengers are entitled to

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UP LAW BOC TRANSPORTATION LAW
VI. International Air
Transport
The Warsaw Convention
A. APPLICABILITY
The Warsaw Convention applies to:
(1) All international carriage of persons,
baggage, or cargo performed by aircraft
for reward;
(2) Gratuitous carriage by aircraft
performed by an air transport
undertaking [Art. 1(1), Warsaw
Convention].
International air carriage or international air
transport means transportation by air
between points of contact of two high
contracting parties, or those countries that
have acceded to the Warsaw Convention,
wherein the place of departure and the
place of destination are situated:
(1) Within the territories of two high
contracting parties, regardless of
whether or not there be a break in the
transportation or a transshipment; or
(2) Within the territory of a single high
contracting party, if there is an agreed
stopping place within a territory subject
to the sovereignty, mandate or authority
of another power, even though the
power is not a party to the Convention
[Art. 1(2), Warsaw Convention].
A carriage to be perform ed by
several successive air carriers is
deemed, for the purposes of the Convention,
to be one undivided carriage, if it has been
regarded by the parties as a single
operation, whether it had been agreed upon
under the form of a single contract or of a
series of contracts [Art. 1(3), Warsaw
Convention].
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MERCANTILE LAW
The carrier is liable for damages for:
(1) Death or injury of a passenger if the
accident causing it took place:
(a) On board the aircraft;
(b) In the course of the operations of
embarking or disembarking; or
(c) When there was delay [Art. 17 and 19,
Warsaw Convention];
(2) Destruction, loss, or damage to any
baggage or goods that are checked in, if
damage occurred:
(a) During the transportation by air; or
(b) When there was delay [Section 18
and 19, Warsaw Convention];
(3) Delay in the transport by air of
passengers, baggage or goods.
The carriage by air contemplated comprises
the period in which the baggage or goods
are in charge of the carrier, whether in an
airport or on board an aircraft, or, in the
case of a landing outside an airport, in any
place whatsoever [Art. 18, Warsaw
Convention].
B. LIMITATION OF LIABILITY
With respect to the following limitations of
liability, Art. 23, Warsaw Convention
provides that any provision tending to
relieve the carrier of liability or to fix a lower
limit than that which is laid down shall be
null and void, but the nullity of any such
provision does not involve the nullity of the
whole contract.
Also, under Art. 25, Warsaw Convention:
(1) The carrier shall not be entitled to avail
himself of the provisions which exclude
or limit his liability, if the damage is
caused by his willful misconduct or by
such default on his part as is considered
to be equivalent to willful misconduct;
(2) Similarly the carrier shall not be entitled
to avail himself of the said provisions, if
the damage is caused as aforesaid by
UP LAW BOC TRANSPORTATION LAW
any agent of the carrier acting within
the scope of his employment.
Under Art. 29, Warsaw Convention, the right
to damages under the WC is extinguished
after two years from the date of arrival at
the destination or from the date on which
the aircraft ought to have arrived, or from
the date on which the carriage stopped. The
method of calculating the period of
limitation shall be determined by the law of
the court seized of the case.
B.1. LIABILITY TO PASSENGERS
General rule: In the carriage of
passengers, the liability of the carrier for
each passenger is limited to 250,000 francs
passenger.
Exception: By special contract, the carrier
and the passenger may agree to a higher
limit [Art. 22(1), Warsaw Convention].
B.2. LIABILITY FOR CHECKED BAGGAGE
General rule: In the carriage of baggage
and goods, the liability of the carrier is
limited to 250 francs per kilogram.
Exception: The limit does not apply when
the consignor has made, at the time when
the package was handed over to the carrier,
a special declaration of the value at delivery
and has paid a supplementary sum if the
case so requires. In that case the carrier will
be liable to pay a sum not exceeding the
declared sum, unless he proves that that
sum is greater than the actual value to the
consignor at delivery [Art. 22(2), Warsaw
Convention].
B.3. LIABILITY FOR HAND-CARRIED
BAGGAGE
As regards hand-carried baggage, the
liability of the carrier is limited to 5,000
francs per passenger [Art. 22(3), Warsaw
Convention].
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MERCANTILE LAW
The Guatemala Protocol of 1971 increased
the limit for passengers to $100,000 and to
$1,000 for baggage. However, the Supreme
Court noted in Santos III v. Northwest Orient
Airlines (1992), that the Guatemala Protocol
is still ineffective [Sundiang and Aquino
(2013)].
The Warsaw Convention should be deemed
a limit of liability only in those cases where
the cause of death or injury to person, or
destruction, loss or damage to property or
delay in its transport is not attributable to or
attended by any willful misconduct, bad
faith, recklessness, or otherwise improper
conduct on the part of any official or
employee for which the carrier is
responsible; and there is otherwise no
special or extraordinary form of resulting
injury [Alitalia Airways v. CA (1990)].
C. WILLFUL MISCONDUCT
A common carrier may not avail of the
limitation in the following cases:
(1) Willful misconduct;
(2) Default amounting to willful
misconduct [Art. 25, Warsaw
Convention];
(3) Accepting passengers without ticket
[Art. 3(2), Warsaw Convention];
(4) Accepting goods without airway bill or
baggage without baggage check.
Receipt by the person entitled to the
delivery of baggage or cargo without
complaint is prima facie evidence that the
same have been delivered in good condition
and in accordance with the document of
carriage [Art. 26, Warsaw Convention].
UP LAW BOC TRANSPORTATION LAW MERCANTILE LAW

D. JURISDICTION
An action for damages must be brought at
the option of the plaintiff:
(1) Before the court of the domicile of the
carrier;
(2) The court of its principal place of
business;
(3) The court where it has a place of
business through which the contract
had been made; or
(4) The court of the place of destination
[Art. 28 (2) WC].
When a passenger buys a roundtrip ticket,
the place of destination is the place of first
departure. E.g. In a round-trip ticket from
San Francisco Manila, the place of
destination is San Francisco [Santos v
Northwest Airlines (1992)].
Note: The Montreal Convention adds a 5th
jurisdiction: residence of the plaintiff.

PAGE 134 OF 320

UP LAW BOC CORPORATION CODE MERCANTILE LAW

MERCANTILE LAW
CORPORATION
CODE

PAGE 135 OF 320

UP LAW BOC CORPORATION CODE
I. Corporation
A. DEFINITION
Corporation is an artificial being created
by operation of law, having the right of
succession and the powers, attributes, and
properties expressly authorized by law or
incident to its existence [Sec. 2, unless
otherwise indicated, all sections cited herein
are from B.P. 68, or the Corporation Code].
B. ATTRIBUTES OF THE CORPORATION
B.1. AN ARTIFICIAL BEING
A corporation exists by fiction of law. Hence,
it can act only through its directors, officers
and employees.
Being only a juridical entity, the physical acts
of the corporation, like the signing of
documents, can be performed only by natural
persons duly authorized for the purpose by
corporate by-laws or by a special act of the
Board of Directors (BOD). [Shipside, Inc. v. CA
(2001)]
I. MORAL DAMAGES
A corporation can recover moral damages
under Art 2219 (7) if it was the victim of
defamation. [Pilipinas Broadcasting Network v.
Ago Medical and Educational Center (2005)]
II. CRIMINAL LIABILITY
Since a corporation as a person is a mere
legal fiction, it cannot be proceeded against
criminally because it cannot commit a crime
in which personal violence or malicious intent
is required. Criminal action is limited to
the corporate agents guilty of an act
am ounting to a crim e and never
against the corporation itself. [West
Coast Life Ins. Co. v. Hurd (1914); Time Inc. v.
Reyes (1971)]
III. DOCTRINE OF SEPARATE
PERSONALITY
PAGE 136 OF 320
MERCANTILE LAW
A corporation, upon coming into existence, is
invested by law with a personality separate
and distinct from those persons composing it
as well as from any other legal entity to which
it may be related. [Yutivo Sons Hardware v.
CTA (1961)]
B.2. CREATED BY OPERATION OF LAW
Mere consent of the parties to form a
corporation is not sufficient. The State must
give its consent either through a special law
[in case of government corporations] or a
general law (i.e., Corporation Code in case of
private corporations).
A corporation comes into existence upon the
issuance of the certificate of
incorporation. Then and only then will it
acquire juridical personality to sue and be
sued, enter into contracts, hold or convey
property or perform any legal act in its own
name.
B.3. HAS THE RIGHT OF SUCCESSION
Its continued existence during its stated term
cannot be affected by any change in the
members or stockholders or by any transfer of
shares by a stockholder to a third person.
B.4. HAS THE POWERS, ATTRIBUTES AND
PROPERTIES EXPRESSLY AUTHORIZED BY
LAW OR INCIDENT TO ITS EXISTENCE
A corporation has no power except those
expressly conferred on it by the Corporation
Code and by its articles of incorporation,
those which may be incidental to such
conferred powers, those that are implied from
its existence, and those reasonably necessary
to accomplish its purposes. In turn, a
corporation exercises said powers through its
BOD and/or its duly authorized officers and
agents. [Monfort Hermanos Agricultural Dev.
Corp. v. Monfort III (2004)]
UP LAW BOC CORPORATION CODE MERCANTILE LAW

Stock Non Stock

II. Classes of Composed of Composed of
Corporations stockholders members

A. STOCK CORPORATION C. OTHER CORPORATIONS

Stock corporations corporations which C.1. PUBLIC CORPORATION

have capital stock divided into shares AND Public corporation one formed or
are authorized to distribute to the holders of organized for the government of a portion of
such shares dividends or allotments of the the state. Its purpose is for the general good
surplus profits on the basis of shares held and welfare [Sec. 3, Act 1456].
[Sec. 3]. It is organized for profit.
Beyond cavil, a GOCC has a personality of its
The governing body of a stock corporation is own, distinct and separate from that of the
usually the BOD (except in certain instances, government, and the intervention in a
e.g. close corporations). transaction of the Office of the President
Note: A corporation is deemed to have the through the Executive Secretary does not
power to declare dividends. Thus, so long as change the independent existence of a
the corporation has capital stock and there is government entity as it deals with another
no prohibition in its Articles of Incorporation government entity. [Polytechnic University of
or in its by-laws for it to declare dividends, the Phils. v. CA (2001)]
such corporation is a stock corporation [Sec. Not all corporations which are not GOCC
43]. are ipso facto to be considered private
corporations as there exists another distinct
class of corporations or chartered institutions
B. NON-STOCK CORPORATION which are otherwise known as public
corporations.
All other corporations are non-stock These corporations are treated by law as
corporations [Sec. 3]. agencies or instrumentalities of the
Non-stock corporation One where no government which are not subject to the
part of the income is distributable as tests of ownership or control and
dividends to its members, trustees, or officers, economic viability but to different criteria
subject to the provisions of the Code on relating to their public
dissolution [Sec. 87]. It is not organized for purposes/interests or constitutional
profit. policies and objectives and their
adm inistrative relationship to the
Its governing body is usually the Board of government or any of its Departm ents
Trustees (BOT). However, non-stock or Offices. [Boy Scouts of the Philippines v.
corporations may, through their articles of COA (2011)]
incorporation or their by-laws, designate their
governing boards by any name other than as
board of trustees [Sec. 138]. C.2. PRIVATE CORPORATION
Stock Non Stock Private corporation One formed for
some private purpose, benefit, aim or end
Purpose is profits for Exists for purposes
[Sec. 3, Act 1456]; it may be either stock or
its shareholders other than profit
non-stock, government-owned or controlled
Profits are distributed Profits are for or quasi-public.
to shareholders furtherance of its
The test to determine whether GOCC or
purposes
private corporation: if a corporation is created

PAGE 137 OF 320

UP LAW BOC CORPORATION CODE
by its own charter for the exercise of a public
function, then GOCC; if by incorporation
under the general corporation law, then
private corporation. [Baluyot v. Holganza
(2000)]
C.3. CLOSE CORPORATION
Close corporation - One whose articles of
incorporation provide that:
(1) All issued stock, exclusive of treasury
shares, shall be held by persons not
exceeding 20;
(2) All issued stock shall be subject to one or
more specified restrictions on transfer;
and
(3) The corporation shall not list in any stock
exchange or make any public offering of
any of its stock of any class.
Notwithstanding the foregoing, a corporation
shall not be deemed a close corporation
when at least 2/3 of its voting stock or voting
rights is owned or controlled by another
corporation which is not a close corporation.
[Sec. 96]
Any corporation may be incorporated as a
close incorporation, except:
(1) mining or oil companies;
(2) stock exchanges;
(3) banks;
(4) insurance companies;
(5) public utilities;
(6) educational institutions; and
(7) corporations declared to be vested with
public interest [Sec. 96]
C.4. EDUCATIONAL CORPORATION
Educational corporation One
organized for educational purposes [Sec. 106].
C.5. RELIGIOUS CORPORATIONS
I. CORPORATION SOLE
Corporation sole is one formed for the
purpose of administering and managing, as
PAGE 138 OF 320
MERCANTILE LAW
trustee, the affairs, property and
temporalities of any religious denomination,
sect, or church, by the chief archbishop,
bishop, priest, rabbi, or other presiding elder
of such religious denomination, sect or
church [Sec.110].
A corporation sole has no nationality but for
the purpose of applying nationalization laws,
nationality is determined not by the
nationality of its presiding elder but by the
nationality of its members constituting the
sect in the Philippines. Thus, the Roman
Catholic Church can acquire lands in the
Philippines even if it is headed by the Pope.
[Roman Catholic Apostolic, etc v. Register of
Deeds of Davao City (1957)]
II. CORPORATION AGGREGATE
Corporation aggregate is a religious
corporation incorporated by more than one
person.
C.6. ELEEMOSYNARY CORPORATION
Eleemosynary corporation One
organized for a charitable purpose.
C.7. DOMESTIC CORPORATION
Dom estic corporation One formed,
organized, or existing under the laws of the
Philippines.
C.8. FOREIGN CORPORATION
Foreign corporation One formed,
organized or existing under any laws other
than those of the Philippines and whose law
allows Filipino citizens and corporations to do
business in its own country and state [Sec.
123].
C.9. CORPORATION CREATED BY SPECIAL
LAWS OR CHARTER
Corporation created by special laws or
charter - Corporations which are governed
primarily by the provisions of the special law
or charter creating them. Corporation Code
has suppletory application [Sec. 4].
UP LAW BOC CORPORATION CODE
C.10. SUBSIDIARY CORPORATION
Subsidiary corporation One in which
control, in the form of ownership of majority
of its shares, is in another corporation [the
parent corporation].
C.11. PARENT CORPORATION
Parent corporation Its control lies in its
power, directly or indirectly, to elect the
subsidiarys directors thus controlling its
management policies.
Holding com pany a parent company
which has no other business aside from the
holding of the shares of its subsidiaries,
which it controls.
Investment company a parent company
which holds shares in other corporations not
for the purpose of controlling them but
merely to invest therein.
C.12 CORPORATION DE JURE
Corporation de jure A corporation
organized in accordance with the
requirements of the law.
C.13. DE FACTO CORPORATION
De facto corporation A corporation
where there exists a flaw in its incorporation.
I. RULE ON DE FACTO
CORPORATIONS
The due incorporation of any corporation
claiming in good faith to be a corporation
under this Code, and its right to exercise
corporate powers, shall not be inquired into
collaterally in any private suit to which such
corporation may be a party. Such inquiry may
be made by the Solicitor General in a quo
warranto proceeding [Sec. 20].
General Rule: The defect in the juridical
personality of a corporation cannot be
inquired into by private individuals, much less
used as a defense to avoid claims,
Exception: In quo warranto proceedings
brought on behalf of the State where the
main action is to question the validity or
PAGE 139 OF 320
MERCANTILE LAW
existence of such juridical personality
[Villanueva].
II. REQUISITES OF DE FACTO
CORPORATION:
(1) There is an apparently valid statute
under which the corporation may be
formed;
(2) There has been colorable com pliance
with the legal requirements in good
faith; and
(3) There has been user of corporate
powers, i.e. the transaction of business
as if it were a corporation [Campos].
An association of persons cannot claim to be
a corporation if it has not been issued a
certificate of incorporation since that fact
belies the claim of good faith compliance
with the requirements of the law. [Hall v.
Piccio (1950)]
C.14 CORPORATION BY ESTOPPEL
Corporation by estoppel Where a
group of persons misrepresent themselves as
a corporation, they are subsequently
estopped from claiming lack of corporate life
in order to avoid liability;
- Also, a third party who had dealt with an
unincorporated association as a corporation
is precluded from denying its corporate
existence on a suit brought by the alleged
corporation on the contract.
I. EFFECTS
As to liability
All persons who assume to act as a
corporation knowing it to be without
authority to do so shall be liable as
general partners for all debts, liabilities
and damages incurred or arising as a result
thereof [Sec. 21].
As to the defense of lack of corporate
personality
When such ostensible corporation is sued, it
is precluded from raising the defense of lack
of corporate personality [Sec. 21].
UP LAW BOC CORPORATION CODE MERCANTILE LAW

As to third party
One who assumes an obligation to an III. Nationality of
ostensible corporation as such, cannot resist
performance thereof on the ground that there Corporations
was in fact no corporation. [Sec. 21]
The doctrine of estoppel applies to a third
party only when he tries to escape liability on A. PLACE OF INCORPORATION TEST
a contract from which he has benefited on the
ground of defective incorporation. It does not
apply to a third party who is not trying to The corporation is a national of the country
under whose laws it is organized or
escape liability from the contract, but rather
is the one claiming from the contract. incorporated [Sec. 123].
[International Express Travel v. CA (2000)] Dom estic corporations organized and
governed under and by Philippine laws

II. DE FACTO CORPORATION VS. Foreign corporations organized under

CORPORATION BY ESTOPPEL
De facto Estoppel
Where all the If any of the
requisites of a de requisites are absent,
facto corporation are then the estoppel
present, then the doctrine may be
defectively formed applied only if any of
corporation will have the parties is
the status of a de jure estopped from
corporation in all defending:
cases brought by or
(1) the defendant
against it, except
association is
only as to the State in
estopped from
a direct proceeding
defending on the
ground of its lack
of capacity to be
sued, or
(2) the defendant
third party had
dealt with the
plaintiff as a
corporation and
is deemed to
have admitted its
existence.
PAGE 140 OF 320
laws other than those of the Philippines and
can operate only in the territory of the state
under whose laws it was formed. However,
they may be licensed to do business here
[Campos].
B. CONTROL TEST
A corporation shall be considered a Filipino
corporation if the Filipino ownership of its
capital stock is at least 60%, and where the
60-40 Filipino-alien equity ownership is NOT
in doubt [SEC Opinion dated 6 November
1989; DOJ Opinion No. 18, s. 1989].
Therefore, its shareholdings in another
corporation shall be considered to be of
Filipino nationality when computing the
percentage of Filipino equity of that second
corporation [SEC Opinion dated 23 November
1993].
Control test is applied in the following:
Exploitation of natural resources -
Only Filipino citizens or corporations
whose capital stock is at least 60% owned
by Filipinos can qualify to exploit natural
resources. [Sec. 2, Art. XII, Const.]
Public Utilities - no franchise,
certificate or any other form of
authorization for the operation of a public
utility shall be granted except to citizens of
the Philippines or to corporations or
associations organized under the laws of
the Philippines at least 60% of whose
UP LAW BOC
capital is owned by such citizens. [Sec. 11,
Art. XII, Const.]
The term "capital" in Sec. 11, Article XII of
the 1987 Constitution refers only to shares
of stock entitled to vote in the
election of directors, and thus in the
present case only to common shares, and not
to the total outstanding capital stock
[common and non-voting preferred shares].
Compliance with the required Filipino
ownership of a corporation shall be
determined on the basis of outstanding
capital stock whether fully paid or not,
but only such stocks which are generally
entitled to vote are considered.
For stocks to be deemed owned and
held by Philippine citizens or
Philippine nationals, mere legal title
is not enough to m eet the required
Filipino equity. Full beneficial
ownership of the stocks, coupled with
appropriate voting rights is essential.
Thus, stocks, the voting rights of which have
been assigned or transferred to aliens cannot
be considered held by Philippine citizens or
Philippine nationals. [Gamboa v. Teves (2011)]
The SC, however, reversed its ruling in 2012.
The term capital is not lim ited to
voting shares since the constitutional
requirement of at least 60 % Filipino
ownership applies not only to voting
control of the corporation, but also to
the beneficial ownership of the
corporation. It is therefore imperative that
such requirement apply uniformly and across
the board to all classes of shares, regardless
of nomenclature and category, comprising
the capital of a corporation.
Preferred shares, denied the right to vote in
the election of directors, are anyway still
entitled to vote on the eight specific
corporate matters under Sec. 6. of the
Corporation Code.
Thus, the 60-40 ownership
requirem ent in favor of Filipino
citizens m ust apply separately to each
class of shares, whether com m on,
preferred non-voting, preferred voting
or any other class of shares. [Gamboa v.
Teves, (2012)]
CORPORATION CODE MERCANTILE LAW
SEC Mem orandum Circular No. 8 dated
20 May 2013
Sec. 1. Covered corporations: All corporations
engaged in identified areas of activities or
enterprises specifically reserved, wholly or
partly, to Philippine Nationals by the
Constitution, the FIA and other existing laws,
amendments thereto and IRRs of said laws
except as may otherwise be provided therein.
Sec. 2. All covered corporations shall, at all
times, observe the constitutional or statutory
ownership requirement. For purposes of
determining compliance therewith, the
required percentage of Filipino ownership
shall be applied to both
(1) the total number of outstanding shares of
stock entitled to vote in the election of
directors; AND
(2) the total number of outstanding shares of
stock, whether or not entitled to vote in
the election of directors.
C. GRANDFATHER RULE
Method used when a domestic corporation
has both domestic and foreign stockholders
to determine whether or not said corporation
is qualified to engage in a partially
nationalized business [Campos].
It involves the computation of Filipino
ownership of a corporation in which another
corporation of partly Filipino and partly
foreign equity owns capital stock. The
percentage of shares held by the second
corporation in the first is multiplied by the
latters own Filipino equity, and the product
of these percentages is determined to be the
ultimate Filipino ownership of the subsidiary
corporation.
The Grandfather Rule must be applied to
accurately determine the actual participation,
both direct and indirect, of foreigners in a
corporation engaged in a nationalized activity
or business. [SEC Opinion re: Silahis Intl Hotel
(1987)]
Compliance with the constitutional
limitation[s] on engaging in nationalized
activities must be determined by ascertaining
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UP LAW BOC CORPORATION CODE MERCANTILE LAW

if 60% of the investing corporations below the threshold 60% , the

outstanding capital stock is owned by corporation is im m ediately considered
Filipino citizens, or as interpreted, by foreign-owned, in which case, the
natural or individual Filipino citizens. If such need to resort to the Grandfather
investing corporation is in turn owned to Rule disappears.
some extent by another investing corporation,
On the other hand, a corporation that
the same process must be observed. One
complies with the 60-40 Filipino to foreign
must not stop until the citizenships of the
equity requirement can be considered a
individual or natural stockholders of layer
Filipino corporation if there is no doubt as to
after layer of investing corporations have
who has the beneficial ownership and
been established, the very essence of the
control of the corporation. In that instance,
Grandfather Rule. [Redmont Consolidated
there is no need for a dissection or further
Mines, Corp v. McArthur Mining, Inc., et al.
inquiry on the ownership of the corporate
(2010)]
shareholders in both the investing and
The Grandfather Rule applies only when the investee corporation or the application of the
60-40 Filipino foreign equity ownership is in Grandfather Rule. As a corollary rule, even if
doubt [i.e. in cases where the joint venture the 60-40 Filipino to foreign equity
corporation with Filipino and foreign ratio is apparently m et by the subject
stockholders with less than 60% Filipino or investee corporation, a resort to
stockholdings (or 59%) invests in another the Grandfather Rule is necessary if
joint venture corporation which is either 60- doubt exists as to the locus of the
40% Filipino alien or 59% less Filipino]. beneficial ownership and control.
Stated differently, where the 60-40 In this case (where based on the
Filipino foreign equity ownership is incorporation papers, the Filipino-Owned
not in doubt, the Grandfather Rule corporation subscribed to 60% of the capital
will not apply. [Narra Nickel Mining and while the foreign corporation subscribed to
Dev. Corp v. Redmont Consolidated Mines 40% but the subscription of the former is only
Corp. (2014)] nominally paid-up and such corporation
entered into a financial assistance agreement
The Control Test can be, as it has been,
with the foreign-owned corporation), a
applied jointly with the Grandfather Rule to
further investigation as to the nationality of
determine the observance of foreign
the personalities with the beneficial
ownership restriction in nationalized
ownership and control of the corporate
economic activities. The Control Test and the
shareholders in both the investing and
Grandfather Rule are not, as it were,
investee corporations is necessary. [Narra
incompatible ownership-determinant
Nickel Mining and Dev. Corp v. Redmont
methods that can only be applied alternative
Consolidated Mines Corp. (2015)]
to each other. Rather, these methods can, if
appropriate, be used cumulatively in the
determination of the ownership and control
of corporations engaged in fully or partly
nationalized activities.
The Grandfather Rule, standing alone, should
not be used to determine the Filipino
ownership and control in a corporation, as it
could result in an otherwise foreign
corporation rendered qualified to perform
nationalized or partly nationalized activities.
Hence, it is only when the Control
Test is first complied with that the
Grandfather Rule may be applied. Put
in another m anner, if the subject
corporations Filipino equity falls
PAGE 142 OF 320
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FULLY/PARTIALLY NATIONALIZED
AREAS
IV. Corporate Juridical
Nationality Industry
Requirement Personality
100% Filipino Retail Trade It commences from the date the SEC issues a
ownership certificate of incorporation under its official
Rural Banks seal [Sec. 19].
Mass Media
75% Filipino Inter-island
ownership shipping industry A. DOCTRINE OF SEPARATE JURIDICAL
70% voting stock Banks [except PERSONALITY
Filipino ownership Rural Banks]
[but may be reduced CONCEPT
to 60%] A corporation has a personality separate
60% capital stock Public utilities, and distinct from that of its stockholders
Filipino ownership corporations and members and is not affected by the
engaged in personal rights, obligations, and transactions
exploration, of the latter.
exploitation and A corporation, upon coming into existence, is
utilization of invested by law with a personality separate
natural resources and distinct from the persons comprising it as
well as from any other legal entity to which it
Educational may be related. By this attribute, a
institutions stockholder may not, generally, be made to
answer for acts or liabilities of said
corporation, and vice versa. [Land Bank of the
Philippines v. CA (2001)]

PROPERTY
Stockholders have no claim on corporate
property as owners, but mere expectancy or
inchoate right to the same upon dissolution
of the corporation after all corporate creditors
have been paid. Such right is limited only to
their equity interest (doctrine of lim ited
liability). Although a stockholders interest
in the corporation may be attached by his
personal creditor, corporate property cannot
be used to satisfy his claim. [Wise and Co. v.
Man Sun Lung (1940)]

A.1. LIABILITY FOR TORTS AND CRIMES

Being an entity with a separate juridical
personality, a corporation can be held liable
for torts committed by its officers for
corporate purpose. [PNB v. CA (1978)]

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A.2. RECOVERY OF MORAL DAMAGES
General rule: A corporation has the power
to sue in its corporate name. [Sec. 36]
Exception: Moral damages cannot be
awarded in favor of corporations because
they do not have feelings and cannot
experience mental suffering. They may not
even claim moral damages for besmirched
reputation. [NAPOCOR v. Philipp Brothers
Oceanic (2001)]
Exception to the Exception: However,
a corporation can recover moral damages
under Art 2219 [7] if it was the victim of
defamation, as it does not qualify whether
the plaintiff is a natural or juridical person.
[Pilipinas Broadcasting Network v. Ago
Medical and Educational Center (2005)]
CONSTITUTIONAL RIGHTS
Corporate entities are entitled to due process,
equal protection, and protection against
unreasonable searches and seizures.
However, a corporation is not entitled to the
privilege against self-incrimination. [Bataan
Shipyard and Engg Co. v. PCGG (1987)]
B. DOCTRINE OF PIERCING THE
CORPORATE VEIL
Piercing the veil of corporate entity is merely
an equitable remedy, and may be granted
only in cases:
(1) when the corporate fiction is used to
defeat public convenience, justify
wrong, protect fraud or defend crime
[Koppel Phil v. Yatco (1946)]; or
(2) where the corporation is a mere alter
ego; or
(3) where the corporation is a business
conduit of a person. [Yutivo Sons v.
CTA, (1961)]
In order to disregard the separate juridical
personality of a corporation, the
wrongdoing must be clearly and
convincingly established. In the absence
of any malice or bad faith, a stockholder or an
officer of a corporation cannot be made
PAGE 144 OF 320
MERCANTILE LAW
personally liable for corporate liabilities. The
mere fact that a stockholder owns majority of
the stock of a corporation is not a ground to
conclude that said stockholder and
corporation are one and the same. [Land
Bank of the Philippines v. CA (2001)]
The veil of corporate fiction treats as separate
and distinct the affairs of a corporation and
its officers and stockholders. As a general
rule, a corporation will be looked upon as a
legal entity, unless and until sufficient reason
to the contrary appears. When the notion of
legal entity is used to defeat public
convenience, justify wrong, protect fraud, or
defend crime, the law will regard the
corporation as an association of
persons. Also, the corporate entity may be
disregarded in the interest of justice in such
cases as fraud that may work inequities
among members of the corporation
internally, involving no rights of the public or
third persons. In both instances, there must
have been fraud and proof of it. [Suldao v.
Cimech System Construction, Inc. (2006)]
B.1. GROUNDS FOR APPLICATION OF
DOCTRINE
The corporate fiction may be pierced if used:
(1) to defraud the government of taxes due
it;
(2) to evade payment of civil liability;
(3) by a corporation which is merely a
conduit or alter ego of another
corporation;
(4) to evade compliance with contractual
obligations; or
(5) to evade financial obligation to its
employees.
Only in these and similar instances may the
veil be pierced and disregarded: to ward off a
judgment credit, to avoid inclusion of
corporate assets as part of the estate of the
decedent, to escape liability arising from a
debt, or to perpetuate fraud and/or confuse
legitimate issues either to promote or to
shield unfair objectives to cover up an
otherwise blatant violation of the prohibition
against forum shopping. [PNB v. Andrada
Electric and Engineering Co. (2002)]
UP LAW BOC CORPORATION CODE
B.2. TEST IN DETERMINING
APPLICABILITY
General rule: the mere fact that a
corporation owns all or substantially all of
the stocks of another corporation is not
sufficient to justify their being treated as one
entity.
Exception: the subsidiary is a mere
instrum entality of the parent corporation.
Circumstances rendering subsidiary
an instrum entality:
(1) the parent corporation owns all or most
of the subsidiarys capital stock;
(2) the parent and subsidiary corporations
have common directors or officers;
(3) the parent corporation finances the
subsidiary;
(4) the parent corporation subscribes to all
the capital stock of the subsidiary or
otherwise causes its incorporation;
(5) the subsidiary has grossly inadequate
capital;
(6) the parent corporation pays the salaries
and other expenses or losses of the
subsidiary;
(7) the subsidiary has substantially no
business except with the parent
corporation or no assets except those
conveyed to or by the parent corporation;
(8) in the papers of the parent corporation or
in the statements of its officers, the
subsidiary is described as a department
or division of the parent corporation or its
business or financial responsibility is
referred to as the parent corporations
own;
(9) the parent corporation uses the property
of the subsidiary as its own;
(10) the directors or executives of the
subsidiary do not act independently in the
interest of the subsidiary but take their
orders from the parent corporation in the
latters interest; and
(11) the formal ledger requirements of the
subsidiary are not observed. [PNB v.
Ritratto Group (2001)]
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MERCANTILE LAW
V. Incorporation and
Organization
A. PROMOTER
Promoters are persons who, acting alone
or with others, take initiative in founding and
organizing the business or enterprise of the
issuer and receives consideration therefor
[Sec. 3.10, RA 8799, The Securities Regulation
Code].
A.1. LIABILITY OF PROMOTER
General rule: the promoter binds himself
personally and assumes the responsibility
of looking to the proposed corporation for
reimbursement.
Exceptions:
(1) Express or implied agreement to the
contrary
(2) Novation, not merely adoption or
ratification of the contract
A.2. LIABILITY OF CORPORATION FOR
PROMOTERS CONTRACTS
General rule: A corporation is NOT bound
by the contract. A corporation, until
organized, has no life and no legal existence.
It could not have had an agent [the promoter]
who could legally bind it. [Cagayan Fishing
Development Co., Inc. v. Sandiko (1937)]
Exceptions: A corporation may be bound by
the contract if it makes the contract its own
by:
(1) Adoption or ratification of the ENTIRE
contract after incorporation.
Note:
A corporations power to adopt a
contract [by its promoters] must be
understood to be limited to such
contracts as the corporation itself,
after its organization, would be
authorized to make. [Builders Duntile
Co. v. Dunn Mfg. Co. (1929)]
UP LAW BOC CORPORATION CODE MERCANTILE LAW

Novation or the intent to novate the courts is that a contract made by

original contract is required to adopt
or ratify the pre-incorporation contract.
[Campos]
The Courts ruling in Cagayan Fishing v.
Teodoro Sandiko, that a corporation
should have a full and complete
organization and existence as an
entity before it can enter into any kind
of a contract or transact any business,
is not absolute. One of the
exceptions recognized by American
the prom oters of a corporation
on its behalf m ay be adopted,
accepted or ratified by the
corporation when organized.
[Rizal Light v. PSC and Morong Electric
(1968)]
(2) Acceptance of benefits under the contract
with knowledge of the terms thereof.
(3) Performance of its obligation under the
contract

STEPS IN INCORPORATION
Steps
a. Prom otional Stage
(See SEC. 2. Definitions)
b. Drafting articles of
incorporation. (See SEC. 14)
c. Filing of articles;
payment of fees.
d. Exam ination of
articles; approval or
rejection by SEC.
Comments
Prom oter
brings together persons who become interested in the
enterprise
aids in procuring subscriptions and sets in motion the
machinery which leads to the formation of the corporation itself
formulates the necessary initial business and financial plans
and, if necessary, buys the rights and property which the
business may need, with the understanding that the
corporation when formed, shall take over the same.
(see chart below)
AOI & the treasurers affidavit duly signed & acknowledged
must be filed w/ the SEC & the corresponding fees paid
failure to file the AOI will prevent due incorporation of the
proposed corporation & will not give rise to its juridical
personality. It will not even be a de facto corp.
Under present SEC rules, the AOI once filed , will be published
in the SEC Weekly Bulletin at the expense of the corp.
(SEC Circular # 4, 1982).
Process:
(a) SEC shall examine them in order to determine whether they are
in conformity w/ law.
(b) If not, the SEC must give the incorporators a reasonable time
w/in w/c to correct or modify the objectionable portions.

Grounds for rejection or disapproval of AOI:

(a) AOI /amendment not substantially in accordance w/ the form
prescribed

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Steps Comments
(b) purpose/s are patently unconstitutional, illegal, immoral, or
contrary to government rules & regulations;
(c) Treasurers Affidavit is false;
(d) required percentage of ownership has not been complied
with (Sec. 17)
(e) corp.s establishment, organization or operation will not be
consistent w/ the declared national economic policies (to be
determined by the SEC, after consultation w/ BOI, NEDA or any
appropriate government agency -- PD 902-A as amended by
PD 1758, Sec. 6 (k))
Decisions of the SEC disapproving or rejecting AOI may be appealed
to the CA by petition for review in accordance w/ the ROC.
e. Issuance of certificate Certificate of Incorporation will be issued if:
of incorporation.
(a) SEC is satisfied that all legal requirements have been complied
with; and
(b) there are no reasons for rejecting or disapproving the AOI.

It is only upon such issuance that the corporation acquires

juridical personality. (See Sec. 19. Commencement of corporate
existence)
Should it be subsequently found that the incorporators were
guilty of fraud in procuring the certificate of incorporation, the
same may be revoked by the SEC, after proper notice & hearing.

B. NUMBER AND QUALIFICATIONS OF C. CORPORATE NAME LIMITATIONS

INCORPORATORS ON USE OF CORPORATE NAME

(1) Natural Persons Corporate name

(2) Any number from 5-15
(3) Majority are residents of the Philippines
(4) Each incorporator must own or be a
subscriber to at least 1 share of the
capital stock of the corporation [Sec. 20]
(1) Must not be identical or deceptively or
confusingly similar to that of any existing
corporation or to any other name already
protected by law
(2) Not patently deceptive, confusing or
contrary to existing laws [Sec. 18]

Change of corporate name requires the

amendment of the Articles of Incorporation:
majority vote of the board and the vote or
written assent of stockholders holding 2/3 of
the outstanding capital stock [Sec. 16].

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Amendment of a corporations Articles of
Incorporation to change its corporate name
does not extinguish the personality of the
original corporation. It is the same
corporation with a different name, and its
character is not changed. Consequently, the
new corporation is still liable for the debts
and obligations of the old corporation.
[Republic Planters Bank v. CA (1992)]
D. CORPORATE TERM
General rule: A corporation shall exist for a
period not exceeding 50 years from the date
of incorporation. [Sec. 11]
Exceptions:
(1) Sooner dissolved
(2) Period extended
For periods not exceeding 50 years in
any single instance by an amendment
of the Articles of Incorporation
Extensions may not be made earlier
than 5 years prior to the original or
subsequent expiry date[s] [Sec. 11]
Except: If the SEC determines that
there are justifiable reasons for an
earlier extension.
Rationale: Corporations are creatures of
the law through the State legislature. The
State is therefore concerned that this
privilege be enjoyed by corporations only
under the conditions and not beyond the
period that it sees fit to grant; and
particularly, that it not be abused in fraud
and to the detriment of other parties; and for
this reason, it has been ruled that the
limitation to a definite period is an exercise of
control in the interest of the public. [Benguet
Consolidated Mining Co. v. Pineda (1956)]
E. MINIMUM CAPITAL STOCK AND
SUBSCRIPTION REQUIREMENTS
Stock corporations incorporated under the
Corporation Code shall not be required to
have a minimum authorized capital stock
[Sec 12]
CORPORATION CODE MERCANTILE LAW
Except as provided for by special law and
subject to the provisions of Sec. 13
Amount of Capital Stock to be
Subscribed and Paid for the Purposes
of Incorporation
(1) At the time of incorporation, at least 25%
of the authorized capital stock stated in
the Articles of Incorporation should be
subscribed;
(2) At least 25% of the total subscription
must be paid upon subscription;
(3) The balance to be payable on
Dates fixed in the subscription contract
without need of call or
Upon call by the BOD in the absence of
fixed dates
(4) The paid-up capital can in no case be
lower than P5,000.00 [Sec. 13]
F. ARTICLES OF INCORPORATION
F.1. NATURE AND FUNCTION OF ARTICLES
Constitutes the charter of the corporation
and sets forth the rules and conditions
upon which the association or corporation
is founded
Defines the contractual relationships
between the State and the corporation, the
stockholders and the State, and the
corporation and the stockholders
The Articles must be filed with the SEC for
the issuance of the Certificate of
Incorporation.
F.2. CONTENTS
I. CORPORATE NAME
(1) Must not be identical or deceptively or
confusingly similar to that of any existing
corporation or to any other name already
protected by law
(2) Not patently deceptive, confusing or
contrary to existing laws [Sec. 18]
The policy underlying the prohibition against
the registration of a corporate name which is
PAGE 148 OF 320
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identical or deceptively or confusingly
similar to that of any existing corporation or
which is patently deceptive or patently
confusing or contrary to existing laws is:
(1) The avoidance of fraud upon the public
which would have occasion to deal with
the entity concerned;
(2) The prevention of evasion of
legal obligations and duties, and
(3) The reduction of difficulties of
administration and supervision over
corporations. [Lyceum of the Philippines v.
CA (1993)]
To determine whether a given corporate
name is "identical" or "confusingly or
deceptively similar" with another entity's
corporate name, one must evaluate corporate
names in their entirety.
The corporate name shall contain the word
Corporation or Incorporated, or the
abbreviations Corp. or Inc. respectively.
[SEC Memo Circ. No.5, s.2008]
Business or trade name which is different
from the corporate name shall be indicated in
the articles of incorporation. A company may
have more than one business or trade name.
[SEC Memo Circ. No. 12, s. 2008]
Change of corporate name requires the
amendment of the Articles of Incorporation:
majority vote of the board and the vote or
written assent of stockholders holding 2/3 of
the outstanding capital stock, or the vote of
or written assent of at least 2/3 of the
members if non-stock [Sec. 16].
Amendment of a corporations Articles of
Incorporation to change its corporate name
does not extinguish the personality of the
original corporation. It is the same
corporation with a different name, and its
character is not changed. Consequently, the
new corporation is still liable for the debts
and obligations of the old corporation.
[Republic Planters Bank v. CA (1992)]
II. PURPOSE CLAUSE
Must indicate the specific PRIMARY and
SECONDARY purposes if there are more
than one purpose, which should not
PAGE 149 OF 320
MERCANTILE LAW
contradict or change the nature of the
corporation [Sec. 14(2)]
Must not be patently unconstitutional,
illegal, immoral, and contrary to
government rules and regulations [Sec. 17
(2)].
Must not be for the purpose of practicing a
profession. [People v. United Medical Service,
200 N.E. 157, cited in Campos]
Under the present state of our law and
jurisprudence, a corporation cannot be
organized for or engage in the practice of
law in this country. This interdiction, just
like the rule against unethical advertising,
cannot be subverted by employing some
so-called paralegals supposedly rendering
the alleged support services. The remedy
for the apparent breach of this prohibition
is the concern and province of the Solicitor
General who can institute the
corresponding quo warranto action, after
due ascertainment of the factual
background and basis for the grant of the
corporate charter, in light of the putative
misuse thereof. [Ulep v. The Legal Clinic
(1993)]
III. PRINCIPAL OFFICE
Must be within the Philippines [Sec. 14 (3)]
Articles of Incorporation must specify both
province or city or town where it is located
SEC Circular No. 3-2006: A specific
address is now required; merely indicating
Metro Manila is no longer allowed.
Important for [1] determining venue in an
action by or against the corporation, and [2]
determining the province where a chattel
mortgage of shares should be registered.
[Chua Guan vs. Samahang Magsasaka (1935)]
The residence of a corporation is the place
where its principal office is located, as stated
in its Articles of Incorporation. To insist that
the proper venue is the actual principal office
and not that stated in its Articles of
Incorporation would indeed create confusion
and work untold inconvenience. Enterprising
litigants may, out of some ulterior motives,
easily circumvent the rules on venue by the
UP LAW BOC CORPORATION CODE MERCANTILE LAW

simple expedient of closing old offices and If STOCK corporation:

opening new ones in another place that they
may find well to suit their needs. [Hyatt
Elevators v. Goldstar Elevators (2005)]
IV. CORPORATE TERM
Maximum life of 50 years.
Extendible for a period not exceeding 50
years at any one instance. No extension,
however, can be made earlier than 5 years
before the end of the term. [Sec. 11]
Extension requires an amendm ent of
the Articles of Incorporation subject to
the exercise of appraisal right by the
dissenting stockholder [Sec. 37].
V. NAMES, CITIZENSHIP AND
RESIDENCES OF INCORPORATORS
VI. NUMBER, NAMES, CITIZENSHIP
AND RESIDENCES OF
DIRECTORS/TRUSTEES.
Stock corporations: directors
Non-stock corporations: trustees
General rule: Not less than 5 but not more
than 15 directors/trustees
Exceptions: Non-stock corporations whose
articles or by-laws may provide for more than
15 trustees [Sec. 92]
Banks may have up to 21 directors for cases of
mergers and consolidation. [Sec. 17, General
Banking Act]
Educational non-stock corporations:
trustees may not be less than 5 nor exceed
15
number of trustees shall be in multiples of
5 [Sec. 108]
Nationalized or partly-nationalzed
industries
Aliens may be directors but only in such
number as may be proportional to their
allowable ownership of shares
authorized capital stock in lawful money of
the Philippines
the number of shares into which the ACS is
divided
If with par value shares, the par value of
each share [Sec. 14[8], Sec. 15[7]].
names, citizenship, residences of original
subscribers
amount subscribed and paid on each
subscription
fact that some or all shares are w/o par
value
If NON-STOCK:
amount of capital
names, nationalities and residences of
contributors
amount contributed by each
VII. AMOUNT PAID BY EACH
SUBSCRIBER ON THEIR
SUBSCRIPTION, W HICH SHALL NOT
BE LESS THAN 25% OF SUBSCRIBED
CAPITAL AND SHALL NOT BE LESS
THAN P5,000 [Sec 15 (8,9)]
VIII. NAME OF TREASURER ELECTED
BY THE SUBSCRIBERS [Sec 15(10)]
IX. OTHER MATTERS
(1) Classes of shares, as well as preferences
or restrictions on any such class [Sec. 6].
(2) Denial or restriction of pre-emptive right
[Sec.39].
(3) Prohibition against transfer of stock
which would reduce stock ownership to
less than the required minimum in the
case of a nationalized business or activity
[Sec. 15(11)].

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No transfer clause land. No law disqualifies a person from

purchasing shares in a landholding
If the foreign shareholdings of a landholding
corporation even if the latter will exceed the
corporation exceeds 40%, it is not the foreign
allowed foreign equity, what the law
stockholders ownership of the shares which
disqualifies is the corporation from owning
is adversely affected but the capacity of the
land. [J.G. Summit Holdings, Inc. v. CA
corporation to own land that is, the
(2005)]
corporation becomes disqualified to own

Contents of AOI Comments

Corporate Essential to its existence since it is through it that the corporation can sue and
Name be sued and perform all legal acts
A corporate name shall be disallowed by the SEC if the proposed name is
either:
(1) identical or deceptively or confusingly similar to that of any existing
corporation or to any other name already protected by law; or
(2) patently deceptive, confusing or contrary to existing laws. (Sec. 18)
LYCEUM OF THE PHILS. VS. CA (219 SCRA 610)
The policy underlying the prohibition against the registration of a corporate name
which is identical or deceptively or confusingly similar to that of any existing
corporation or which is patently deceptive or patently confusing or contrary to
existing laws is:
(1) the avoidance of fraud upon the public which would have occasion to deal
with the entity concerned;
(2) the prevention of evasion of legal obligations and duties, and
(3) the reduction of difficulties of administration and supervision over
corporations.
Purpose A corporation can only have one (1) primary purpose. However, it can have
Clause several secondary purposes.
A corporation has only such powers as are expressly granted to it by law & by
its articles of incorporation, those which may be incidental to such conferred
powers , those reasonably necessary to accomplish its purposes & those which
may be incident to its existence.
Corporation may not be formed for the purpose of practicing a profession like
law, medicine or accountancy
Principal Must be within the Philippines
Office
Must specify city or province
Street/number not necessary
important in determining venue in an action by or against the corp., or on
determining the province where a chattel mortgage of shares should be
registered
Term of Cannot specify term which is longer than 50 years at a time
Existence
May be renewed for another 50 years, but not earlier than 5 years prior to the

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Contents of AOI Comments

original or subsequent expiry date UNLESS there are justifiable reasons for an
earlier extension.
Incorporators Names, nationalities & residences of the incorporators;
and Directors
Names, nationalities & residences of the directors or trustees who will act as
such until the first regular directors or trustees are elected;
Treasurer who has been chosen by the pre-incorporation
subscribers/members to receive on behalf of the corporation, all subscriptions
/contributions paid by them.
Capital Stock Amount of its authorized capital stock in lawful money of the Philippines
Number of shares into which it is divided
In case the shares are par value shares, the par value of each,
Names, nationalities and residences of the original subscribers, and the
amount subscribed and paid by each on his subscription, and if some or all of
the shares are without par value, such fact must be stated
For a non-stock corporation, the amount of its capital, the names, nationalities
and residences of the contributors and the amount contributed by each
25% of 25% rule to be certified by Treasurer
Paid up capital should not be less than P5,000
Other Classes of shares into w/c the shares of stock have been divided, preferences
matters of, and restrictions on any such class; and any denial or restriction of the pre-
emptive right of stockholders should also be expressly stated in said articles.
If the corporation is engaged in a wholly or partially nationalized business or
activity, the AOI must contain a prohibition against a transfer of stock which
would reduce the Filipino ownership of its stock to less than the required
minimum.

F.3. AMENDMENT I. LIMITATIONS

Amendment of the Articles of (1) Requirements imposed by the Code or by
Incorporation special laws
(1) By a majority vote of the BOD or trustees (2) Must be for a legitimate purpose
(2) And the vote or written assent of (3) Must be approved by the
directors/trustees and the
2/3 of the outstanding capital stock, stockholders/members through the vote
without prejudice to the appraisal right requirement
of dissenting stockholders in
accordance with the provisions of this (4) Appraisal Right
Code, (5) Both the original and the amended
2/3 of the members if it be a non-stock articles together must contain all the
corporation. [Sec. 16] provisions required by law to be set out in
the articles

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(6) If the corporation is governed by a special
law, the amended articles must be
accompanied by a favorable
recommendation of the appropriate
government agency to the effect that
such amendment is in accordance with
law [Lopez]
(7) Will take effect only
Upon their approval by the SEC by the
issuance of a certificate of amended
articles
Or from the date of filing with the SEC if
not acted upon within 6 months from
the date of filing for a cause not
attributable to the corporation
II. PROCEDURE
(1) The original and amended articles
together shall contain all provisions
required by law to be set out in the
articles of incorporation
(2) The articles, as amended shall be
indicated by underscoring the change or
changes made
(3) A copy shall be submitted to the SEC
Duly certified under oath by the
corporate secretary and a majority of
the directors or trustees
Stating the fact that the amendment or
amendments have been duly approved
by the required vote of the stockholders
or members
The following items are amendable under
Sec. 16:
(1) Change of name of the Corporation
(2) Adding to or changing the purpose/s
(3) Change of principal office
(4) Change in the number of directors or
trustees
(5) Increase or decrease in authorized capital
stock [subject to Sec. 38]
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MERCANTILE LAW
F.4. NON-AMENDABLE ITEMS
The following items state accomplished facts,
therefore, cannot be amended:
(1) The names, nationalities and residences
of the incorporators.
Otherwise, an amendment would go
against the definition of
incorporators in Sec. 5
(2) Treasurer-in-trust
(3) First set of directors or trustees
(4) Original stock subscriptions and paid-in
capital
(5) Place and date of execution
(6) Witnesses [De Leon]
Note: Articles of Incorporation must be
accompanied by Treasurers sworn statement
of compliance with Sec. 13 on amount of
capital to be subscribed and paid for the
purposes of incorporation; otherwise, SEC
shall not accept the Articles of Incorporation
[Sec. 14].
G. REGISTRATION AND ISSUANCE OF
CERTIFICATE OF INCORPORATION
G.1. REGISTRATION OF THE ARTICLES OF
INCORPORATION
DOCUMENTS TO BE FILED W ITH SEC:
(1) Articles of Incorporation, and By-Laws (if
crafted prior to incorporation)
(2) Treasurers Affidavit certifying that 25%
of the total authorized capital stock has
been subscribed and at least 25% of such
has been fully paid in cash or property
[Note: SEC Resolution No. 0331 dated
July 20, 2012 no longer requires a bank
certificate of deposit covering the paid-up
capital if payment for shares is made in
cash; where the capital stock is paid by a
combination of cash and property, only
the portion paid by way of property will
require the submission of supporting
documents.]
(3) Letter authority authorizing the SEC to
examine the bank deposit and other
UP LAW BOC CORPORATION CODE
corporate books and records to
determine the existence of paid-up
capital
(4) Undertaking to change the corporate
name in case there is another person or
entity with same or similar name that was
previously registered
(5) Certificate of authority from proper
government agency whenever
appropriate like BSP for banks and
Insurance Commission for insurance
corporations. [Sundiang and Aquino]
G.2. ISSUANCE OF CERTIFICATE OF
INCORPORATION BY SEC
Effect: Commencement of corporate
existence and juridical personality [Sec. 19]
Revocation of certificate of incorporation: If
incorporators are found guilty of fraud in
procuring the same after due notice and
hearing [Sec. 6(i), PD 902-A]
G.3. GROUNDS FOR DISAPPROVING THE
ARTICLES OF INCORPORATION:
Does not substantially comply with form
prescribed
Purpose is patently unconstitutional, illegal,
immoral, contrary to government rules and
regulations
Treasurers Affidavit concerning the
amount of capital subscribed and or paid is
false
Required percentage of ownership of
Filipino citizens has not been complied with
when required by existing laws or the
Constitution. [Sec. 17]
REMEDY in case of rejection - petition for
review in accordance with the Rules of Court,
i.e. Rule 43 [Sec. 6, last par., PD 902-A]
SEC shall give the incorporators reasonable
tim e to correct or modify objectionable
portions of the articles or amendment [Sec.
17].
PAGE 154 OF 320
MERCANTILE LAW
H. ADOPTION OF BY-LAWS
By-laws has traditionally been defined as
regulations, ordinances, rules or laws
adopted by an association or corporation for
its internal governance, including rules for
routine matters such as calling meetings
[SMC v. Mandaue (2005)].
Adoption of By-Laws
May be done either:
(1) Prior to incorporation - approved and
signed by all the incorporators and
submitted to SEC together with Articles
of Incorporation; or
(2) After incorporation - within 1 month
after receipt of official notice of the
issuance of its certificate of incorporation
by the SEC. [Sec. 46]
Effect of failure to file the By-Laws
within the period
Does not im ply the "dem ise" of the
corporation. By-laws may be required by law
for an orderly governance and management
of corporations but they are not essential to
corporate birth. Nonetheless, failure to file
them within the period required by law by no
means tolls the automatic dissolution of a
corporation. [Loyola Grand Villas Homeowners
Association v. CA (1997)]
Note: Sec. 22 on the effect of failure to
formally organize within 2 years from
incorporation, the corporations corporate
powers cease and the corporation is deemed
dissolved. Organization includes: the filing
and approval of by-laws with the SEC and the
election of directors and officers [Campos].
H.1. NATURE AND FUNCTIONS OF BY-
LAWS
Nature: It is a product of agreement of the
stockholders or members [Campos].
Function: It establishes the rules for
internal government of the corporation
[Campos].
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It also regulates the affairs and relationship II. HOW DELEGATION REVOKED:
between and among stockholders, BOD and
Any power delegated to the BOD or trustees
corporation [Lopez].
to amend or repeal any by-laws or adopt new
by-laws shall be considered as revoked
whenever stockholders owning or
H.2. REQUISITES OF VALID BY-LAWS
representing a majority of the outstanding
Approval requirement: Must be approved capital stock or a majority of the members in
by the affirmative vote of the stockholders non-stock corporations, shall so vote at a
representing MAJORITY of the outstanding regular or special meeting. [Sec. 48]
capital stock or majority of members
If filed pre-incorporation: must be approved
and signed by all incorporators
Record-Keeping: Must be kept in the
principal office of the corporation, subject to
inspection of stockholders or members during
office hours [Sec. 74]
No provision of the by-laws can be adopted if
it is contrary to law. [Grace Christian High
School v. CA (1997)]

H.3. BINDING EFFECTS

When Binding: ONLY from date of issuance
of SEC of a certification that the by-laws are
not inconsistent with the Code [Sec. 48]
Pending such approval, they cannot bind
stockholders or corporation
Effect to third parties: Mere internal
rules among stockholders and cannot affect
or prejudice 3rd persons who deal with the
corporation unless they have knowledge of
the same [China Banking Corp v CA (1997)].

H.4. AMENDMENT OR REVISION

Effected by: majority vote of the members
of the board and m ajority vote of
owners of the Outstanding Capital Stock or
members, in a meeting duly called for the
purpose

I. DELEGATION TO THE BOD OF

POW ER TO AMEND OR REPEAL BY-
LAW S:
By vote of stockholders representing 2/3 of
the Outstanding Capital Stock or 2/3 of the
members [Sec. 48]

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VI. Corporate Powers
A. GENERAL POWERS, THEORY OF
GENERAL CAPACITY [SEC. 36]
(1) Sue and be sued in its corporate name;
(2) Succession;
(3) Adopt and use a corporate seal;
(4) Amend its Articles of Incorporation;
(5) Adopt and amend by-laws;
(6) For stock corporations - issue or sell
stocks to subscribers and sell treasury
stocks; for non-stock corporation - admit
members to the corporation;
(7) Purchase, receive, take or grant, hold,
convey, sell, lease, pledge, mortgage and
otherwise deal with such real and
personal property, pursuant to its lawful
business;
(8) Enter into merger or consolidation with
other corporations as provided in the
Code;
(9) Make reasonable donations, including
those for the public welfare or for hospital,
charitable, cultural, scientific, civic, or
similar purposes: Provided, no
corporation, domestic or foreign, shall
give donations in aid of any political party
or candidate or for purposes of partisan
political activity;
(10) Establish pension, retirement, and other
plans for the benefit of its directors,
trustees, officers and employees; and
(11) Exercise such other powers as may be
essential or necessary to carry out its
purposes
NOTE:
The Corporation has implied powers which
are deemed to exist because of the following
provisions:
(1) Except such as are necessary or
incidental to the exercise of the powers so
conferred [Sec. 45]
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MERCANTILE LAW
(2) Such powers as are essential or
necessary to carry out its purpose or
purposes as stated in the Articles of
Incorporation catch-all phrase [Sec.
36(11)].
B. SPECIFIC POWERS, THEORY OF
SPECIFIC CAPACITY [SECS. 37-44]
(1) Power to Extend or Shorten Corporate
Term
(2) Power to Increase or Decrease Capital
Stock or Incur, Create, Increase Bonded
Indebtedness
(3) Power to Deny Pre-Emptive Rights
(4) Power to Sell or Dispose of Corporate
Assets
(5) Power to Acquire Own Shares
(6) Power to Invest Corporate Funds in
Another Corporation or Business
(7) Power to Declare Dividends
(8) Power to Enter Into Management
Contract
B.1. EXTEND OR SHORTEN THE
CORPORATE TERM [SEC. 37]
(1) Must be approved by majority vote of the
BOD/ BOT
(2) Ratified at a meeting by shareholders
representing 2/3 of the outstanding
capital stock/ 2/3 of members of non-
stock corporations
(3) Written notice of meeting (includes
proposed action, time and place of
meeting) shall be addressed to each
shareholders/member at his place of
residence and deposited to the addressee
in the post office, or served personally
(4) Appraisal right may be exercised by the
dissenting stockholder for BOTH
extension and shortening of corporate
term [See also Sec. 81]
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B.2. INCREASE OR DECREASE CAPITAL
STOCK OR INCUR, CREATE, INCREASE
BONDED INDEBTEDNESS [SEC. 38]
(1) Same requirements above from 1-3
(2) A certificate in duplicate must be signed
by a majority of the directors of the
corporation (countersigned by the
chairman and the secretary of the
shareholders meeting), setting forth:
(a) That requirements of this section
have been complied with
(b) The amount of the increase or
diminution of the capital stock
(c) In case of increase,
(i) the amount of capital stock or
number of shares of no-par stock
actually subscribed
(ii) names, nationalities and
residences of the persons
subscribing
(iii) the amount of no-par stock
subscribed by each
(iv) the amount paid by each on his
subscription, or the amount of
capital stock or number of shares
of no-par stock allotted to each
stockholder if such increase is for
the purpose of making effective
stock dividend
(d) any bonded indebtedness to be
incurred, created or increased
(e) the actual indebtedness of the
corporation on the day of the meeting
(f) the amount of stock represented at
the meeting
(g) the vote authorizing the increase or
diminution of the capital stock, or the
incurring, creating or increasing of
any bonded indebtedness
(3) prior approval of SEC is required
(4) duplicate certificates shall be kept on file
in the office of the corporation and the
other shall be filed with the SEC,
attached in the original articles of
incorporation.
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MERCANTILE LAW
(a) From and after approval of the SEC of
its certificate of filing, the capital
stock shall stand increased or
decreased and the incurring, creating
or increasing of any bonded
indebtedness authorized
(b) SEC shall not accept for filing any
certificate of increase unless
accompanied by the sworn statement
of the treasurer of the corporation
showing:
(i) That at least 25% of such
increased capital stock have been
subscribed and
(ii) that at least 25% of the amount
subscribed has been paid or that
there has been transferred to the
corporation property the value of
which is equivalent to 25% of the
subscription
(c) SEC shall not approve any decrease
in the capital stock if its effect shall
prejudice the rights of corporate
creditors
(5) Bonds issued by a corporation shall be
registered with the SEC
B.3. DENY PREEMPTIVE RIGHT [SEC. 39]
General Rule: All shareholders of a stock
corporation have preemptive right to
subscribe to all issues or disposition of shares
of any class, in proportion to their respective
shareholdings
Exception: If such right is denied by the
Articles of Incorporation or an amendment
thereto
Pre-emptive right shall not extend to:
(1) shares to be issued in compliance
with laws requiring stock offerings or
minimum stock ownership by the
public
(2) shares to be issued in good faith with
the approval of 2/3 of the
stockholders representing
outstanding capital stock, in
exchange for property needed for
corporate purposes or in payment of
a previously contracted debt
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B.4. SELL OR DISPOSE OF
SUBSTANTIALLY ALL ITS ASSETS [SEC. 40]
(1) Same requirements from 1-3 as Sec. 37
above
(2) Any dissenting shareholders may exercise
his appraisal right
(3) Deemed to cover substantially all the
corporate property and assets
(4) After authorization by the
shareholders/members, the BOD/BOT
may abandon such sale, lease, exchange,
mortgage, pledge or other disposition,
subject to the rights of third parties under
any contract relating thereto, without
further action or approval by the
shareholders/ members
(5) Corporation is not restricted in its power
to sell or dispose of its assets without the
authorization of shareholders or
members:
(a) if the same is necessary in the usual
and regular course of business of the
corporation or
(b) if the proceeds of the sale will be
appropriated for the conduct of its
remaining business
While the Corporation Code allows the
transfer of all or substantially all the
properties and assets of a corporation, the
transfer should not prejudice the creditors of
the assignor. The only way the transfer can
proceed without prejudice to the creditors is
to hold the assignee liable for the obligations
of the assignor. The acquisition by the
assignee of all or substantially all of the
assets of the assignor necessarily includes
the assumption of the assignors liabilities,
unless the creditors who did not consent to
the transfer choose to rescind the transfer on
the ground of fraud. To allow an assignor to
transfer all its business, properties and assets
without the consent of its creditors and
without requiring the assignee to assume the
assignors obligations will defraud the
creditors. The assignment will place the
assignors assets beyond the reach of its
creditors. [Caltex (Phils.) Inc. v. PNOC
Shipping and Transport Corp. (2006)]
PAGE 158 OF 320
MERCANTILE LAW
B.5. ACQUIRE ITS OWN SHARES [SEC. 41]
(1) For a legitimate corporate purpose/s,
including but not limited to the following:
(a) To eliminate fractional shares arising
out of stock dividends
(b) To collect or compromise an
indebtedness to the corporation,
arising out of unpaid subscription, in
a delinquency sale, and to purchase
delinquent shares sold during said
sale; and
(c) To pay dissenting or withdrawing
stockholders
(2) Provided there are unrestricted retained
earnings in the corporate books to cover
the shares purchased or acquired
B.6. INVEST IN ANOTHER CORPORATION
OR BUSINESS [SEC. 42]
(1) Same requirements from 1-3 as Sec. 37
above
(2) Any dissenting shareholders shall have
appraisal right
(3) Where the investment is reasonably
necessary to accomplish the corporations
primary purpose, the approval of the
shareholders/ members is not necessary
Notes:
If it is for the same purpose, or incidental, or
related to its PRIMARY purpose, the board
can invest the corporate fund WITHOUT the
consent of the stockholders. No appraisal
right.
If the investment is in another corporation of
different business or purpose BUT in
pursuance of the SECONDARY purpose, the
affirmative vote of majority of the board
consented by stockholders/ members is
required.
If the investment is OUTSIDE the purpose/s
for which the corporation was organized,
Articles of Incorporation must be amended
first, otherwise it will be an Ultra Vires act.
A private corporation, in order to accomplish
its purpose as stated in its articles of
incorporation, and subject to the limitations
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imposed by the Corporation Law, has the Stock dividends cannot be issued to a person
power to acquire, hold, mortgage, pledge or who is not a stockholder in payment of
dispose of shares, bonds, securities, and services rendered.
other evidences of indebtedness of any
A corporation may legally issue shares of
domestic or foreign corporation. Such an act,
stock in consideration of services rendered to
if done in pursuance of the corporate
it by a person not a stockholder, or in
purpose, does not need the approval of the
payment of its indebtedness. A share of stock
stockholders; but when the purchase of
issued to pay for services rendered is
shares of another corporation is done solely
equivalent to a stock issued in exchange of
for investment and not to accomplish the
property, because services is equivalent to
purpose of its incorporation, the vote of
property. It is the shares of stock that are
approval of the stockholders is necessary. [De
originally issued by the corporation and
La Rama v. Ma-ao Sugar Central Co. (1969)]
forming part of the capital that can be
exchanged for cash or services rendered, or
property. A share of stock coming from stock
B.7. DECLARE DIVIDENDS [SEC. 43]
dividends declared cannot be issued to one
(1) Out of unrestricted retained earnings who is not a stockholder of a corporation.
[Nielson and Co. v. Lepanto Consolidated
(2) Payable in cash, in property, or in stock to
Mining (1968)]
all shareholders on the basis of
outstanding stock held by them
(3) Any cash dividend due on delinquent Cash Dividends v. Stock Dividends
stock shall first be applied to the unpaid
Cash Stock
balance on the subscription plus costs
Dividend Dividend
and expenses
(4) Stock dividends shall be withheld from Voting Board of Board of
the delinquent stockholder until his Requirements Directors Directors +
unpaid subscription is fully paid for issuance 2/3 of SH
holding OCS
(5) Should be approved by 2/3 of
shareholders representing the Effect on Shall be Shall be
outstanding capital stock at a delinquent applied to withheld
regular/special meeting called for that stock the unpaid from the
purpose balance on delinquent
the stockholder
(6) Stock corporations- prohibited from subscription until his
retaining surplus profits in excess of plus costs unpaid
100% of their paid-in capital stock, and subscription
except: expenses. is fully paid.
(a) When justified by definite corporate Can be issued No. [Sec. No, since this
expansion projects or programs by Executive 35] requires SH
approved by the BOD Committee? approval.
(b) When the corporation is prohibited
under any loan agreement with any
financial institution or creditor from B.8. ENTER INTO MANAGEMENT
declaring dividends without its CONTRACTS [SEC. 44]
consent, and such consent has not (1) Should be approved by the BOD and by
yet been secured shareholders owning at least the
(c) When it can be clearly shown that majority of the outstanding capital
such retention is necessary under stock or at least a majority of the
special circumstances obtaining in members of both the managing and the
the corporation
PAGE 159 OF 320
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managed corporation at a meeting duly
called for that purpose
(2) Should be approved by the 2/3 of
stockholders owning outstanding capital
stock/members of the managed
corporation when:
(1) A stockholder or stockholders
representing the same interest of both
the managing and managed corporations
own more than 1/3 of the total
outstanding capital stock entitled to vote
of the managing corporation; or
(2) A majority of the members of the BOD of
the managing corporation also constitute
a majority of the BOD of the managed
corporation
(3) No management contract shall be
entered into for a period longer than 5
years for any one term
(4) 1-3 above applies to any contract
whereby a corporation undertakes to
manage or operate all or substantially all
of the business of another corporation,
whether such are called service contracts,
operating agreements or otherwise
(5) Service contracts or operating
agreements which relate to exploration,
development, exploitation or utilization
of natural resources may be entered into
for such periods as may be provided in
the pertinent laws and regulations
NOTES: 2 general restrictions on the power
of the corporation to acquire and hold
properties:
(1) property must be reasonably and
necessarily required by the business
(2) that the power shall be subject to the
limitations prescribed by other special
laws and the Constitution (corporation
may not acquire more than 30% of voting
stocks of a bank; corporations are
restricted from acquiring public lands
except by lease of not more than 1000
hectares)
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MERCANTILE LAW
B.9. ULTRA VIRES ACTS
Definition
Ultra Vires acts are those acts which a
corporation is not empowered to do or
perform because they are not conferred by its
Articles of Incorporation or by the
Corporation Code, or not necessary or
incidental to the exercise of the powers so
conferred [Sec. 45].
Types of Ultra Vires Acts
(1) Acts done beyond the powers of the
corporation as provided in the law or its
articles of incorporation;
(2) Acts or contracts entered into in behalf of
a corporation by persons who have no
corporate authority (Note: This is
technically Ultra Vires acts of officers and
not of the corporation);
(3) Acts or contracts, which are per se illegal
as being contrary to law. [Villanueva]
i. APPLICABILITY OF ULTRA VIRES
DOCTRINE
It is a question, therefore, in each case of the
logical relation of the act to the corporate
purpose expressed in the charter. If that act is
one which is lawful in itself, and not
otherwise prohibited, is done for the purpose
of serving corporate ends, and is reasonably
tributary to the promotion of those ends, in a
substantial, and not in a remote and fanciful
sense, it may fairly be considered within the
charter powers. The test to be applied is
whether the act in question is in direct and
immediate furtherance of the corporations
business, fairly incident to the express powers
and reasonably necessary to their exercise. If
so, the corporation has the power to do it;
otherwise, not. [Montelibano v. Bacolod-
Murcia Milling Co., Inc. (1962)]
ii. CONSEQUENCES OF ULTRA VIRES
ACTS
(1) Executed contract courts will not set
aside or interfere with such contracts;
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(2) Executory contracts no enforcement C. HOW (CORPORATE POWERS)

even at the suit of either party (void and EXERCISED
unenforceable);
(3) Partly executed and partly C.1. BY THE SHAREHOLDERS
executory principle of no unjust
enrichment at expense of another shall i. CORPORATE ACTS REQUIRING
apply; APPROVAL OF STOCKHOLDERS OR
MEMBERS (VOTING AND NON-
(4) Executory contracts apparently VOTING SHARES)
authorized but Ultra Vires the
principle of estoppel shall apply. General Rule: Vote necessary to approve a
particular corporate act as provided in this
Code shall be deemed to refer only to stocks
Ultra Vires v. Illegal Acts with voting rights [Sec. 6]
Ultra Vires Acts Illegal Acts Exceptions [Sec. 6]

Not necessarily Unlawful; against law, Voting and non-voting shares shall be
unlawful, but morals, public policy, entitled to vote in the following cases:
outside the powers and public order (1) Amendment of Articles of Incorporation
of the corporation
(2) Adoption, Amendment and Repeal of By-
Can be ratified Cannot be ratified Laws [Sec. 48]
Can bind the parties Cannot bind the (3) Sale, Lease, Mortgage or Other
if wholly or partly parties Disposition of Substantially all corporate
executed assets [Sec. 40]
Voidable, and may Void and cannot be (4) Incurring, Creating or Increasing Bonded
be enforced by validated Indebtedness [Sec. 38]
performance,
(5) Increase or Decrease of Capital Stock [Sec.
ratification or
38]
estoppel
(6) Merger and Consolidation [Sec. 76-80]
(7) Investment of funds in another
Rem edies in Case of Ultra Vires Acts
corporation or business or for any
(1) State purpose other than the primary purpose
for which it was organized [Sec. 42]
(a) Dissolution of the corporation thru a
quo warranto proceeding Requisites [Sec. 42] (Bar 1995):
(b) Injunction (a) Approval of majority of the BOD or
trustees
(c) Suspension or revocation of the
certificate of registration by the SEC (b) Ratification by the stockholders
representing at least 2/3 of the
(2) Stockholders
Outstanding Capital Stock or the
(a) Injunction members at a meeting duly called for
the purpose
(b) Derivative suit
(c) Written notice addressed to each
(c) Ratification (except when a 3rd party
stockholder or member at his place of
is prejudiced or the act is illegal)
residence as shown on the books of
(3) Creditors the corporation
(a) Nullification of contract in fraud of (d) Appraisal right available to
creditors dissenting stockholders or members

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(8) Dissolution of the Corporation [Sec. 118- Requisites of a VALID Corporate Act
121] by the BOD [Sec. 25]:
(a) The Board must act as a BODY in a
meeting. Note: Current SEC regulations
ii. CORPORATE ACTS REQUIRING
allow BOD meetings by teleconferencing
APPROVAL OF STOCKHOLDERS OR
or videoconferencing (SEC Memo Circular
MEMBERS (VOTING SHARES ONLY)
No.15, series of 2001, in relation to Sec. 16
(1) Declaration of Stock Dividends [Sec. 43] of R.A. 8792)
(2) Management Contracts [Sec. 44] (b) There must be a VALIDLY constituted
meeting.
(3) Fixing the Consideration of No-Par shares
[Sec. 62] (c) Their act must be supported by a
MAJORITY OF THE QUORUM duly
(4) Fixing the Compensation of Directors [Sec.
assembled (Exception: Election of
30]
officers requires a vote of majority of ALL
the members of the board)
C.2. BY THE BOD (d) The act must be within the powers
Board as Repository of Corporate conferred to the Board.
Powers
General Rule (Doctrine Of Centralized C.3. BY THE OFFICERS
Management): The corporate powers of the
corporation shall be exercised, all business Corporate Officer Corporate Employee
conducted, and all property of controlled and Position is provided Employed through
held by the BOD or trustees. [Sec. 23] for in the by-laws or the action of the
Exceptions: under the Corp. Code managing officer of
the corporation
(1) Executive Committee duly authorized in
the by-laws [Sec. 35]; RTC has jurisdiction NLRC has jurisdiction
in case of labor in case of labor
(2) A contracted manager which may be an dispute disputes
individual, a partnership, or another
corporation.
NOTE: In case the contracted manager I. W HO ARE CORPORATE OFFICERS
is another corporation, the special rule in [SEC. 25]
Sec. 44 applies. President Secretary Treasurer
(3) In case of close corporations, the Director YES NO NO
stockholders may manage the business of
the corporation rather than by a BOD, if Filipino NO YES YES
the Articles of Incorporation so provide Citizen
[Sec. 97] Residency NO YES YES
The power to purchase real property is vested Prohibited Secretary President President
in the BOD or trustees. While a corporation concurren or
may appoint agents to negotiate for the t positions Treasurer
purchase of real property needed by the
corporation, the final say will have to be with (1) President must be a director;
the board, whose approval will finalize the (2) Treasurer may or may not be a director;
transaction. [Spouses Constantine Firme v. as a matter of sound corporate practice,
Bukal Enterprises and Development must be a resident and citizen of the Phil
Corporation (2003)] (SEC opinion)

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(3) Secretary need not be a director unless Corporation Code. These are the president,
required by the by-laws; must be a secretary and the treasurer. The number
resident and citizen of the Philippines; of officers is not lim ited to these
and three. A corporation may have such other
officers as may be provided for by its by-laws
(4) Other officers as may be provided in the
like, but not limited to, the vice-president,
by-laws.
cashier, auditor or general manager. The
NOTE: Any 2 or more positions may be held number of corporate officers is thus limited
concurrently by the same person, EXCEPT by law and by the corporations by-laws
that no one shall act as president and (citing Garcia v. Eastern Telecommunications
secretary or as president and treasurer at the Philippines, Inc., 2009).
same time.
Additional qualifications of officers may be
ii. DISQUALIFICATIONS [SEC. 27]
provided for in the by-laws [Sec. 47(5)]
(1) Convicted by final judgment of an offense
punishable by imprisonment for a period
Conformably with Sec. 25 of the Corporation exceeding 6 years
Code, a position must be expressly
(2) Convicted by final judgment of a violation
mentioned in the by-Laws in order to be
of the Corporation Code committed
considered as a corporate office. Thus, the
within 5 years prior to the date of his
creation of an office pursuant to or under a
election or appointment. This includes
by-Law enabling provision is not enough to
violations of rules and regulations issued
make a position a corporate office. Guerrea v.
by the SEC to implement the provisions of
Lezama (1958), the first ruling on the matter,
the Corporation Code.
held that the only officers of a corporation
were those given that character either by
the Corporation Code or by the By-Laws; the
III. AUTHORITY OF CORPORATE
rest of the corporate officers could be
OFFICERS
considered only as employees or subordinate
officials. [Matling Industrial and Commercial A person dealing with a corporate officer is
Corp. v. Coros (2010)] put on inquiry as to the scope of the latters
authority but an innocent person cannot be
prejudiced if he had the right to presume
A different interpretation can easily leave the under the circumstances the authority of the
way open for the BOD to circumvent the acting officers.
constitutionally guaranteed security of tenure
of the employee by the expedient inclusion in
the By-Laws of an enabling clause on the Associated Bank v. Pronstroller (2008,
creation of just any corporate officer position. Nachura):
An office is created by the charter of the Q: What is the Doctrine of Apparent
corporation and the officer is elected (or Authority?
appointed) by the directors or stockholders
A: If a corporation knowingly permits one of
[Real v. Sangu Philippines citing Easycall
its officers, or any other agent, to act within
Communications Phils., Inc. v. King, 2005,
the scope of an apparent authority, it holds
(2011)]
him out to the public as possessing the power
to do those acts; the corporation will, as
against anyone who has in good faith dealt
Corporate officers in the context of PD No.
with it through such agent, be estopped from
902-A are those officers of the corporation
denying the agents authority.
who are given that character by the
Corporation Code or by the corporations by-
laws. There are three specific officers whom
a corporation must have under Sec. 25 of the
PAGE 163 OF 320
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D. TRUST FUND DOCTRINE
Trust Fund Doctrine means that the capital
stock, properties and other assets of a
corporation are regarded as equity in trust for
the payment of corporate creditors. Stated
simply, the trust fund doctrine states that all
funds received by the corporation in payment
of the shares of stock shall be held in trust for
the corporate creditors and other
stockholders of the corporation. Under such
doctrine no fund shall be used to buy back
the issued shares of stock except only in
instances specifically allowed by the
Corporation Code. [Boman Environmental
Development Corporation v. CA (1988)]
The subscribed capital is the same amount
that can loosely be termed as the trust fund
of the corporation. The Trust Fund doctrine
considers this subscribed capital as a trust
fund for the payment of the debts of the
corporation, to which the creditors may
look for satisfaction. Until the
liquidation of the corporation, no part
of the subscribed capital m ay be
returned or released to the
stockholder (except in the redemption
of redeem able shares) without
violating this principle. Thus, dividends
must never impair the subscribed capital;
subscription commitments cannot be
condoned or remitted; nor can the
corporation buy its own shares using the
subscribed capital as the consideration
therefor. [NTC v. CA (1999)]
Under Sec. 43 of Code, the corporation can
declare dividends only out of "unrestricted
retained earnings;" and that under Sec. 122,
no corporation shall distribute any of its
assets or property except upon lawful
dissolution and after payment of all its debts
and liabilities. These provisions in essence
provide for the "trust fund doctrine" where
the "subscription to the capital of a
corporation constitute a fund to which
creditors have a right to look for
satisfaction of their claims." [Philippine
Trust Co. v. Rivera (1923)]
"The Trust Fund Doctrine, first enunciated by
this Court in the 1923 case of Philippine Trust
Co. v. Rivera' is the underlying principle in the
PAGE 164 OF 320
MERCANTILE LAW
procedure for the distribution of capital
assets, embodied in Corporation Code, which
allows the distribution of corporate capital
only in three instances:
(1) amendment of the Articles of
Incorporation to reduce the authorized
capital stock,
(2) purchase of redeemable shares by the
corporation, regardless of the existence
of unrestricted retained earnings, and
(3) dissolution and eventual liquidation of
the corporation.
Furthermore, the doctrine is articulated in
Sec. 41 on the power of a corporation to
acquire its own shares and in Sec. 122 on the
prohibition against the distribution of
corporate assets and property unless the
stringent requirements therefore are
complied with. [Ong Yong v. Tiu (2003)]
The creditors of a corporation have the right
to assume that so long as there are debts and
liabilities, the BOD will not use corporate
assets to purchase its own shares of stock or
to declare dividends to its stockholders when
the corporation is insolvent. [Steinberg v.
Velasco (1929)]
The trust fund doctrine is not limited to
reaching the stockholders unpaid
subscriptions. The scope of the doctrine when
the corporation is insolvent encompasses not
only the capital stock, but also other
property and assets generally regarded in
equity as a trust fund for the payment of
corporate debts. All assets and property
belonging to the corporation held in trust for
the benefit of creditors that were distributed
or in the possession of the stockholders,
regardless of full payment of their
subscriptions, may be reached by the creditor
in satisfaction of its claim.
Also, under the trust fund doctrine, a
corporation has no legal capacity to release
an original subscriber to its capital stock from
the obligation of paying for his shares, in
whole or in part, without a valuable
consideration, or fraudulently, to the
prejudice of creditors. The creditor is allowed
to maintain an action upon any unpaid
subscriptions and thereby steps into the
UP LAW BOC CORPORATION CODE
shoes of the corporation for the satisfaction
of its debt.
To make out a prima facie case in a suit
against stockholders of an insolvent
corporation to compel them to contribute to
the payment of its debts by making good
unpaid balances upon their subscriptions, it
is only necessary to establish that the
stockholders have not in good faith paid the
par value of the stocks of the corporation.
[Donnina Halley v. Printwell, Inc. (2011)]
PAGE 165 OF 320
MERCANTILE LAW
VII. Board Of Directors
And Trustees
A. DOCTRINE OF CENTRALIZED
MANAGEMENT
A.1. BOARD IS SEAT OF CORPORATE
POWERS
General Rule: Unless otherwise provided in
this Code, the corporate powers of all
corporations form ed under this Code
shall be exercised, all business
conducted and all property of such
corporations controlled and held by
the BOD or trustees to be elected from
among the holders of stocks, or where there
is no stock, from among the members of the
corporation, who shall hold office for 1 year
until their successors are elected and
qualified. [Sec. 23]
Exceptions:
(1) In case of an Executive Committee duly
authorized in the by-laws; [Sec. 35]
(2) In case of a contracted manager which
may be an individual, a partnership, or
another corporation
Note: In case the contracted manager is
another corporation, the special rule in
Sec. 44 applies.
(3) In case of close corporations, the
stockholders may manage the business of
the corporation rather than by a BOD, if
the Articles of Incorporation so provide
[Sec. 97]
The Corporation Code of the Philippines vests
in the BOD the exercise of the corporate
powers of the corporation, save in those
instances where the Code requires
stockholders approval for certain specific
acts. [Great Asian Sales Center Corp v. CA,
(2002)]
The power to purchase real property is vested
in the BOD or trustees. While a corporation
may appoint agents to negotiate for the
purchase of real property needed by the
corporation, the final say will have to be with
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the board, whose approval will finalize the (g) Fixing of compensation of directors
transaction. [Spouses Constantine Firme v. [Sec. 30]
Bukal Enterprises and Development
(3) Cannot exercise powers not possessed by
Corporation (2003)]
the corporation.
Indisputably, one of the rights of a
stockholder is the right to participate in the
control or management of the corporation. A.2. PRINCIPLE ON DELEGATION OF
This is exercised through his vote in the BOARD POWER
election of directors because it is the BOD
Under Sec 23, the power and the
that controls or manages the corporation.
responsibility to decide whether the
[Gamboa v. Teves, (2011)]
corporation should enter into a contract that
will bind the corporation is lodged in the
board, subject to the articles of incorporation,
i. REQUISITES OF A VALID
by-laws, or relevant provisions of law.
CORPORATE ACT BY THE BOD
However, just as a natural person may
(a) The Board must act as a BODY in a authorize another to do certain acts for and
meeting. on his behalf, the BOD may validly delegate
some of its functions and powers to officers,
(b) There must be a VALIDLY constituted
committees or agents. The authority of such
meeting.
individuals to bind the corporation is
(c) There act must be supported by a generally derived from law, corporate by-laws
MAJORITY OF THE QUORUM duly or authorization from the board, either
assembled (Exception: Election of expressly or impliedly by habit, custom or
officers requires a vote of majority of ALL acquiescence in the general course of
the members of the board) business. [Peoples Aircargo v. CA, (1998)]
(d) The act must be within the powers
conferred to the Board.
B. BUSINESS JUDGMENT RULE

ii. LIMITATIONS ON POW ERS OF General Rule: Directors cannot be held

BOD/TRUSTEES
(1) Limitations imposed by the Constitution,
statutes, articles of incorporation or by-
laws;
(2) Certain acts of the corporation that
require joint action of the stockholders
and BOD:
liable for mistakes or errors in the exercise of
their business judgment as long as they acted
in good faith, with due care and prudence.
Contracts entered into by the BOD are
binding upon the corporation and courts will
not interfere.
Exceptions:

(a) Removal of director [Sec. 28] (1) If the contracts are so unconscionable
and oppressive as to amount to a wanton
(b) Amendments of Articles of destruction of the rights of the minority
Incorporation [Sec. 16] [Ingersoll v. Malabon Sugar (1927)];
(c) Fundamental changes [Sec. 6] (2) if they violate their duties under Sec. 31
(d) Declaration of stock dividends [Sec. (director willfully and knowingly assents
43] to patently unlawful acts of the
corporation, or are guilty of gross
(e) Entering into management contracts negligence or bad faith); and
[Sec. 44]
(3) if they violate Sec. 34 (disloyalty of a
(f) Fixing of consideration of non-par director who acquires for himself a
shares [Sec. 62] business opportunity that should have
belonged to the corporation, unless his
PAGE 166 OF 320
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act is ratified by a 2/3 vote of committed an act causing damage to the

stockholders). corporation or when the Board is placed in a
conflict of interests scenario whereby it is
unlikely that it would use such business
Consequences of the Business discretion to file such suit for the best interest
Judgment Rule: of the corporation.
(1) The resolution, contracts and
transactions of the board cannot be
overturned or set aside by the C. TENURE, QUALIFICATIONS AND
stockholders or members and not even by DISQUALIFICATIONS OF DIRECTORS
the courts under the principle that the OR TRUSTEES
business of the corporation has been left
to the hands of the board
C.1. TENURE
(2) Directors and duly authorized officers
Directors shall hold office for 1 year until
cannot be held personally liable for acts
their successors are elected and
or contracts done with the exercise of
qualified [Sec. 23]
their business judgment.
Exceptions:
Term v. Tenure [Valle Verde Country Club v.
(1) When the Corporation Code expressly
Africa, 2009]
provides otherwise
(2) When the Directors or officers acted with Term Tenure
fraud, gross negligence or in bad faith Time during which the The period within
(Sec. 31). officer may claim to which the director
(3) When Directors or officers act against the hold the office as of actually holds
corporation in conflict of interest right, and fixes the office, including
situation (Villanueva). interval after which the the holdover
several incumbents period after the
shall succeed one end of his term
Rem edies in case of Mism anagement another.

(1) Removal of directors pursuant to Sec. 28 Not affected by Includes holdover

holdover.
(2) Derivative suit or complaint filed with the
RTC) (Sec. 5.2, R.A. 8799, Securities Fixed by statute and it May be shorter or
Regulation Code; A.M. No. 01-2-04 SC, does not change simply longer (in case of
Interim Rules of Procedure Governing because the office may a holdover) than
Intra-corporate Controversies) have become vacant, the term for
nor because the reasons within or
(3) Receivership incumbent holds over in beyond the power
(4) Injunction if the act has not yet been done office beyond the end of of the incumbent
the term due to the fact
(5) Dissolution if abuse amounts to a ground that a successor has not
for quo warranto but Solicitor General been elected and has
Refuses to act failed to qualify.
NOTE: 1 Year
Dean Villanueva opined that a derivative suit
may be an exception to such Rule: this occurs
when it is apparent that the Board is not in a C.2. QUALIFICATIONS
position to validly exercise its business (1) If STOCK, director must own at least 1
judgment for the protection of the share of the capital stock, which stock
corporation, e.g., when the Board itself has shall stand in his own name [Sec. 23]
PAGE 167 OF 320
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Exception: Trustee in a voting trust may
be elected director/trustee.
(2) If NON-STOCK, trustee must be a
member.
Qualifications:
(1) Majority of the directors/trustees must be
residents of the Philippines.
(2) Natural person
(3) Of Legal Age
(4) Other qualifications as may be prescribed
in the by-laws of the corporation.
With the omission of the phrase "in his own
right" the election of trustees and other
persons who in fact are not beneficial owners
of the shares registered in their names on the
books of the corporation becomes formally
legalized. Hence, this is a clear indication
that in order to be eligible as a director, what
is material is the legal title to, not beneficial
ownership of, the stock as appearing on the
books of the corporation. [Lee v. CA (1992)]
C.3. DISQUALIFICATIONS [SEC. 27]
(1) Convicted by final judgment of an offense
punishable by imprisonment for a period
exceeding 6 years; or
(2) A violation of the Corporation Code,
committed within 5 years prior to the
date of his election. This includes
violations of rules and regulations issued
by the SEC to implement the provisions of
the Corporation Code.
An amendment to the corporations by-laws
which renders a stockholder ineligible to be a
director, if he be also a director in a
corporation whose business is in competition
with that of the other corporation, has been
sustained as valid. This is based upon the
principle that where the director is so
employed in the service of a rival company, he
cannot serve both, but must betray one or the
other. Such an amendment "advances the
benefit of the corporation and is good."
[Gokongwei, Jr. v. SEC (1979)]
PAGE 168 OF 320
MERCANTILE LAW
D. ELECTIONS
D.1. CUMULATIVE VOTING
i. CUMULATIVE VOTING FOR ONE
CANDIDATE
A stockholder is allowed to concentrate his
votes and give one candidate as many votes
as the number of directors to be elected
multiplied by the number of his shares shall
equal.
ILLUSTRATION
If there are 5 directors to be elected and
Pedro, as shareholder, has 100 shares, Pedro
can give 500 (5 x 100 shares) votes to just
one candidate.
ii. CUMULATIVE VOTING BY
DISTRIBUTION
A stockholder may cumulate his shares by
multiplying the number of his shares by the
number of directors to be elected and
distribute the same among as many
candidates as he shall see fit.
ILLUSTRATION
In the illustration above, Pedro instead may
choose to give 100 votes to candidate 1, 100
votes to candidate 2, 100 votes to candidate 3,
150 votes to candidate 4, and 50 votes to
candidate 5.
iii. STRAIGHT VOTING
Every stockholder may vote such number of
shares for as many persons as there are
directors to be elected.
D.2. QUORUM
There must be present, in person or by
representative authorized to act by written
proxy, the owners of majority of the
Outstanding Capital Stock or majority of the
members entitled to vote in the meeting.
Election must be by ballot if requested.
UP LAW BOC CORPORATION CODE
A stockholder cannot be deprived in the
articles of incorporation or in the by-laws of
his statutory right to use any of the methods
of voting in the election of directors.
No delinquent stock shall be voted.
The candidates receiving the highest number
of votes shall be declared elected.
E. REMOVAL
General Rule: Any Director or Trustee of a
corporation may be removed from office, with
or without cause. [Sec. 28]
Exception: Directors who have been elected
by minority stockholders exercising
cumulative voting can only be removed for
cause. Removal without cause may not be
used to deprive minority stockholders or
members of the right of representation to
which they may be entitled under Sec. 24.
Other requisites:
(1) by a vote of the stockholders holding or
representing 2/3 of the outstanding
capital stock, or if the corporation be a
non-stock corporation, by a vote of 2/3 of
the members entitled to vote
(2) At a regular or special meeting after
proper notice is given
F. FILLING OF VACANCIES
F.1. VACANCY (1) BY REMOVAL; OR (2) BY
EXPIRATION OF TERM; OR (3) WHEN THE
REMAINING DIRECTORS DO NOT
CONSTITUTE A QUORUM
Vacancy/ies must be filled by the
stockholders in a regular or special meeting
called for that purpose.
A director or trustee elected to fill a vacancy
shall be elected only for the unexpired term
of his predecessor in office.
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MERCANTILE LAW
F.2. VACANCY BY REASON OF INCREASE
IN THE NUMBER OF THE
DIRECTORS/TRUSTEES
Vacancy/ies must be filled by the
stockholders:
(1) in a regular or special meeting called for
that purpose; or
(2) in the same meeting authorizing the
increase of directors or trustees if so
stated in the notice of the m eeting.
F.3. VACANCY BY OTHER CAUSES
Vacancy/ies may be filled by the vote of at
least a majority of the remaining directors or
trustees, if still constituting a quorum .
G. COMPENSATION [SEC. 30]
General Rule: Directors are only entitled to
reasonable per diems. They are not entitled
to compensation as directors.
Exceptions:
(1) When Articles of Incorporation, by-laws,
or an advance contract provides for
compensation.
(2) Compensation other than per diems may
also be granted to directors by the vote of
the stockholders representing at least a
majority of the Outstanding Capital Stock
at a regular or special stockholders
meeting.
The total yearly compensation of directors
shall not exceed 10% of the net income
before income tax of the corporation during
the preceding year.
COMPENSATION OF DIRECTORS AS
CORPORATE OFFICERS
The position of being chairman and Vice-
Chairman, like that of treasurer and
secretary, are not considered directorship
positions but officership positions that would
entitle the occupants to compensation.
Likewise, the limitation placed under Sec. 30
of the Corporation Code that directors cannot
receive compensation exceeding 10% of the
UP LAW BOC CORPORATION CODE
net income of the corporation would not
apply to the compensation given to such
positions since it is being given in their
capacity as officers of the corporation and not
as board members. [Western Institute of
Technology v. Salas (1997)]
H. FIDUCIARY DUTIES AND LIABILITY
RULES
H.1. DUTIES
In this jurisdiction, the members of the BOD
have a three-fold duty: duty of obedience,
duty of diligence, and duty of loyalty.
(1) Duty of Obedience - shall direct the
affairs of the corporation only in
accordance with the purposes for which it
was organized;
(2) Duty of Diligence - shall not willfully
and knowingly vote for or assent to
patently unlawful acts of the corporation
or act in bad faith or with gross
negligence in directing the affairs of the
corporation; and
(3) Duty of Loyalty - shall not acquire any
personal or pecuniary interest in conflict
with their duty as such directors or
trustees. [Strategic Alliance Development
Corp v. Radstock Securities Ltd. (2009)]
Duty of Obedience
The Directors or Trustees and Officers to be
elected shall perform the duties enjoined on
them by law and by the by-laws of the
corporation [Sec. 25]
Duty of Diligence
Directors or trustees who (i) willfully and
knowingly vote for or assent to patently
unlawful acts of the corporation or (ii) who
are guilty of gross negligence or bad faith in
directing the affairs of the corporation or (iii)
acquire any personal or pecuniary interest in
conflict with their duty as such directors or
trustees shall be liable jointly and severally
for all damages resulting therefrom suffered
PAGE 170 OF 320
MERCANTILE LAW
by the corporation, its stockholders or
members and other persons. [Sec 31]
The conditions for the application of Sec. 31 of
the Corporation Code require factual
foundations to be first laid out in appropriate
judicial proceedings. Hence, concluding that
a person breached fiduciary duties as an
officer and member of the BOD of a
corporation without com petent evidence
thereon would be unwarranted and
unreasonable. [Republic of the Philippines v.
Sandiganbayan (First Division) et al. (2011)]
Duty of Loyalty
Directors and trustees should not acquire any
personal or pecuniary interest in conflict with
their duty as such directors or trustees,
otherwise they shall be held liable jointly and
severally for all damages resulting therefrom
suffered by the corporation, its stockholders
or members and other persons. [Sec. 31]
Where a director, by virtue of his office,
acquires for himself a business opportunity
which should belong to the corporation,
thereby obtaining profits to the prejudice of
such corporation, he must account to the
latter for all such profits by refunding the
same, unless his act has been ratified by a
vote of the stockholders owning or
representing at least 2/3 of the outstanding
capital stock [Sec. 34]
Doctrine of Corporate Opportunity
Unless his act is ratified, a director shall
refund to the corporation all the profits he
realizes on a business opportunity which:
(1) corporation is financially able to
undertake
(2) from its nature, is in line with
corporations business and is of practical
advantage to it; and
(3) one in which the corporation has an
interest or a reasonable expectancy.
The rule shall be applied notwithstanding the
fact that the director risked his own funds in
the venture. [Sec. 34]
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By embracing the opportunity, the self-
interest of the officer or director will be
brought into conflict with that of his
corporation. Hence, the law does not permit
him to seize the opportunity even if he will
use his own funds in the venture. [Sundiang
and Aquino]
NOTE: Differences between Sec. 31 and Sec.
34:
(1) First, while both involve the same subject
matter (business opportunity) they
concern different personalities; Sec. 34 is
applicable only to directors and not to
officers, whereas Sec. 31 applies to
directors, trustees and officers.
(2) Second, Sec. 34 allows a ratification of a
transaction by a self-dealing director by
vote of stockholders representing at least
2/3 of the outstanding capital stock.
[Villanueva]
H.2. LIABILITIES
i. SOLIDARY LIABILITY FOR
DAMAGES
(1) Willfully and knowingly voting for and
assenting to patently unlawful acts of the
corporation; [Sec. 31]
(2) Gross negligence or bad faith in directing
the affairs of the corporation; [Sec. 31]
(3) Acquiring any personal or pecuniary
interest in conflict of duty; [Sec. 31]
(4) Consenting to the issuance of watered
stocks, or, having knowledge thereof,
failing to file objections with secretary;
[Sec. 65]
(5) Agreeing or stipulating in a contract to
hold himself liable with the corporation;
or
(6) By virtue of a specific provision of law
ii. LIABILITY FOR W ATERED STOCKS
W atered Stocks stocks issued for a
consideration less than its par or issued value
or for a consideration in any form other than
cash, valued in excess of its fair value.
CORPORATION CODE MERCANTILE LAW
Any director or officer of a corporation
consenting to the issuance of watered stocks
or who, having knowledge thereof, does not
forthwith express his objection in writing and
file the same with the corporate secretary
shall be solidarily liable with the
stockholder concerned to the corporation and
its creditors for the difference in value [Sec.
65]
iii. PERSONAL LIABILITIES
GENERAL RULE
Members of the Board, who purport to act in
good faith for and in behalf of the corporation
within the lawful scope of their authority, are
not liable for the consequences of their acts.
When the acts are of such nature and done
under those circumstances, they are
attributed to the corporation alone and no
personal liability is incurred.
The provisions on seizing corporate
opportunity and disloyalty [Secs. 31 and 34]
shall also apply to corporate officers. [Price v.
Innodata Phils., Inc. (2008)]
NOTE:
Members of the BOD who are also officers are
held to a more stringent liability because they
are in-charge of day-to-day activities
[Campos]
Doctrine of Limited Doctrine of
Liability Immunity
Shields the Protects a person
incorporators from acting for and in
corporate liability behalf of the
beyond their agreed corporation from
contribution to the being himself
capital or personally liable for
shareholding in the his authorized
corporation. actions
Liability of Director, Trustee or Officer
(Asked in 96 and 97)
Personal liability of a corporate director,
trustee or officer along (although not
necessarily) with the corporation may so
validly attach, as a rule, only when:
PAGE 171 OF 320
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(1) He assents (a) to a patently unlawful act
of the corporation, or (b) for bad faith or
gross negligence in directing its affairs, or
(c) for conflict of interest, resulting in
damages to the corporation, its
stockholders or other persons;
(2) He consents to the issuance of watered
stocks or who, having knowledge thereof,
does not forthwith file with the corporate
secretary his written objection thereto;
(3) He agrees to hold himself personally and
solidarily liable with the corporation; or
(4) He is made, by a specific provision of law,
to personally answer for his corporate
action [Tramat Mercantile, Inc. vs. CA,
(1994), reiterated in Atrium Management
Corp. v. CA, (2001)]
IV. SPECIAL FACTS DOCTRINE
Even though a director may not be under the
obligation of a fiduciary nature to disclose to
a shareholder his knowledge affecting the
value of the shares, that duty may exist in
special cases. [Strong v. Repide (1909)]
General Rule:
Majority view: Directors only owe its duty to
the corporation. They owe no fiduciary duty to
stockholders but they may deal with each
other at fair and reasonable terms, as if they
were unrelated. No duty to disclose facts
known to the director or officer. [Taylor v.
Wright, 1945]
NOTE: Minority View (Realistic View)
recognizes the directors obligation to the
stockholders individually as well as
collectively, and refuses to permit him to
profit at the latters expense by the use of
information obtained as a result of official
position and duties.
Exception:
Special Facts Doctrine: Conceding the
absence of a fiduciary relationship in the
ordinary case, courts nevertheless hold that
where special circumstances or facts are
present which make it inequitable for the
director to withhold information from the
stockholder, the duty to disclose arises and
concealment is fraud. [Strong v. Repide, 1909]
PAGE 172 OF 320
MERCANTILE LAW
I. RESPONSIBILITY FOR CRIMES
Since a corporation as a person is a mere
legal fiction, it cannot be proceeded against
criminally because it cannot commit a crime
in which personal violence or malicious intent
is required.
Criminal action is limited to the corporate
agents guilty of an act amounting to a crime
and never against the corporation itself.
Since the BOD is the repository of corporate
powers and acts as the agent of the
corporation, the directors may be held
criminally liable. [West Coast Life Ins. Co. v.
Hurd (1914); Time Inc. v. Reyes (1971)]
The Trust Receipts Law recognizes the
impossibility of imposing the penalty of
imprisonment on a corporation. Hence, if the
entrustee is a corporation, the law makes the
officers or employees or other persons
responsible for the offense liable to suffer the
penalty of imprisonment. The reason is
obvious: corporations, partnerships,
associations and other juridical entities
cannot be put to jail. Hence, the criminal
liability falls on the human agent responsible
for the violation of the Trust Receipts Law.
[Ong v. CA (2003)] (see also Sec. 13, P.D. 115)
J. INSIDE INFORMATION
The fiduciary position of insiders, directors,
and officers prohibits them from using
confidential information relating to the
business of the corporation to benefit
themselves or any competitor corporation in
which they may have a mere substantial
interest.
Since loss and prejudice to the corporation is
not a requirement for liability, the corporation
has a cause of action as long as there is unfair
use of inside information
It is inside information if it is not generally
available to others and is acquired because of
the close relationship of the director or officer
to the corporation
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INSIDER, DEFINED
Insider means:
(a) the issuer;
(b) a director or officer (or person
performing similar functions) of, or a
person controlling the issuer;
(c) a person whose relationship or former
relationship to the issuer gives or
gave him access to material
information about the issuer or the
security that is not generally available
to the public;
(d) a government employee, or director,
or officer of an exchange, clearing
agency and/or self-regulatory
organization who has access to
material information about an issuer
or a security that is not generally
available to the public; or
(e) a person who learns such information
by a communication from any of the
foregoing insiders [Sec. 3.8,
Securities Regulations Code]
K. CONTRACTS
K.1. BY SELF-DEALING DIRECTORS WITH
THE CORPORATION
General Rule: A contract of the corporation
with one or more of its directors or trustees is
VOIDABLE, at the option of such corporation.
[Sec. 32]
Exceptions:
Such contract is VALID if all of the following
conditions are present:
(a) That the presence of such director or
trustee in the board meeting in which the
contract was approved was not necessary
to constitute a quorum for such meeting;
(b) That the vote of such director or trustee
was not necessary for the approval of the
contract;
(c) That the contract is fair and reasonable
under the circumstances; and
(d) That in case of an officer, the contract has
been previously authorized by the BOD.
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MERCANTILE LAW
Ratification
In case of absence of the first two conditions
above, contract may be ratified if:
(a) Stockholders representing at least 2/3 of
the outstanding capital stock or at least
2/3 of the members in a meeting called
for the purpose voted to ratify the
contract.
(b) Full disclosure of the adverse interest of
the directors or trustees involved is made
at such meeting.
(c) Contract is fair and reasonable under the
circumstances
K.2. BETWEEN CORPORATIONS WITH
INTERLOCKING DIRECTORS
Interlocking, characterized
If the interests of the interlocking director in
the corporations are both substantial (i.e.,
stockholdings exceed 20% of outstanding
capital stock). [Sec. 33]
General Rule: A contract between two or
more corporations having interlocking
directors shall not be invalidated on that
ground alone. [Sec. 33]
Exception: If contract is fraudulent or not
fair and reasonable under the circumstances
If the interest of the interlocking director in
one of the corporations is nom inal
(stockholdings 20% or less) while substantial
in the other, the contract shall be VALID, if
the following conditions are met:
(a) The presence of such director or trustee in
the board meeting in which the contract
was approved was NOT necessary to
constitute a quorum for such meeting
(b) That the vote of such director or trustee
was not necessary for the approval of the
contract
(c) That the contract is fair and reasonable
under the circumstances.
Where (a) and (b) are absent, the contract can
be ratified by the vote of the stockholders
representing at least 2/3 of the outstanding
capital stock or at least 2/3 of the members
UP LAW BOC CORPORATION CODE
in a meeting called for the purpose voted to
ratify the contract, provided that:
(a) Full disclosure of the adverse interest of
the directors/trustees involved is made
on such meeting;
(b) The contract is fair and reasonable under
the circumstances.
K.3. MANAGEMENT CONTRACTS [SEC 44]
See: Corporate Powers (2)(h) above
L. EXECUTIVE COMMITTEE
L.1. CREATION
The by-laws of a corporation may create an
executive committee, composed of not less
than three members of the board, to be
appointed by the board.
Said committee may act, by majority vote of
all its members, on such specific matters
within the competence of the board, as may
be delegated to it in the by-laws or on a
majority vote of the board [Sec. 35]
L.2. LIMITATION ON ITS POWERS
Executive Committees CANNOT be
delegated the following:
(1) Matters needing stockholder approval
[Sec. 35];
(2) Filling up of board vacancies;
(3) Amendment, repeal or adoption of by-
laws [Sec. 35];
(4) Amendment or repeal of any resolution of
the Board which by its express terms is
not amendable or repealable [Sec. 35];
(5) Cash dividend distribution [Sec. 35]; and
(6) Acts which would render the BOD
powerless and free from all
responsibilities imposed on it by law
[Campos]
Under Sec. 35 of the Corporation Code, the
creation of an executive committee must be
provided for in the by-laws of the corporation.
Unfortunately, the by-laws of the corporation
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MERCANTILE LAW
in this case are silent as to the creation by its
BOD of an executive committee.
(1) Notwithstanding the silence of the by-
laws on the matter, the SC did not rule
that the BODs creation of the executive
committee is illegal or unlawful.
(2) One reason is the absence of a showing
as to the true nature and functions of said
executive committee considering that the
"executive committee," referred to in Sec.
35 of the Corporation Code which is as
powerful as the BOD and in effect acting
for the board itself, should be
distinguished from other committees
which are within the competency of the
board to create at anytime and whose
actions require ratification and
confirmation by the board.
(3) Another reason is that the BOD has the
power to create positions not provided for
in the by-laws since the board is the
corporations governing body. [Filipinas
Port Services Inc. v. Go (2007)]
M. MEETINGS OF BOD
M.1. REGULAR OR SPECIAL
W ho May Attend?
The members of the Board themselves;
directors or trustees cannot be represented or
voted by proxies at board meetings. [Sec. 25]
In the Philippines, teleconferencing and
videoconferencing of members of BOD of
private corporations is a reality, in light of
Republic Act No. 8792. The Securities and
Exchange Commission issued SEC
Memorandum Circular No. 15, series of 2001,
on November 30, 2001, providing the
guidelines to be complied with in relation to
such conferences. [Expertravel and Tours, Inc.
v. CA, (May 26, 2005)]
i. W HEN AND W HERE
W hen? [Sec.53]
(1) Regular meetings of directors or
trustees shall be held monthly, unless the
by-laws provide otherwise.
UP LAW BOC CORPORATION CODE
(2) Special m eetings of the BOD or
trustees may be held at any time upon
the call of the president or as provided in
the by-laws.
W here? [Sec. 53]
Meetings of directors or trustees of
corporations may be held anywhere in or
outside of the Philippines, unless the by-laws
provide otherwise.
ii. NOTICE
Notice of regular or special meetings stating
the date, time and place of the meeting must
be sent to every director or trustee at least 1
day prior to the scheduled m eeting,
unless otherwise provided by the by-
laws.
A director or trustee may waive this
requirement, either expressly or impliedly.
[Sec. 50]
M.2. WHO PRESIDES
The president presides, unless the by-laws
provide otherwise. [Sec. 54]
M.3. QUORUM
General Rule: Majority of the number of
directors or trustees as fixed in the articles of
incorporation. [Sec. 25]
Exceptions:
(1) Unless the articles of incorporation or the
by-laws provide for a GREATER majority,
or
(2) In case of election of officers where a vote
of a majority of all the members of the
board is needed.
Whether or not "dead members" are entitled
to exercise their voting rights (through their
executor or administrator), depends on the
articles of incorporation or by-laws. [Tan v.
Sycip (2006)]
The quorum in a members meeting is to be
reckoned as the actual number of members of
the corporation. W hat happens in the
event of the death of one of them?
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MERCANTILE LAW
(1) In stock corporations, shareholders may
generally transfer their shares. Thus, on
the death of a shareholder, the executor
or administrator duly appointed by the
Court is vested with the legal title to the
stock and entitled to vote it. Until a
settlement and division of the estate is
effected, the stocks of the decedent are
held by the administrator or executor.
(2) On the other hand, membership in and
all rights arising from a non-stock
corporation are personal and non-
transferable, unless the articles of
incorporation or the bylaws of the
corporation provide otherwise. In other
words, the determination of whether or
not dead members are entitled to
exercise their voting rights (through their
executor or administrator), depends on
the Articles of Incorporation or by-laws.
M.4. RULE ON ABSTENTION
A vote of abstention is considered to be a vote
in itself. Abstentions will not be counted
towards the affirmative and such refusal to
vote does not indicate acquiescence in the
action of those who vote.
Regular BOD Special BOD
Meetings Meetings
W HEN
Held monthly, unless at any time upon the
the by-laws provide call of the president
otherwise or as provided in the
by-laws
W HERE
anywhere in or outside of the Philippines,
unless the by-laws provide otherwise
NOTICE
Notice of regular or special meetings stating
the date, time and place of the meeting
must be sent to every director or trustee at
least 1 day prior to the scheduled
meeting, unless otherwise provided
by the by-laws.
A director or trustee may waive this
requirement, either expressly or
impliedly
UP LAW BOC CORPORATION CODE MERCANTILE LAW

QUORUM
General Rule: Majority of the number of VIII. Stockholders and
directors or trustees as fixed in the articles
of incorporation. [Sec. 25]
Members
Exceptions:
A. RIGHTS OF A STOCKHOLDER AND
(3) Unless the articles of incorporation or MEMBERS
the by-laws provide for a GREATER

majority, or
(4) In case of election of officers where a (1) Direct or indirect participation in
vote of a majority of all the members of management (Sec. 6)
the board is needed. (2) Voting rights (Sec. 6)
(3) Right to remove directors (Sec. 28)
(4) Proprietary rights
(a) Right to dividends (Secs. 43 and 71)
(b) Appraisal right (Sec. 81)
(c) Right to issuance of stock certificate
for fully paid shares (Sec. 64)
(d) Proportionate participation in the
distribution of assets in liquidation
(Sec. 122)
(e) Right to transfer of stocks in
corporate books (Sec. 63)
(f) Pre-emptive right (Sec. 39)
(5) Right to inspect books and records (Sec
74)
(6) Right to be furnished with the most
recent financial statements/reports (Sec.
75)
(7) Right to recover stocks unlawfully sold for
delinquent payment of subscription (Sec.
69)
(8) Right to file individual suit, representative
suit and derivative suits

A.1. DOCTRINE OF EQUALITY OF SHARES

All stocks issued by the corporation are
presumed equal with the same privileges and
liabilities, provided that the Articles of
Incorporation is silent on such differences.
[CIR v. CA, CTA, and A. Soriano Corporation
(1999)]
Doctrine of Equality of Shares provides that
where the Articles of Incorporation do not

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provide for any distinction of the shares of
stock, all shares issued by the corporation are
presumed to be equal and enjoy the same
rights and privileges and are also subject to
the same liabilities. [Sundiang and Aquino]
The default rule is that all stockholders have
equal right and obligations, expressed in the
last paragraph of Sec. 6 of the Corporation
Code which provides, each share shall be
equal in all respects to every other share.
[Villanueva]
Note:
However, when preferences or restrictions are
made to apply to a class of shares, then such
preferences on restrictions shall exist and be
valid only when provided in the articles of
incorporation and stated in the certificate of
stock. [Villanueva]
Sec. 6 of the Corporation Code also contains
a Board-enabling clause that although the
default rule is that all shareholders have
equal rights and obligations, nevertheless,
when authorized by the articles of
incorporation, the BOD, may fix the terms and
conditions of preferred shares of stock or any
series thereof, or to classify its shares for the
purpose of insuring compliance with
constitutional or legal requirements; but such
terms and conditions shall be effective upon
filing of a certificate thereof with the SEC.
Thus, a preference or restriction on shares
may be valid and effective only if the same
has formally been registered with the SEC
and thereby becomes public records binding
on the public. [Villanueva]
Nature of the Rights of Members
The eleemosynary nature (i.e. charitable) of
every non-stock corporation defines the
characteristic of membership therein as being
essentially personal in character and
therefore essentially non-transferable in
nature.
Sec. 89 of the Corporation Code specifically
provides that in a non-stock corporation, the
right of members of any class or classes to
vote may be limited, broadened or denied to
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MERCANTILE LAW
the extent specified in the articles of
incorporation or the by-laws.
The SEC has opined that the rule in Sec. 6
allowing non-voting shares to vote on
specified fundamental matters does not apply
to non-voting members of a non-stock
corporation; that insofar as members of a
non-stock corporation, the applicable
provision is Sec. 89, which specifically
provides that members may be denied
entirely their voting rights in the articles of
incorporation or by-laws of the corporation.
[SEC Opinion, 4 September 1995]
B. PARTICIPATION IN MANAGEMENT
B.1. PROXY
Stockholders and members may vote in
person or by proxy in all meetings of
stockholders or members (Sec. 58).
The right to issue a proxy is vested with public
interest when it comes to stock corporations;
although it may be regulated under the by-
laws, it cannot be denied, since it is an aspect
of ownership interest of stockholders.
However, the right of members to vote by
proxy may be denied under the articles of
incorporation or by-laws of a non-stock
corporation (Sec. 89)
Requisites for a Valid and Enforceable
Proxy:
(1) It must be in writing
(2) Signed by the stockholder or member of
record; and
(3) Filed with the corporation before the
scheduled meeting with the Corporate
Secretary [Sec. 58]
Note: Unless otherwise provided in the proxy,
it shall be valid only for the meeting for which
it is intended. No proxy shall be valid and
effective for a period longer than five (5) years
at any one time. [Sec. 58]
UP LAW BOC CORPORATION CODE MERCANTILE LAW

Procedural Matters Relating to A voting trust agreement shall be ineffective

Proxies: and unenforceable unless:
(1) Proxy solicitation involves the securing (1) It is in writing and notarized;
and submission of proxies, while proxy
(2) Specify the terms and conditions thereof;
validation concerns the validation of
and
such secured and submitted proxies;
(3) A certified copy of such agreement shall
(2) The SECs power to pass upon the validity
be filed with the corporation and with the
of proxies in relation to election
SEC.
controversies has effectively been
withdrawn, tied as it is to its abrogated
quasi-judicial powers, and has been
Proxy Trustee
transferred to the RTC Special
Commercial Courts pursuant to the terms Principalagent Trustee-beneficiary
of Sec. 5.2 of the Securities Regulation
Proxy cannot The only limit to
Code;
exceed delegated authority is that the act
(3) Nevertheless, although an intra- authority. must be for the benefit
corporate controversy may animate a of trustee. (fiduciary
disgruntled shareholder to complain to obligation)
the SEC a corporations violations of SEC
rules and regulations, that motive alone Must be in writing Must be in writing and
should not be sufficient to deprive the notarized
SEC of its investigatory and regulatory Copy must be filed Copy must be filed
powers, especially so since such powers with the with SEC and the
are exercisable on a motu proprio basis. corporation. corporation.
The fact that the jurisdiction of the RTC No transfer. Transfer of legal title
Special Commercial Courts is confined to the to trustee.
voting on election of officers, and not all
matter which may be voted upon by Proxy exercises Trustee exercises
stockholders, elucidates that the power of the voting rights only absolute voting rights
SEC to regulate proxies remains extant and for a specific continuously, subject
could very well be exercised when meeting (unless only to fiduciary duty.
stockholders vote on matters other than the otherwise provided)
election of directors. [GSIS v. CA (2009)] Proxy cannot be Trustee can be director
director because he holds legal
title over the shares
B.2. VOTING TRUST
Revocable at will in Irrevocable, as long as
An arrangement created by one or more any manner, no misconduct or
stockholders for the purpose of conferring EXCEPT if coupled fraud.
upon a trustee or trustees the right to vote with an interest.
and other rights pertaining to the shares for a
period not exceeding 5 years at any time [Sec. Max of 5 yrs at a Max of 5 yrs at a time
59]. time (unless the voting trust
is specifically required
Under a voting trust arrangement, a as a condition in a loan
stockholder of a stock corporation parts with agreement)
the naked or legal title, including the power
to vote, of the shares and only retains the SEC can pass on validity
beneficial ownership of the stock. A voting
trustee is a share owner vested with colorable
and naked title of the shares covered for the
primary purpose of voting upon stocks that
he does not own.
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B.3. CASES WHEN STOCKHOLDERS 2. Amendments to by-laws (Sec. 48)

ACTION IS REQUIRED
Requires approval by majority of the
Under Sec. 6 of the Corporation Code, each BOD/BOT and approval by stockholders
share of stock is entitled to vote, unless owning at least the majority of the
otherwise provided in the articles of outstanding capital stock/majority of
incorporation or declared delinquent under members
Sec. 67 of the Code. [Tan v. Sycip (2006)]
Includes all stockholders with or without
In non-stock corporations, the voting rights voting rights
attach to membership. Members vote as
persons, in accordance with the law and the
by-laws of the corporation. Each member 3. Revocation of delegation to the
shall be entitled to one vote unless so limited, BOD of the power to am end or repeal
broadened, or denied in the articles of or adopt by-laws (Sec. 48)
incorporation or by-laws. When the principle
Requires approval by stockholders owning at
for determining the quorum for stock
least the majority of the outstanding capital
corporations is applied by analogy to non-
stock/majority of members
stock corporations, only those who
are actual members with voting rights should
be counted. 4. Calling a meeting to remove
directors (Sec. 28)
I. BY A MAJORITY VOTE Meeting for the removal of directors or
trustees, or any of them, must be called by
1. Power to enter into m anagem ent
the secretary on order of the president or on
contracts (Sec. 44)
the written demand of the stockholders
General Rule representing or holding at least a majority of
the outstanding capital stock/majority of
Requires approval by majority of the
members
BOD/BOT and approval by stockholders
owning at least the majority of the
outstanding capital stock/majority of
5. Granting com pensation other than
members of both the managing and the
per diems to directors (Sec. 30)
managed corporation
Compensation other than per diems may be
Exceptions
granted to directors by the vote of the
(1) Where a stockholder/s representing the stockholders representing at least a majority
same interest of both the managing and of the outstanding capital stock
the managed corporations own or control
more than one-third (1/3) of the total
outstanding capital stock entitled to vote 6. Consideration for no-par shares
of the managing corporation; or (Sec. 62)
(2) Where a majority of the members of the When the Articles of Incorporation or the
managing corporations BOD also BOD does not provide for the value of no-par
constitute a majority of the managed shares, the value of such shares shall be
corporations BOD determined by the stockholders representing
at least a majority of the outstanding capital
Requires at least 2/3 votes of the outstanding
stock
capital stock/membership of the managed
corporation.
BUT only majority vote is required for the
managing corporation.

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II. BY A TW O-THIRDS VOTE
1. Am endm ent of Articles
Incorporation (Sec. 16)
Amendment of the Articles of Incorporation
may be made by a majority vote of the
BOD/BOT and the vote or written assent of
the stockholders representing at least two-
thirds 2/3 of the outstanding capital stock,
without prejudice to the appraisal right of
dissenting stockholders.
Includes all stockholders with or without
voting rights
Amendment of Articles of
Incorporation of close corporations
(Sec 103)
Amendment to the Articles of Incorporation
which seeks to delete or remove any provision
required to be contained in the Articles of
Incorporation of Close Corporations or to
reduce a quorum or voting requirement
stated in said Articles of Incorporation
requires the affirmative vote of at least 2/3 of
the outstanding capital stock, whether with
or without voting rights, or of such
greater proportion of shares as may be
specifically provided in the Articles of
Incorporation at a meeting duly called.
2. Delegating the power to amend or
repeal by-laws or adopt new by-laws
(Sec. 48)
Delegation to the BOD/BOT of the power to
amend or repeal by-laws or adopt new by-
laws requires approval by at least 2/3 of the
outstanding capital stock/membership.
Revocation of the delegation requires only
majority vote of the outstanding capital
stock/membership.
3. Extending/shortening corporate
term (Sec. 37)
Requires approval by a majority vote of the
BOD/BOT and approval by at least 2/3 of the
outstanding capital stock/membership.
Includes all stockholders with or without
voting rights
CORPORATION CODE MERCANTILE LAW
of 4. Increasing/decreasing capital stock
(Sec. 38)
Requires approval by a majority vote of the
BOD and approval by at least 2/3 of the
outstanding capital stock.
Includes all stockholders with or without
voting rights
5. Incurring, creating, increasing
bonded indebtedness (Sec. 38)
Requires approval by a majority vote of the
BOD and approval by at least 2/3 of the
outstanding capital stock.
Includes all stockholders with or without
voting rights
6. Issuance of shares not subject to
pre-emptive right (Sec. 39)
Shares issued in good faith in exchange for
property or previously incurred indebtedness
with the approval of the stockholders
representing 2/3 of the outstanding capital
stock are not subject to pre-emptive rights.
7. Sale/disposition of all or
substantially all of corporate
assets(Sec. 40)
Requires approval by a majority vote of the
BOD/BOT and approval by at least 2/3 of the
outstanding capital stock/membership.
Includes all stockholders with or without
voting rights
Note: In non-stock corporations where there
are NO members with voting rights, the vote
of at least the majority of the BOT will be
sufficient authorization for any sale or
disposition of all or substantially all of
corporate assets. (Sec. 40)
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8. Investm ent of funds in another
business (Sec. 42)
Requires approval by a majority vote of the
BOD/BOT and approval by at least 2/3 of the
outstanding capital stock/membership.
Includes all stockholders with or without
voting rights
9. Dividend declaration (Sec. 43)
No stock dividend shall be issued without the
approval of stockholders representing not
less than 2/3 of the outstanding capital stock.
10. Power to enter into m anagem ent
contracts (Sec. 44)
See discussion under By a Majority Vote
11. Rem oval of directors or trustees
(Sec. 28)
Any director or trustee may be removed from
office by a vote of the stockholders holding or
representing at least 2/3 of the outstanding
capital stock/membership.
12. Ratifying contracts with respect to
dealings with directors/trustees (Sec.
32)
A contract of the corporation with one or
more of its directors is voidable, at the option
of such corporation, unless all the following
conditions are present:
(1) The directors presence in the BOD
meeting in which the contract was
approved was not necessary to constitute
a quorum
(2) The vote of such director was not
necessary for the approval of the contract
(3) The contract is fair and reasonable under
the circumstances
(4) In case of an officer, the contract has
been previously authorized by the BOD.
Where any of the first two conditions is
absent, in the case of a contract with a
director, such contract may be ratified by the
PAGE 181 OF 320
MERCANTILE LAW
vote of the stockholders representing at least
2/3 of the outstanding capital stock provided
that the contract is fair and reasonable under
the circumstances.
13. Ratifying acts of disloyalty of a
director (Sec. 34)
General Rule
Where a director, by virtue of his office,
acquires for himself a business opportunity
which should belong to the corporation,
thereby obtaining profits, he must account to
the corporation for all such profits by
refunding it.
Exception
His act may be ratified by a vote of the
stockholders owning or representing at least
2/3 of the outstanding capital stock.
14. Stockholders approval of the plan
of m erger or consolidation (Sec. 77)
Requires approval by majority of each of the
BOD/BOT of the constituent corporations of
the plan of merger or consolidation and
approval by at least 2/3 of the outstanding
capital stock/membership of each
corporation at separate corporate meetings
duly called.
Amendments to the plan of merger or
consolidation also requires approval by
majority vote of each of the BOD and 2/3 vote
of the outstanding capital stock/membership
of each corporation voting separately.
Includes all stockholders with or without
voting rights
15. Distribution of assets in non-stock
corporations (Sec. 95)
The BOT shall, by majority vote, adopt a
resolution recommending a plan of
distribution which shall be approved by at
least 2/3 of the members with voting rights.
UP LAW BOC CORPORATION CODE
16. Incorporation of a religious society
(Sec. 116)
Any religious society or religious order, or any
diocese, synod, or district organization of any
religious denomination, sect or church,
unless forbidden by the constitution, rules,
regulations, or discipline of the religious
denomination, sect or church of which it is a
part, or by competent authority, may, upon
written consent and/or by an affirmative vote
at a meeting called for the purpose of at least
2/3 of its membership, incorporate for the
administration of its temporalities or for the
management of its affairs, properties and
estate.
17. Voluntary dissolution of a since these are not distributions but
corporation (Sec. 118-119)
Requires a resolution adopted by a majority
vote of the BOD/BOT, and by a resolution
duly adopted by the affirmative vote of the
stockholders owning at least 2/3 of the
outstanding capital stock/membership at a
meeting to be held upon call for such
purpose.
III. BY CUMULATIVE VOTING
Election of Directors or Trustees (Sec.
24) - A stockholder may vote such number of
shares for as many persons as there are
directors to be elected or he may cumulate
said shares and give one candidate as many
votes as the number of directors to be elected
multiplied by the number of his shares shall
equal, or he may distribute them on the same
principle among as many candidates as he
shall see fit:
Provided, That the total number of votes cast
by him shall not exceed the number of shares
owned by him as shown in the books of the
corporation multiplied by the whole number
of directors to be elected.
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MERCANTILE LAW
C. PROPRIETARY RIGHTS
C.1. RIGHT TO DIVIDENDS
General Rule
The right to dividends vests upon lawful
declaration by the BOD. From that time,
dividends become a debt owing to the
shareholders. No revocation can be made.
Exceptions
(1) Dividends are revocable if NOT yet
announced or communicated to the
stockholders.
(2) Stock dividends, even if already declared,
may be revoked prior to actual issuance
merely representations of changes in the
capital structure.
Note: Right to dividends vests upon
declaration so whoever owns the stock at
such time also owns the dividends.
Subsequent transfer of stock would not carry
with it right to dividends UNLESS agreed
upon by the parties.
C.2. RIGHT OF APPRAISAL
Right to withdraw from the corporation and
demand payment of the fair value of the
shares after dissenting from certain corporate
acts involving fundamental changes in
corporate structure (Sec. 81). The amount
paid to the stockholder is the fair value of his
shares as of the day prior to the date on
which the vote was taken, excluding any
appreciation or depreciation in anticipation of
the corporate action (Sec. 82).
I. INSTANCES OF APPRAISAL RIGHT
(1) Extension or reduction or corporate term
(Sec. 81)
(2) Amendment to Articles of Incorporation
which involves change in the rights of
stockholders, authorize preferences
superior to those stockholders, or restrict
the right of any stockholder (Sec. 81)
(3) Investment of corporate funds in another
business or purpose (Sec. 42)
UP LAW BOC CORPORATION CODE
(4) Sale or disposal of all or substantially all
assets of the corporation (Sec. 81)
(5) Merger or consolidation (Sec. 81)
II. REQUIREMENTS FOR EXERCISE OF
APPRAISAL RIGHT (SECS. 82, 86)
(1) Stockholder must have voted against the
corporate act.
(2) Stockholder must make a written
demand on the corporation within 30
days after the vote was taken for payment
of the fair value of his shares (failure to
make demand within such period shall be
deemed waiver of the appraisal right).
(3) Stockholder must submit his certificates
of stock to the corporation for notation
within 10 days after demand for payment.
Otherwise, right to appraisal may be
terminated at the option of corporation.
III. EFFECT OF DEMAND (SEC. 83)
ALL rights accruing to such shares, including
voting and dividend rights, shall be
suspended
EXCEPT the right of such stockholder to
receive payment of the fair value thereof
Immediate RESTORATION of voting and
dividend rights if the dissenting stockholder is
not paid the value of his shares within 30
days after the award.
IV. EXTINGUISHMENT OF APPRAISAL
RIGHT (SEC. 84, GENERALLY)
(1) Withdrawal of demand by the
stockholder WITH CONSENT of the
corporation
(2) Abandonment of the proposed action
(3) Disapproval by SEC of the proposed
action where such approval is necessary
(4) Where SEC (now RTC) determines that
such stockholder is not entitled to
appraisal right
(5) Failure to submit the certificates of stock
representing his shares to the corporation
for notation as dissenting shares within
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10 days after demand for payment, at the
option of the corporation [Sec. 86]
Effect of Extinguishment
(1) Right of dissenting stockholder to be paid
the fair value of his shares shall cease;
(2) His status as a stockholder shall
thereupon be restored; and
(3) All dividend distributions which would
have accrued on his shares shall be paid
to him. [Sec. 84]
Note: If shares represented by the certificates
bearing such notation are transferred, and
the certificates consequently cancelled, the
rights of the transferor as a dissenting
stockholder under this Title shall cease and
the transferee shall have all the rights of a
regular stockholder; and all dividend
distributions which would have accrued on
such shares shall be paid to the transferee.
[Sec. 86]
C.3. RIGHT TO INSPECT
I. BASIS OF RIGHT
As the beneficial owners of the business, the
stockholders have the right to know the
financial condition and management of
corporate affairs.
A stockholders right of inspection is based on
his ownership of the assets and property of
the corporation. Therefore, it is an incident of
ownership of the corporate property, whether
this ownership or interest is termed an
equitable ownership, a beneficial ownership,
or quasi-ownership. Such right is predicated
upon the necessity of self-protection.
[Gokongwei Jr. v. SEC (1979)]
II. RECORDS/BOOKS TO BE KEPT
(SEC. 74)
(1) Books that record all business
transactions of the corporation which
shall include contract, memoranda,
journals, ledgers, etc;
(2) Minute book for meetings of the
stockholders/members;
UP LAW BOC CORPORATION CODE
(3) Minute book for meetings of the
board/trustees;
(4) Stock and transfer book
Stock transfer agent - One engaged
principally in the business of registering
transfers of stocks in behalf of a stock
corporation (licensed by the SEC).
The corporate secretary is the one duly
authorized to make entries in the stock and
transfer book.
It is the corporate secretary's duty and
obligation to register valid transfers of stocks
and if said corporate officer refuses to comply,
the transferor-stockholder may rightfully
bring suit to compel performance. [Torres et
al v. CA (1997)]
III. FINANCIAL STATEMENTS (SEC. 75)
Within 10 days from written request, the
corporation shall furnish its most recent
financial statement (balance sheet and profit
or loss statement as of last taxable year)
At a regular meeting, the Board shall present
a financial report of the operations of the
corporation for the preceding year, which
shall include financial statements duly signed
and certified by an independent CPA.
Exception
If the paid-up capital is less than P50,000
the financial statements may be certified
under oath by the treasurer or any
responsible officer of the corporation (instead
of an independent CPA).
IV. REQUIREMENTS FOR THE
EXERCISE OF THE RIGHT OF
INSPECTION (SEC. 74)
(1) It must be exercised at reasonable hours
on business days and in the place where
the corporation keeps all its records (i.e.,
principal office).
(2) The stockholder has not improperly used
any information he secured through any
previous examination.
(3) Demand is made in good faith or for a
legitimate purpose. If the corporation or
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its officers contest such purpose or
contend that there is evil motive behind
the inspection, the burden of proof is with
the corporation or such officer to show
the same.
TEST to determine whether the purpose is
legitimate A legitimate purpose is one
which is germane to the interests of the
stockholder as such and not contrary to the
interests of the corporation. [Gokongwei v.
SEC (1979)]
Among the changes introduced in the new
Code with respect to the right of inspection
granted to a stockholder are the following:
(1) The records must be kept at the
principal office of the corporation;
(2) The inspection must be made on
business days;
(3) The stockholder may demand a copy
of the excerpts of the records or
minutes;
(4) The refusal to allow such inspection
shall subject the erring officer or
agent of the corporation to civil and
criminal liabilities.
However, while seemingly enlarging the right
of inspection, the new Code has prescribed
limitations to the same. It is now expressly
required as a condition for such examination
that the one requesting it must not have been
guilty of using improperly any information
through a prior examination, and that the
person asking for such examination must be
"acting in good faith and for a legitimate
purpose in making his demand." [Gonzales v.
PNB (1983)]
Directors of a corporation have the
unqualified right to inspect the books and
records of the corporation at all reasonable
times. The right of inspection is not to be
denied on the ground that the director or
shareholder is on unfriendly terms with the
officers of the corporation whose records are
sought to be inspected. A director or
stockholder can make copies, abstracts, and
memoranda of documents, books, and
papers as an incident to the right of
inspection, but cannot, without an order of a
court, be permitted to take books from the
office of the corporation. However, a director

UP LAW BOC CORPORATION CODE
or stockholder does not have any absolute
right to secure certified copies of the minutes
of the corporation until these minutes have
been written up and approved by the
directors. [Veraguth v. Isabela Sugar (1932)]
A stockholder of a sequestered company has
the right to inspect and/or examine the
records of the corporation pursuant to Sec. 74
of the Corporation Code. [Africa v. PCGG
(1992)]
V. REMEDIES W HEN INSPECTION IS
REFUSED
(1) Mandamus
(2) Injunction
(3) Action for damages
(4) File an action under Sec. 144 to
impose a penal offense by fine and/or
imprisonment
Refusal to allow inspection is a criminal
offense. Such refusal, when done in violation
of Sec 74(4) of the Corporation Code, properly
falls within the purview of Sec. 144 of the
same code and thus may be penalized as an
offense. [Yujuico and Sumbilla v Quiambao
and Pilapil (2014)]
Because the obligations provided for in Sec.
74 fall on the corporation, violation of the
same is done by the corporation; thus
criminal action based on such violation can
only be maintained against corporate officers
or other such persons acting on behalf of the
corporations.
C.4. PRE-EMPTIVE RIGHT
I. DEFINITION AND DISTINGUISHED
FROM RIGHT OF FIRST REFUSAL
Pre-emptive right is an option privilege of an
existing stockholder to subscribe to a
proportionate part of shares subsequently
issued by the corporation before the same
can be disposed of in favor of others; this
right includes all issues and disposition of
shares of any class. It is a common law right
and may be exercised by stockholders even
without legal provision. On the other hand, a
right of first refusal arises only by virtue of
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81
MERCANTILE LAW
contract stipulations, by which the right is
strictly construed against the right of person
to dispose or deal with their property.
Stockholders of a corporation shall enjoy pre-
emptive right to subscribe to ALL ISSUES OR
DISPOSITIONS OF SHARES OF ANY CLASS,
in proportion to their respective
shareholdings. The purpose is to enable the
shareholder to retain his proportionate
control in the corporation and to retain his
equity in the surplus.
Note: The broad phrase all issues or
disposition of shares of any class is
construed to include not only new shares
issued in pursuance of an increase in capital
stock or from the unissued shares which form
part of the ACS, but also covers treasury
shares. Treasury shares would come under
the term disposition. Likewise considering
that it is not included among the exceptions
enumerated therein, where pre-emptive right
shall not extend, the intention is to include it
in its application. (SEC Opinion, 14 January
1993).
A pre-emptive right is a right claimed against
the corporation on unissued shares of its
capital stock, and likewise on treasury shares
held by the corporation; while the right of first
refusal is a right exercisable against another
stockholder on his shares of stock.
[Villanueva]
Basis of Preemptive Right: to preserve the
existing proportional rights of the
stockholders [Campos]
II. LIMITATIONS TO EXERCISE OF
PRE-EMPTIVE RIGHT (SEC. 39)
Such pre-emptive right shall NOT extend
to shares to be issued in compliance with
laws requiring stock offerings or
minimum stock ownership by the public;
It shall also NOT extend to shares to be
issued in good faith with the approval of
the stockholders representing 2/3 of the
outstanding capital stock, in exchange for
property needed for corporate purposes
or in payment of a previously contracted
debt
UP LAW BOC CORPORATION CODE
It shall not take effect if denied in the
Articles of Incorporation or an
amendment thereto.
If one shareholder does not want to
exercise his pre-emptive right, the other
shareholders are not entitled to purchase
the corresponding shares of the
shareholder who declined. But if nobody
purchased the same and later on the
board re-issued the shares, the pre-
emptive right applies. [Sundiang and
Aquino]
III. REMEDIES IN CASE OF
UNW ARRANTED DENIAL
Injunction
Mandamus
The suit should be individual and not
derivative because the wrong done is to
the stockholders individually
SEC can cancel shares if the 3rd party is
not innocent
IV. W AIVER/ DENIAL OF PREEMPTIVE
RIGHT
Allowed by the Code provided that it is
made in the Articles of Incorporation
o Waiver made through Articles of
Incorporation would bind
present and subsequent
shareholders
o 2/3 vote of the outstanding
capital stock is necessary before
waiver is binding
o Result of Non-placement of
waiver clause in Articles of
Incorporation: waiver shall not
bind future stockholders but only
those who agreed to it
The shareholders must be given
reasonable time within which to exercise
their pre-emptive rights. Upon expiration
of such period, any shareholders who did
not exercise such will be deemed to have
waived it. This is necessary so as to not
hinder future financing plans of the
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corporation. Some new investors may be
willing to invest only if all the new shares
will be issued to them [Campos].
C.5. RIGHT TO VOTE
Non-voting shares are not entitled to vote
except as provided for in the last
paragraph of Sec. 6.
Preferred or redeemable shares may be
deprived of the right to vote
Fractional shares of stock cannot be
voted
Treasury shares have no voting rights as
long as they remain in the treasury.
No delinquent stock shall be voted (Sec.
71)
A transferee of stock cannot vote if his
transfer is not registered in the stock and
transfer book of the corporation.
C.6. RIGHT OF FIRST REFUSAL
The right of first refusal provides that a
stockholder who may wish to sell or assign
his shares must first offer the shares to the
corporation or to the other existing
stockholders under terms and conditions
which are reasonable; and that only when the
corporation or the other stockholders do not
or fail to exercise their option, is the offering
stockholder at liberty to dispose of his shares
to third parties.
An agreement entered into between the two
majority stockholders of a corporation
whereby they mutually agreed not to sell,
transfer, or otherwise dispose of any part of
their shareholdings till after one year from
the date of the agreement. [Lambert v. Fox
(1914)]
The right of first refusal is primarily an
attribute of ownership, and consequently can
be effected only through a contractual
commitment by the owner of the shares;
consequently, the waiver of a right of first
refusal when duly constituted can be effected
only by the registered owner. [PCGG v. SEC,
unreported (1988)]
UP LAW BOC CORPORATION CODE
D. REMEDIAL RIGHTS
D.1. INDIVIDUAL SUIT
A suit brought by the shareholder in his own
name against the corporation when a wrong
is directly inflicted against him.
D.2. REPRESENTATIVE SUIT
A suit brought by the stockholder in behalf of
himself and all other stockholders similarly
situated when a wrong is committed against
a group of stockholders.
D.3. DERIVATIVE SUIT
A suit is brought by a stockholder for
wrongful acts committed by
directors/trustees of the corporation, when
the stockholder finds that he has no redress
because the directors/trustees are the ones
vested by law to decide whether or not to sue.
Derivative Suit as defined in
jurisprudence
It is a suit by a shareholder to enforce a
corporate cause of action. The corporation is
a necessary party to the suit, and the relief
which is granted is a judgment against a third
person in favor of the corporation. [Chua v. CA
(2004)]
It is a suit brought by one or more
stockholders/members in the name and on
behalf of the corporation to redress wrongs
committed against it, or protect/vindicate
corporate rights whenever the officials of the
corporation refuse to sue, or the ones to be
sued, or has control of the corporation.
[Sundiang and Aquino]
Suits of stockholders based on wrongful or
fraudulent acts of directors or other persons.
Requisites of Derivative Actions
(1) That the person instituting the action be
a stockholder or member at the time the
acts or transactions subject of the action
occurred and the time the action was
filed;
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(2) That the stockholder or member exerted
all reasonable efforts, and alleges the
same with particularity in the complaint,
to exhaust all remedies available under
the Articles of Incorporation, by-laws,
laws or rules governing the corporation or
partnership to obtain the relief he desires.
(3) That there is no appraisal right available
for the act(s) complained of;
(4) That the suit is not a nuisance or
harassment suit. (Rule 8, Interim Rules of
Procedure for Intra-Corporate
Controversies)
Note: Fifth requisite: (implied from first
paragraph of Rule 8, Section 1): The action
brought by the shareholder or member must
be in the name of the corporation or
association [Villamor v. Umale (2014)]
How this works in terms of procedure?
Corporation as an unwilling co-plaintiff (Rule
3, Sec. 10, ROC); suing stockholder mere
nominal party/plaintiff.
Requisites of a Derivative Suit
according to Jurisprudence [SMC v.
Kahn, 1989]
(1) the party bringing the suit should be a
shareholder as of the time of the act or
transaction complained of, the number of
his shares not being material;
(2) he has tried to exhaust intra-corporate
remedies, i.e., has made a demand on the
BOD for the appropriate relief but the
latter has failed or refused to heed his
plea; and
(3) the cause of action actually devolves on
the corporation, the wrongdoing or harm
having been, or being caused to the
corporation and not to the particular
stockholder bringing the suit. [Lisam
Enterprises, Inc., represented by Lolita A.
Soriano and Lolita A. Soriano v. Banco de
Oro Unibank, Inc., et al., (2012)]
NOTE: The wrong contemplated in a
derivative suit is one in which the injury
alleged be indirect as far as the stockholders
are concerned and direct only insofar as the
corporation is concerned. [De Leon]
UP LAW BOC CORPORATION CODE
Corporation should be made a party to the
suit, either as plaintiff or defendant, for res
judicata to apply.
BUT the personal injury suffered by the
stockholder cannot disqualify him from filing
a derivative suit in behalf of the corporation.
It merely gives rise to an additional cause of
action for damages against the erring
corporate officers. [Gochan v. Young (2001)]
Requisites based on jurisprudence
The cause of action actually devolves on
the corporation, the wrong or harm
having been, or being caused to it and
not the shareholder filing the suit.
[Evangelista vs. Santos (1950); SMC v.
Kahn (1989)]
The reliefs sought pertain to the
corporation. [Symaco Trading Corp. v.
Santos (2005)]
Recent rulings on the matter
Status of heirs as co-owners of shares
before partition of estate does not make
them shareholders until there is
compliance with Sec. 63 on the manner
of transferring shares, thus the heirs are
not automatically registered
shareholders of the corporation. [Reyes v.
RTC of Makati (2008)]
Stockholder may commence a derivative
suit for mismanagement, waste or
dissipation of corporate assets because of
a special injury to him for which he is
otherwise without redress. In effect, the
suit is an action for specific performance
of an obligation owed by the corporation
to the stockholders to assist its right of
action when the corporation is put on
default by the wrongful refusal of the
directors or management to make
suitable measures for its protection. [Yu
v. Yukayguan (2009)]
The power to sue and be sued in any court by
a corporation even as a stockholder is lodged
in the BOD that exercises its corporate
powers and not in the president or officer
thereof. But where corporate directors are
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guilty of a breach of trust, not of mere error of
judgment or abuse of discretion, and intra-
corporate remedy is futile or useless, a
shareholders may institute a derivative suit in
behalf of himself and other stockholders and
for the benefit of the corporation, to bring
about a redress of the wrong inflicted directly
upon the corporation and indirectly upon the
stockholders. [Bitong v. CA (1998)]
Jurisdiction over derivative suits lies with the
RTC (Sec. 5.2, Securities Regulation Code)
E. OBLIGATION OF A STOCKHOLDER
E.1. LIABILITY TO THE CORPORATION FOR
UNPAID SUBSCRIPTION (SEC. 67)
A subscription contract is unconditional (i.e.,
obligation to pay is not be subject to any
contingency) and indivisible (as to the
amount and transferability [Fua Cun v.
Summers, (1923)]. Hence, if the subscriber
paid 20% of his subscription, he is not
entitled to the issuance of certificates
corresponding to 20% of the shares.
Unpaid claim refers to any unpaid
subscription and not to any indebtedness
which a subscriber may owe the corporation
rising from any other transaction. [China
Banking Corp. v. CA (1997)]
E.2. LIABILITY TO THE CORPORATION FOR
INTEREST ON UNPAID SUBSCRIPTION IF
SO REQUIRED BY THE BY-LAWS (SEC. 66)
General Rule: Subscribers for stock are
NOT liable to pay interest on his unpaid
subscription
Exception: If so required in the by-laws at
the rate fixed in the by-laws. If no rate is fixed
in the by-laws, such rate shall be deemed to
be the legal rate (Sec. 66)
Notes: Transfer for consideration of treasury
shares is a sale (or disposition) by the
corporation (not subscription). A transfer of
previously issued shares by a stockholder to a
third person is a sale (or disposition).
Transfer of unissued shares is subscription.
Shareholders are not creditors of the
corporation with respect to their
UP LAW BOC CORPORATION CODE
shareholdings thereto and the principle of
compensation or set-off has no application.
Subscription contract is NOT required to be in
writing.
E.3. LIABILITY FOR WATERED STOCKS
(SEC. 65)
I. DEFINITION
These are shares issued as fully paid when in
truth no consideration is paid, or the
consideration received is known to be less
than the par value or issued value of the
shares. (Sec. 65)
These include the following:
Issued without consideration (bonus
share)
Issued as fully paid when the corporation
has received less sum of money than its
par or issued value (discounted share)
Issued for consideration other than actual
cash (i.e., property or services), the fair
valuation of which is less than its par or
issued value
Issue stock dividend when there are no
sufficient retained earnings or surplus
profit to justify it.
Note: Subsequent increase in the value of
the property used in paying the stock does
not do away with the watered stocks.
Subsequent increase in the value of the
property used in paying the stock does not
cure the defect in issuance. The existence of
watered stocks is determined at the time of
issuance of the stock.
II. LIABILITY OF DIRECTORS OR
OFFICERS
Any director or officer of a corporation
consenting to the issuance of watered stocks
or who, having knowledge thereof, does not
forthwith express his objection in writing and
file the same with the corporate secretary
shall be SOLIDARILY liable with the
stockholder concerned to the corporation and
its creditors for the difference in value (Sec.
65).
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It is hornbook principle that personal liability
of corporate directors, trustees or officers
attaches only when: (a) they assent to a
patently unlawful act of the corporation, or
when they are guilty of bad faith or gross
negligence in directing its affairs, or when
there is a conflict of interest resulting in
damages to the corporation, its stockholders
or other persons; (b) they consent to the
issuance of watered down stocks or
when, having knowledge of such
issuance, do not forthwith file with
the corporate secretary their written
objection; (c) they agree to hold themselves
personally and solidarily liable with the
corporation; or (d) they are made by specific
provision of law personally answerable for
their corporate action. [SPI Technologies Inc. v
Mapua (2014)]
E.4. LIABILITY FOR DIVIDENDS
UNLAWFULLY PAID
When a director, trustee or officer attempts to
acquire or acquires, in violation of his duty,
any interest adverse to the corporation in
respect of any matter which has been
reposed in him in confidence, as to which
equity imposes a disability upon him to deal
in his own behalf, he shall be liable as a
trustee for the corporation and must account
for the profits which otherwise would have
accrued to the corporation (Sec. 31).
Violations of any of the provisions of the
Corporation Code not otherwise specifically
penalized therein shall be punished by a fine
of not less than one thousand (P1,000.00)
pesos but not more than ten thousand
(P10,000.00) pesos or by imprisonment for
not less than thirty (30) days but not more
than 5 years, or both, in the discretion of the
court (Sec. 144).
E.5. LIABILITY FOR ASSUMING TO ACT AS
A CORPORATION KNOWING IT TO BE
WITHOUT AUTHORITY
All persons who assume to act as a
corporation knowing it to be without
authority to do so shall be liable as general
partners for all debts, liabilities and damages
incurred or arising as a result thereof.
UP LAW BOC CORPORATION CODE
When any such ostensible corporation is sued
on any transaction entered or on any tort
committed by it as a corporation, it shall not
be allowed to use as a defense its lack of
corporate personality.
One who assumes an obligation to an
ostensible corporation cannot resist
performance thereof on the ground that there
was in fact no corporation (Sec. 21).
F. MEETINGS
General Rule: Stockholders or members
approval is expressed in a meeting duly
called and held for the purpose.
Exception: In case of amendment of
Articles of Incorporation, approval may be
expressed by referendum or written assent of
the stockholders or members (Sec. 16)
W HO MAY ATTEND AND VOTE?
Stockholders, either in person or by proxy
Pledgors or mortgagors (Sec. 55)
Pledgee or mortgagee, IF expressly given
such right by the pledgor or mortgagor in
writing which is recorded on the
corporate books(Sec. 55)
Executors, administrators, receivers, and
other legal representatives duly
appointed by the court, without need of
any written proxy(Sec. 55)
ALL joint owners of stocks, or any one of
them with the consent of ALL the co-
owners, unless there is a written proxy,
signed by all the co-owners(Sec. 56)
Any one of the joint owners of shares
owned in an "and/or" capacity or a proxy
thereof(Sec. 56)
F.1. REGULAR OR SPECIAL
I. W HEN AND W HERE
W hen? (Sec. 50)
Regular meetings of stockholders or
members shall be held annually on a date
fixed in the by-laws, or if not so fixed, on any
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date in April of every year as determined by
the BOD or trustees.
Special meetings of stockholders or members
shall be held at any time deemed necessary
or as provided in the by-laws.
W here?
Stock: City or municipality where the
principal office of the corporation is
located, or, if practicable, in the principal
office of the corporation: Provided, Metro
Manila shall be considered a city or
municipality. (Sec. 51)
Non-stock: Any place even outside the
place where the principal office is located,
within the Philippines (Sec. 93)
II. NOTICE (SEC. 50)
Regular M eetingwritten notice sent
to all shareholders or members at least 2
weeks prior to the meeting, unless a
different period is required by the by-laws
Special Meetingwritten notice sent
at least 1 week prior to the meeting,
unless otherwise provided in the by-laws.
Subject to waiver, expressly or impliedly
(i.e., attendance despite no notice)
Effect of Failure to Give Notice: Failure
to give notice would render a meeting
VOIDABLE at the instance of an absent
stockholder, who was not notified of the
meeting (Board v. Tan, 1959).
F.2. WHO CALLS THE MEETINGS
Any petitioning stockholder or member upon
order of the SEC when there is no person
authorized to call a meeting. (Sec. 50)
F.3. WHO PRESIDES AT THE MEETINGS
The president, unless the by-laws provide
otherwise.(Sec. 54)
UP LAW BOC CORPORATION CODE MERCANTILE LAW

The petitioning stockholder or member (when Regular Stockholders Special Stockholders

there is no person authorized to call a Meetings Meetings
meeting) shall preside thereat until at least a
notice sent to all notice sent to all
majority of the stockholders or members
present have chosen one of them as presiding shareholders or shareholders or
members at least 2 members at least 1
officer.(Sec. 50)
weeks prior to the week prior to the
meeting, unless a meeting, unless
F.4. QUORUM different period is otherwise provided
required by the by- in the by-laws
General Rule: Stockholders representing laws
majority of the Outstanding Capital Stock or
majority of the members QUORUM

Exception: The Code or the by-laws provide
otherwise
Where quorum is present at the start of a
lawful meeting, stockholders present cannot
without justifiable cause break the quorum by
walking out from said meeting so as to defeat
the validity of any act proposed and approved
by the majority. (However, stockholders can
break the quorum for justifiable causes.)
(Johnston vs. Johnston, 1965 CA decision)
Regular Stockholders Special Stockholders
Meetings Meetings
General Rule: Stockholders representing
majority of the Outstanding Capital Stock or
majority of the members
Exception: The Code or the by-laws provide
otherwise
F.5. MINUTES OF THE MEETINGS
A record of all the minutes of all meetings of
stockholders or members, or of the BOD or
trustees shall be kept and preserved at the
principal office of every corporation.
Contents:

W HEN time and place of holding the meeting;

held annually on a at any time upon the how the meeting was authorized;
date fixed in the by- call of the president the notice given;
laws, or if not so fixed, or as provided in the
on any date in April of by-laws whether the meeting was regular or
every year as special, if special its object;
determined by the
those present and absent; and
BOD or trustees
every act done or ordered done at the
W HERE
meeting.
STOCK - City or municipality where the
principal office of the corporation is located,
or, if practicable, in the principal office of the Upon dem and by any director/trustee
corporation: Provided, Metro Manila shall be or shareholders/m em ber, the
considered a city or municipality (sec. 51) following shall also be noted in the
minutes:
NON-STOCK - Any place even outside the
place where the principal office is located, the time when any director, trustee,
within the Philippines (sec. 93) stockholder or member entered or left the
meeting;
NOTICE
the yeas and nays on any motion or
proposition;

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the protest of any director/trustee or
stockholder/member on any action or
proposed action.
Notes:
The minutes of any meetings shall be open to
inspection by any director/trustee or
stockholder/member at reasonable hours on
business days.
The director/trustee or stockholder/member
may demand, in writing, for a copy of
excerpts from said records or minutes, at his
expense.
Any officer or agent of the corporation
refusing to allow the examination and
copying of the minutes shall be:
(1) liable to the director/trustee or
stockholder/ member; and
(2) guilty of an offense punishable under Sec.
144 (Sec. 74)
However, the officer of agent may use as a
defense that:
(1) the person demanding examination or
copy thereof made improper use of any
information secured through any prior
examination of the records or minutes of
such corporation or of any other
corporation thereby;
(2) the person demanding examination or
copy acts in bad faith or has no legitimate
purpose in making his demand.
IX. Capital Structure
A. SUBSCRIPTION AGREEMENTS
Any contract for the acquisition of unissued
stock in an existing corporation or a
corporation still to be formed shall be
deemed a subscription contract (Sec. 60).
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MERCANTILE LAW
A. 1. CHARACTERISTICS
A subscription is a contract for the acquisition
of unissued stock of a corporation whether
existing or still to be formed, and is in effect
the contribution or promised contribution of a
person to the capital of a corporation
[Campos].
There can be a subscription only with
reference to unissued shares of the
Authorized Capital Stock (ACS), in the
following cases:
(1) The original issuance of the ACS at the
time of incorporation.
(2) The opening, during the life of the
corporation, of the portion of the original
ACS previously unissued; or
(3) The increase in ACS achieved through a
formal amendment of the Articles and
registration thereof with the SEC.
[Villanueva]
A. 2. STATUS AS SHAREHOLDER
One may become a shareholder in a
corporation in either of two ways:
(1) By entering into a SUBSCRIPTION
CONTRACT with an existing or still to be
formed corporation (he becomes a
stockholder upon acceptance of the
corporation of his offer to subscribe
whether the consideration is fully paid or
not).
Once a subscription contract is
perfected, the stockholder becomes a
debtor to the corporation and may be
liable to pay any unpaid portion
thereof upon call by the BOD.
(2) By acquisition of already issued shares
through:
(a) purchase of TREASURY SHARES
from the corporation
(b) acquisition of shares from existing
shareholders by SALE OR ANY
OTHER CONTRACT [Sundiang and
Aquino]
UP LAW BOC CORPORATION CODE MERCANTILE LAW

Notes Notes
Transfer of unissued shares = Shareholders are NOT creditors of the
SUBSCRIPTION corporation with respect to their
shareholdings thereto and the principle of
Transfer of already issued shares = NOT
compensation or set-off has no application.
SUBSCRIPTION; can either be:
Subscription contract is NOT required to be in
SALE/DISPOSITION BY CORPORATION writing.
of treasury shares
SALE/DISPOSITION BY STOCKHOLDER
TO A THIRD PERSON B. CONSIDERATION FOR STOCKS

B. 1. FORMS OF CONSIDERATION (SEC. 62)

A. 3. TYPES OF SUBSCRIPTION
CONTRACTS
I. PRE-INCORPORATION
SUBSCRIPTION (SEC. 61)
It is a subscription for shares of stock of a
corporation still to be formed.
When pre-incorporation subscription
IRREVOCABLE:
(1) For a period of at least 6 months from the
date of subscription, UNLESS (a) all of
the other subscribers consent to the
revocation, or (b) the incorporation fails
to materialize within 6 months or within a
longer period as may be stipulated in the
contract of subscription; or
Actual cash
Property, tangible or intangible,
actually received by the corporation and
necessary or convenient for its use and
lawful purposes at a fair valuation equal
to the par or issued value of the stock
issued
is - Property should NOT be
encumbered. Otherwise, it would
impair the consideration.
- Valuation is initially determined
by the incorporators or the BOD,
subject to approval by the SEC.
Labor performed for or services actually
rendered to the corporation;

(2) After the submission of the Articles of Amounts transferred from unrestricted
Incorporation to the SEC. retained earnings to stated capital
(declaration of stock dividends); and
Outstanding shares exchanged for
II. POST-INCORPORATION stocks in the event of reclassification or
SUBSCRIPTION conversion;
It is entered into after incorporation. Previously incurred indebtedness of the
corporation;

A. 4. INTEREST ON UNPAID
SUBSCRIPTION B. 2. LIMITATIONS ON CONSIDERATION
General Rule Stocks shall NOT be issued:
Stockholder is NOT liable to pay interest on for a consideration less than the par or
his unpaid subscription. issued price thereof
Exception in exchange for promissory notes or
If so required by the by-laws future service
RATE: that fixed in the by-laws, otherwise,
the legal rate (Sec. 66)

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Notes common of the corporate property.

[Stockholders of F. Guanzon and Sons, Inc. v
Promissory notes and future service may be
Register of Deeds of Manila (1962)]
used as consideration provided that
certificates of stock will be issued ONLY
AFTER actual encashment of promissory note
C. 2. SUBSCRIPTION AGREEMENTS (SEE
or performance of such services.
ABOVE)

C. SHARES OF STOCK C. 3. CONSIDERATION FOR SHARES OF

STOCK (SEE ABOVE)
C. 1. NATURE OF STOCK
Shares of stock are units into which the C. 4. WATERED STOCK
capital stock is divided. A share of stock
represents interest of the holder thereof to I. DEFINITION
participate in the management of the These are shares issued as fully paid when in
corporation, to share proportionally in the truth no consideration is paid in any form, or
profits of the business and, upon liquidation, the consideration received is known to be less
to obtain an aliquot part of corporate assets than the par value or issued value of the
after all corporate debts have been paid. shares. (Sec. 65)
[Campos]
These include the following:
A stockholder may own the share even if he is
not holding a certificate of stock. Issued without consideration (bonus
share)
Issued as fully paid when the
Share of Stock Certificate of Stock corporation has received less sum of
Evidence of the money than its par or issued value
holders ownership of (discounted share)
Unit of interest in the stock and of his Issued for consideration other than
a corporation right as a shareholder actual cash (i.e., property or services),
and up to the extent the fair valuation of which is less than
specified therein. its par or issued value
An incorporeal or Issue stock dividend when there are
intangible Concrete and tangible no sufficient retained earnings or
property surplus profit to justify it.
May be issued by Note
the corporation May be issued only if Subsequent increase in the value of the
even if the the subscription is fully property used in paying the stock does not do
subscription is not paid away with the watered stocks. Subsequent
fully paid increase in the value of the property used in
paying the stock does not cure the defect in
issuance. The existence of watered stocks is
A share of stock only typifies an aliquot part determined at the time of issuance of the stock.
of the corporation's property, or the right to
share in its proceeds to that extent when
distributed according to law and equity, but II. LIABILITY OF DIRECTORS FOR
its holder is not the owner of any part of the W ATERED STOCKS
capital of the corporation. Nor is the
shareholder entitled to the possession of any Any director or officer of a corporation
definite portion of its property or assets. The consenting to the issuance of watered stocks
stockholder is not a co-owner or tenant in or who, having knowledge thereof, does not
PAGE 194 OF 320
UP LAW BOC CORPORATION CODE MERCANTILE LAW

forthwith express his objection in writing and with the statutory regulations is necessary.
file the same with the corporate secretary [Philippine Trust Corp. v. Rivera (1923)]
shall be solidarily liable with the
stockholder concerned to the corporation and
its creditors for the difference in value (Sec. C. 5. SITUS OF THE SHARES OF STOCK
65).
It is a general rule that for purposes of
execution, attachment and garnishment, it is
not the domicile of the owner of a certificate
III. TRUST FUND DOCTRINE FOR
but the domicile of the corporation which is
LIABILITY FOR W ATERED STOCKS
decisive. [Chua Guan v. Samahang
Where the corporation issues watered stock Magsasaka, Inc. (1935)]
and thereby assumes an ostensible
capitalization in excess of its real assets, the
transaction necessarily involves the C. 6. CLASSES OF SHARES OF STOCK
misleading of subsequent creditors, and
Shares of stock of stock corporations may be
whether done with that purpose actually in
divided into classes or series of shares or both.
mind or not, is at least a constructive fraud
Each class or series of shares may have rights,
upon creditors. Hence, it is held that recovery
privileges or restrictions, as stated in the
may be had by a creditor in such case, even
Articles of Incorporation.
though the corporation itself has no cause of
action against the stockholders. Some of the Classification of shares:
earlier decisions put the right of recovery in (1) Common shares
such a case upon the so-called trust fund
doctrine. In any view of the matter, however, (2) Preferred shares
the creditors right of action to compel the (a) Preference as to dividends
making good of the representation as to the
corporations capital is based on fraud, and (i) Participating and non-
the trust fund doctrine is only another way of participating
expressing the same underlying idea. [De (ii) Cumulative and non-cumulative
Leon]
(3) Par value shares
Despite the view of foreign authors that the
fraud theory is the prevailing view, it would (4) No-par value shares
seem that in the Philippine jurisdiction, the (5) Founders shares
trust fund doctrine on watered stock prevails.
(6) Redeemable shares
It is established doctrine that subscription to
the capital of a corporation constitute a fund (7) Treasury shares
to which creditors have a right to look for (8) Convertible shares
satisfaction of their claims and that the
assignee in insolvency can maintain an action (9) Non-voting shares
upon any unpaid stock subscription in order
to realize assets for the payment of its debts
(citing Velasco v. Poizat, 1918). A corporation General Rule
has no power to release an original No share may be deprived of voting rights
subscriber to its capital stock from the (Sec. 6)
obligation of paying for his shares, without a
valuable consideration for such release; and Exceptions
as against creditors a reduction of the capital Preferred non-voting or
stock can take place only in the manner and
under the conditions prescribed by the Redeemable shares,
statute or the charter or the articles of
Provided by the Code (e.g., Treasury
incorporation. Moreover, strict compliance
shares)

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There shall always be a class/series of shares Preference as to dividends:

which have COMPLETE VOTING RIGHTS (Sec.
(1) Participating and Non-participating
6)
(a) Participating - those which, after
getting their fixed dividend
Doctrine of Equality of Shares preference, share with common
stocks the rest of the dividends.
Each share shall be EQUAL in ALL respects to
every other share, except as otherwise (b) Non-participating - those which,
provided in the Articles of Incorporation and after getting their fixed dividend
stated in the certificate of stock (Sec. 6) preference, have no more right to
share in the remaining dividends with
the common stocks.
I. COMMON SHARES
(c) Unless otherwise provided, preferred
The most common type of shares, which stocks are non-participating.
enjoy no preference but the owners thereof
(2) Cumulative and Non-cumulative
are entitled to management (via exclusive
right to vote) of the corporation and to equal (a) Cumulative - regardless of lack of
pro-rata division of profits after preference. It profits in any given year, and lack of
represents a residual ownership interest in declaration of dividends, the arrears
the corporation. for such year have to be paid to the
preferred stocks in a subsequent year
(once profits are made) before any
II. PREFERRED SHARES dividends can be paid to the common
stocks.
Stocks which are given preference by the
issuing corporation in dividends, or in the (b) Non-Cumulative entitlement to
distribution of assets of the corporation in receipt of dividends essentially
case of liquidation, or both, or such other depends on declaration of such;
preferences as may be stated in the Articles types:
of Incorporation which do not violate the
(i) Discretionary right to
Corporation Code.
dividends in a particular year
Unless the right to vote is clearly withheld, a depends on the discretion of the
preferred stockholder would have such right board, even if the corporation has
as it is an incident to stock ownership. profits.
Lim itations: (ii) Mandatory a positive duty is
imposed to declare preferred
Preferred shares can only be issued with
dividends every year that profits
par value.
are earned.
Preferred shares must be stated in the (iii) Earned cumulative or
Articles of Incorporation and in the dividend credit board with
certificate of stock. discretion not to declare
The BOD may fix the terms and dividends even if there were
conditions only when so authorized by profits in a certain year; however,
the Articles of Incorporation and such once the board decides that
terms and conditions shall be effective dividends will be declared, the
upon filing a certificate thereof with the preferred stockholders have a
SEC. right to arrears in dividends for
the years when there were profits
but no dividend was declared.

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(c) In the absence of any express
stipulation, preferred stocks are
deemed cumulative.
Note: Only preferred and redeemable shares
may be deprived of the right to vote. (Sec. 6,
Corporation Code)
Exception: As otherwise provided in the
Corporation Code.
III. PAR VALUE SHARES
These are shares with a stated value set out
in the Articles of Incorporation. This remains
the same regardless of the profitability of the
corporation. This gives rise to financial
stability and is the reason why banks, trust
corporations, insurance companies and
building and loan associations must always
be organized with par value shares.
Par value is minimum issue price of such
share in the Articles of Incorporation which
must be stated in the certificate.
IV. NO-PAR VALUE SHARES
These are shares without a stated value.
A no par share does not purport to represent
any stated proportionate interest in the
capital stock measured by value, but only an
aliquot part of the whole number of such
shares of the issuing corporation (Agbayani)
Lim itations:
Cannot have an issue price of less
than P5.00 per share (Sec. 6)
Once issued, they shall be deemed
fully paid and non-assessable and
the holders of such shares shall not
be liable to the corporation or to its
creditors in respect thereto (Sec. 6)
Entire consideration received by the
corporation shall be treated as
capital and shall not be available for
distribution as dividends (Sec. 6)
Articles of Incorporation must state
the fact that the corporation issues
no-par shares and the number of
shares
PAGE 197 OF 320
MERCANTILE LAW
Cannot be issued as preferred stocks
(Sec. 6)
Cannot be issued by banks, insurance
companies, trust companies, building
and loan associations, and public
utilities (Sec. 6)
Issued price may be fixed in the
Articles of Incorporation, or by the
BOD pursuant to authority conferred
upon it by the Articles of
Incorporation, or, in the absence
thereof, by majority vote of the
outstanding shares in a meeting
called for the purpose (Sec. 62).
V. FOUNDERS SHARES (SEC. 7)
These are shares, classified as such in the
Articles of Incorporation, which are given
certain rights and privileges not enjoyed by
the owners of other stocks.
Where exclusive right to vote and be voted for
in the election of directors is granted, such
right must be for a limited period not to
exceed 5 years subject to approval by SEC.
The 5 year period shall commence from date
of approval by SEC.
VI. REDEEMABLE SHARES (SEC. 8)
These are shares which permit the issuing
corporation to redeem or purchase its shares.
Lim itations:
Redeemable shares may be issued
only when expressly provided for in
the Articles of Incorporation (Sec. 8).
The terms and conditions affecting
said shares must be stated both in
the Articles of Incorporation and in
the certificate of stock (Sec. 8).
Redeemable shares may be deprived
of voting rights in the Articles of
Incorporation.
The corporation is required to
maintain a sinking fund to answer for
redemption price if the corporation is
required to redeem. [SEC-OGC
Opinion No. 07-03]
UP LAW BOC CORPORATION CODE
The redeemable shares are deemed
retired upon redemption unless
otherwise provided in the Articles of
Incorporation (i.e., if the Articles of
Incorporation allows for reissuance of
such shares).
Unrestricted retained earnings is NOT
necessary before shares can be
redeemed but there must be
sufficient assets to pay the creditors
and to answer for operations.
[Republic Planters Banks v. Agana
(1997)]
Redemption cannot be made if such
redemption will result in insolvency or
inability of the corporation to meet its
obligations (SEC Opinion, 24 Aug
1987).
Note
Redeemable shares reacquired shall be
considered retired and no longer issuable,
unless otherwise provided in the Articles of
the redeeming corporation (SEC Rules
Governing Redeemable and Treasury Shares,
26 April 1982).
VII. TREASURY SHARES (SEC. 9)
These are shares which have been issued and
fully paid for, but subsequently re-acquired
by the issuing corporation by purchase,
redemption, donation or through some other
lawful means. Such shares may again be
disposed of for a reasonable price fixed by the
BOD.
They are excluded from the definition of
outstanding capital stock [Sec. 137]
Treasury shares shall have no voting right as
long as such shares remain in the Treasury.
[Sec. 57]
Pre-emptive right of stockholders in close
corporations shall extend to reissuance of
treasury shares unless otherwise provided in
the Articles of Incorporation. [SEC. 102]
Treasury shares are issued shares, but being
in the treasury, do not have the status of
PAGE 198 OF 320
MERCANTILE LAW
outstanding shares. Consequently, although
a treasury share, not retired by reacquisition,
may be re-issued or resold, such share, as
long as it is held by the corporation as a
treasury share, participates neither in the
dividends, because dividends cannot be
declared by the corporation to itself nor in the
meetings of the corporation as voting stock,
for otherwise equal distribution of voting
powers among stockholders will be
effectively lost and the directors will be able
to perpetuate their control of the corporation,
though it still represents a paid for interest in
the property of the corporation. [CIR v.
Manning (1975) cited in San Miguel
Corporation v. Sandiganbayan (2000)]
Note
Delinquent stocks, which are stocks that have
not been fully paid, may become treasury
stocks upon bid of the corporation in absence
of other bidders (Sec.68).
VIII. CONVERTIBLE SHARES
A type of preferred stock that the holder can
exchange for a predetermined number of
common shares at a specified time
IX. NON-VOTING SHARES (SEC. 6)
General Rule
Non-Voting Shares are not entitled to vote.
Exceptions
Amendment of the Articles of
Incorporation
Adoption and amendment of by-laws
Sale, lease, exchange, other
disposition of all or substantially all
of the corporate property
Incurring, creating or increasing
bonded indebtedness
Increase or decrease of capital stock
Merger and consolidation
Investment of corporate funds in
another corporation or business
Dissolution of the corporation
UP LAW BOC CORPORATION CODE MERCANTILE LAW

Common Preferred Par No Par* Treasury Redeem- Founders

able
Definition Stock which Stock Shares that Shares Special
entitles the which have been issued by the shares
owner of entitles issued and corporation whose
such stocks holder to fully paid but that may be exclusive
to an equal some subsequently taken up by rights and
pro rata preference reacquired by the corp privileges
division of either in the issuing upon are
profits dividends corporation expiration of determined
or by lawful a fixed by the AOI.
distribution means. period.
of assets regardless of
upon the existence
liquidation, of
or in both unrestricted
retained
earnings
Voting Usually Can vote Depends if Depends if None for as Usually
Rights vested with only under its its long as stock denied
the exclusive certain common common remains in voting rights.
right to vote circumstan or or the treasury
ces preferred preferred (Sec. 57)
Value Depends if Stated par Fixed in Value not
its par or no value the AOI, fixed in the
par and AOI, and
indicated therefore
in the not
stock indicated
certificate. in the
May be stock cert.
sold at a Price may
value be set by
higher, BOD, SHs
but not or fixed in
lower, the AOI
than that after.
fixed in
the AOI.
Preference No First crack
Upon advantage, at
Liquida- priority, or dividends /
tion preference profits /
over any distribution
other SH in of assets
the same
class

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D. PAYMENT OF BALANCE OF
SUBSCRIPTION (SEC. 66 AND 67)
D. 1. CALL BY BOD
The BOD of any stock corporation may at any
time declare due and payable to the
corporation unpaid subscriptions to the
capital stock and may collect the same or
such percentage thereof, in either case with
accrued interest, if any, as it may deem
necessary.
Payment shall be made on the date specified
in the contract of subscription or on the date
stated in the call. Failure to pay on such date
shall render the entire balance due and
payable and shall make the stockholder
liable for interest at the legal rate on such
balance, unless a different rate of interest is
provided for in the by-laws. If within 30 days
from said date no payment is made, all stocks
covered by said subscription shall become
delinquent and subject to sale under Sec. 68
unless the BOD orders otherwise.
There are 2 instances when call is not
necessary to make the subscriber liable for
payment of the unpaid subscription:
(1) When, under the terms of the
subscription contract, subscription is
payable, not upon call, but immediately,
or on a specified day, or when it is
payable in installments at specified
times; and
(2) If the corporation becomes insolvent,
which makes the liability on the unpaid
subscription due and demandable,
regardless of any stipulation to the
contrary in the subscription agreement
[Villanueva]
D. 2. NOTICE REQUIREMENT
Where call is necessary, notice must be given
to the stockholder concerned. A call without
notice to the subscriber is practically no call
at all.
The notice is regarded as a condition
precedent to the right of recovery. It must,
therefore, be alleged and proved to maintain
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MERCANTILE LAW
an action for the call. [Lingayen Gulf Electric
Power Co., Inc. v. Baltazar (1965)]
The right to notice of call, however, may
be waived by the subscriber. [De Leon]
D. 3. SALE OF DELINQUENT SHARES (SEC.
68)
Delinquent Shares - These are shares for
which the corresponding subscription or
balance remains unpaid after a grace period
of 30 days from the date specified in the
contract of subscription or from the date
stated in the call made by the BOD. (Sec. 67)
I. EFFECT OF DELINQUENCY (SEC. 71)
No delinquent stock shall be voted for or be
entitled to vote or to representation at any
stockholders meeting
The holder thereof shall NOT be entitled to
any of the rights of a stockholder except the
right to dividends. But the dividends it will
receive will be subject to Sec. 43, that is, cash
dividends shall first be applied to the unpaid
balance on the subscription plus costs and
expenses, and stock dividends shall be
withheld until the unpaid subscription is fully
paid.
Such shares shall be subject to delinquency
sale.
II. CALL BY RESOLUTION OF THE BOD
(SEC. 68)
The BOD may, by resolution, order the sale of
delinquent stock and shall specifically state
the amount due on each subscription plus all
accrued interest, and the date, time and
place of the sale which shall not be less than
30 days nor more than 60 days from the date
the stocks became delinquent, which is 30
days after the date specified in the contract of
subscription or on the date stated in the call.
UP LAW BOC CORPORATION CODE
III. NOTICE OF SALE
If the BOD resolves to proceed with the sale:
(1) Notice of sale and a copy of the
resolution shall be sent to every
delinquent stockholder either
personally or by registered mail.
(2) Notice of sale shall furthermore be
published once a week for 2
consecutive weeks in a newspaper of
general circulation in the province or
city where the principal office of the
corporation is located.
IV. AUCTION SALE AND THE HIGHEST
BIDDER
Procedure for delinquency sale (Sec.
68)
Call for payment made by the BOD.
Notice of call served on each stockholder.
Notice of delinquency issued by the BOD
upon failure of the stockholder to pay
within 30 days from date specified.
Service of notice of delinquency on the
non-paying subscriber, PLUS publication
in a newspaper of general circulation in
the province or city where the principal
office of the corporation is located, once a
week for 2 consecutive weeks.
Note
Requirements on notice and publication are
mandatory. Lacking such requirements, the
stockholder may question the sale as
provided under Sec. 69.
Public auction - the highest bidder is
one who is willing to pay the balance of
the subscription for the least number of
shares. If there are no bidders, the
corporation must bid for the whole
number of shares regardless of how
much the shareholders has paid. Such
stocks will pertain to the corporation as
fully paid treasury stocks.
The delinquent stockholder may stop the
auction by paying to the corporation on or
before the date specified for the sale the
balance due on his subscription, plus accrued
PAGE 201 OF 320
MERCANTILE LAW
interest, costs of advertisement and expenses
of the sale.
Otherwise, the public auction shall proceed
and the delinquent shares shall be sold to the
bidder that will pay the full amount of the
balance of subscription with accrued interest,
costs and expenses of the sale, for the
smallest number of shares or fraction of a
share. The stock so purchased shall be
transferred to such purchases in the books of
the corporation and a certificate of such stock
shall be issued in his favor. The remaining
shares, if any, shall be credited in favor of the
delinquent stockholder who shall likewise be
entitled to the issuance of a certificate of
stock covering such shares.
Irregularities in the delinquency sale
(Sec. 69)
Action to recover delinquent stock must
be on the ground of irregularity or defect
in:
o the notice of sale or
o in the sale itself of delinquent stock
Unless, party seeking to recover first pays
or tenders to the party holding the stock
the sum for which the same was sold,
with interest from the date of sale at the
legal rate.
The action must be commenced within 6
months from the date of sale.
E. CERTIFICATE OF STOCK
E. 1. NATURE OF THE CERTIFICATE
A certificate of stock is an instrument
formally issued by the corporation with the
intention that the same constitute the best
evidence of the rights and status of a
shareholders (not a condition precedent to
the acquisition of such rights).
A certificate of stock is the paper
representative or tangible evidence of the
stock itself and of the various interests
therein. The certificate is not a stock in the
corporation but is merely evidence of the
holders interest and status in the corporation,
UP LAW BOC CORPORATION CODE
his ownership of the share represented
thereby. It is not in law the equivalent of such
ownership. It expresses the contract between
the corporation and the stockholder, but is
not essential to the existence of a share of
stock or the nature of the relation of
shareholder to the corporation. [Makati
Sports Club v. Cheng (2010)]
Shares of stock issued pursuant to requisites
in Section 63 are personal property and may
be transferred by delivery of the certificate or
certificates indorsed by the owner, attorney in
fact, or other person legally authorized to
make the transfer. [Sec. 63]
E. 2. UNCERTIFICATED SHARES
Uncertificated Shares/Securities
Security evidenced by electronic or similar
records (Sec. 3.14, Securities Regulation Code)
Notwithstanding Sec. 63 of the
Corporation Code (certificate of stock
and transfer of shares), a corporation
whose securities are registered pursuant to
the SRC or listed on securities exchange may:
If so resolved by the BOD and
agreed by a shareholder, investor
or securities interm ediary, issue
shares to, or record the transfer of some
or all its shares into the name of such
shareholders, investors or, securities
intermediary in the form of uncertified
securities
The use of uncertified securities in these
circumstances shall be without prejudice to
the rights of the securities intermediary
subsequently to require the corporation to
issue a certificate in respect of any shares
recorded in its name; and
If so provided in its articles of
incorporation and by-laws, issue all
of the shares of a particular class in the
form of uncertificated securities and
subject to a condition that investors may
not require the corporation to issue a
certificate in respect of any shares
recorded in their name.
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Transfers of uncertificated securities,
how m ade
Valid as between parties - validly
made and consummated by appropriate
book-entries in the securities
intermediaries, or in the stock and
transfer book held by the corporation or
the stock transfer agent.
A transfer made pursuant to the foregoing
has the effect of delivery of a security in
bearer form or duly indorsed in blank
representing the amount of security or right
transferred, including the unrestricted
negotiability of that security by reason of such
delivery.
Valid as to corporation when the
transfer is recorded in the books of the
corporation so as to show the names of
the parties to the transfer and the
number of shares transferred (Sec. 43,
Securities Regulation Code).
E. 3. NEGOTIABILITY
Theory of Quasi-Negotiability
A stock certificate is regarded as quasi-
negotiable only in the sense that it may be
transferred by endorsement, coupled with
delivery.
This notwithstanding, it is well-known that
the instrum ent is non-negotiable,
because the holder thereof takes it without
prejudice to such rights or defenses as the
registered owner or creditor may have under
the law, except insofar as such rights or
defenses are subject to the limitations
imposed by the principles governing estoppel.
Certificates of stock are not negotiable
instruments. Consequently, a transferee
under a forged assignment acquires no title
which can be asserted against the true owner,
unless the latters negligence has been such
as to create an estoppel against him. If the
owner of the certificate has endorsed it in
blank, and it is stolen from him, no title is
acquired by on innocent purchaser for value.
[De los Santos v. Republic (1955)]
UP LAW BOC CORPORATION CODE
I. REQUIREMENTS FOR VALID
TRANSFER OF STOCKS
For a valid transfer of stocks, the
requirements are as follows:
(1) There must be delivery of the stock
certificate;
(2) The certificate must be endorsed by the
owner or his attorney-in-fact or other
persons legally authorized to make the
transfer; and
(3) To be valid against third parties, the
transfer must be recorded in the books of
the corporation (i.e., showing the names
of the parties to the transaction, the date
of the transfer, the number of the
certificate or certificates and the number
of shares transferred) [Sec. 63] [Bitong v.
CA (1998)]
No shares of stock against which the
corporation holds an unpaid claim shall be
transferable in the books of the corporation
(Sec. 63).
The Corporation Code acknowledges that the
delivery of a duly indorsed stock certificate is
sufficient to transfer ownership of shares of
stock in stock corporations. Such mode of
transfer is valid between the parties. In order
to bind third persons, however, the transfer
must be recorded in the books of the
corporation. Clearly then, the absence of a
deed of assignment is not a fatal flaw which
renders the transfer invalid.
Requisites for a valid transfer Sec. 63:
(1) Between the parties:
(a) Delivery
(b) Indorsement
(2) To be valid as to third persons:
(a) Recorded in the books of the
corporation [Republic v. Estate of
Hans Menzi (2005)]
The execution of a deed of sale does not
necessarily make the transfer effective. The
delivery of the stock certificate duly indorsed
by the owner is the operative act that
transfers the shares. The absence of delivery
is a fatal defect which is not cured by mere
PAGE 203 OF 320
MERCANTILE LAW
execution of a deed of assignment. [Rural
Bank of Lipa City v. CA (2001)]
The stock and transfer book is the basis for
ascertaining the persons entitled to the rights
and subject to the liabilities of a
stockholder. Where a transferee is not yet
recognized as a stockholder, the corporation
is under no specific legal duty to issue stock
certificates in the transferees name. [Ponce v.
Alsons Cement Corp. (2002)]
Citing Hager v. Bryan (1911): A
mandamus should not issue to compel
the secretary of a corporation to make a
transfer of the stock on the books of the
company, unless it affirmatively appears
that he has failed or refused so to do,
upon the demand either of the person in
whose name the stock is registered, or of
some person holding a power of attorney
for that purpose from the registered
owner of the stock.
A transfer of shares is not valid unless
recorded in the books of the corporation. The
purpose of registration is two-fold: (a) to
enable the transferee to exercise all the rights
of a stockholder, including the right to vote
and to be voted for, and (b) to inform the
corporation of any change in share ownership
so that it can ascertain the persons entitled to
the rights and subject to the liabilities of a
stockholder. [Batangas Laguna Tayabas Bus
Co. v. Bitangas (2001)]
Until challenged in a proper proceeding,
a stockholder of record has a right to
participate in any meeting; his vote can
be properly counted to determine
whether a stockholders resolution was
approved, despite the claim of the
alleged transferee. On the other hand, a
person who has purchased stock, and
who desires to be recognized as a
stockholder for the purpose of voting,
must secure such a standing by having
the transfer recorded on the corporate
books. Until the transfer is registered, the
transferee is not a stockholder but an
outsider.
UP LAW BOC CORPORATION CODE
E. 4. ISSUANCE
I. FULL PAYMENT
General Rule
No certificate of stock shall be issued to a
subscriber until the full am ount of his
subscription together with interest and
expenses (in case of delinquent shares), if any
is due, has been paid (Sec. 64)
Exception
Where it was the practice of the corporation
since its inception to issue certificates of stock
to its individual SHs for unpaid shares of
stock and to give full voting power to shares
fully paid. [Baltazar v. Lingayen Gulf Electric
Power Company (1965)]
II. PAYMENT PRO-RATA
The entire subscription must be paid first
before the certificates of stock can be issued.
Partial payments are to be applied pro rata to
each share of stock subscribed. [Nava Peers
Mktg. Corp. and Fua Cun v. Summers (1923)]
E. 5. LOST OR DESTROYED CERTIFICATES
Procedure for re-issuance in case of
loss, stolen or destroyed certificates:
(1) Registered owner to file an affidavit of
loss with the corporation.
(2) Publication of notice of loss in a
newspaper of general circulation
published in the place where the
corporation has its principal office, once a
week for 3 consecutive weeks at the
expense of the owner of the certificate of
stock
(3) Cancellation of the certificate in the
books of the corporation and issuance of
new certificates, after the expiration of 1
year from the date of the last publication
and there is no contest. The right to make
such contest shall be barred after the
expiration of the one-year period.
(4) Issuance of new certificates before 1 year
period if the registered owner files a bond
and there is no pending contest
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MERCANTILE LAW
regarding the ownership of said
certificates.
Note
Except in cases of fraud, bad faith, or
negligence on the part of the corporation and
its officers, no action may be brought against
the corporation which shall have issued
certificates of stock in lieu of those lost,
stolen or destroyed pursuant to the above
procedure.
F. STOCK AND TRANSFER BOOK
F. 1. CONTENTS
a record of all stocks in the names of the
stockholders alphabetically arranged;
the installments paid and unpaid on all
stock for which subscription has been
made, and the date of payment of any
installment;
a statement of every alienation, sale or
transfer of stock made, the date thereof,
and by and to whom made; and
such other entries as the by-laws may
prescribe.
F. 2. WHO MAY MAKE VALID ENTRIES
(1) An SEC-licensed stock transfer agent; or
(2) The Corporate Secretary of the stock
corporation provided all rules and
regulations imposed on stock transfer
agents shall be applicable, except
payment of license fee.
G. DISPOSITION AND ENCUMBRANCE
OF SHARES
G. 1. ALLOWABLE RESTRICTIONS ON THE
SALE OF SHARES
General Rule
Shares of stock so issued are personal
property and may be transferred (Sec. 63).
(FREE TRANSFERABILITY OF SHARES)
UP LAW BOC CORPORATION CODE MERCANTILE LAW

Exception G. 4. SALE OF ALL OF SHARES NOT FULLY

PAID
In CLOSE corporations, restrictions on the
right to transfer shares may be provided in On the other hand, the SEC has opined that
the Articles of Incorporation, by-laws and the entire subscription, although not yet fully
certificates (Sec. 98). paid, may be transferred to a single
transferee, who as a result of the transfer
must assum e the unpaid balance. It is
G. 2. SALE OF PARTIALLY PAID SHARES necessary, however, to secure the consent
of the corporation since the transfer of
Under Sec. 63 of the Corporation Code, no
subscription rights and obligations
shares of stock against which the corporation
contemplates a novation of contract which
holds any unpaid claim shall be transferable
under Article 1293 of the Civil Code cannot be
in the books of the corporation. Therefore, a
made without the consent if the creditor.
corporation may refuse to acknowledge and
[Villanueva]
register a sale or assignment of shares which
are not fully paid, and may continue to hold
the original subscriber liable on the payment
G. 5. SALE OF FULLY PAID SHARES
of the subscription.
Shares of stock so issued are personal
However, in China Banking Corp. v. CA
property and may be transferred by delivery
(1997), the court said that the above
of the certificate or certificates indorsed by
principle in section 63 cannot be utilized by
the owner or his attorney-in-fact or other
the corporation to refuse to recognize
person legally authorized to make the
ownership over pledged shares purchased at
transfer. No transfer however shall be valid
public auction. The term unpaid claims
except as between the parties until the
refers to any unpaid claims arising from
transfer is recorded in the books of the
unpaid subscription, and not to any
corporation showing the names of the parties
indebtedness which a subscriber or
to the transaction, the date of the transfer,
stockholder may owe the corporation arising
the number of the certificate or certificates
from any other transactions. Obligations
and the number of shares transferred (Sec.
arising from unpaid monthly dues do not fall
63)
within the coverage of Sec. 63.

G.6. REQUISITES OF A VALID TRANSFER

G. 3. SALE OF A PORTION OF SHARES NOT
FULLY PAID Same as requirements for valid transfer of
stocks
The SEC has opined on several occasions that
a stockholder who has not paid the full
amount of his subscription cannot transfer
G. 7. INVOLUNTARY DEALINGS WITH
part of his subscription in view of the
SHARES
indivisible nature of a subscription contract.
The reason behind the principle of The right of a stockholder to pledge,
disallowing transfer of not fully paid mortgage or otherwise encumber his shares
subscription to several transferee is that it is recognized under Sec. 55 of the
would be difficult to determine whether or Corporation Code, which regulates the
not the partial payments made should be manner of voting on pledged or mortgaged
applied as full payment for the corresponding shares.
number of shares which can only be covered
If the restriction on the right to pledge or
by such payment or as proportional payment
mortgage shares of stock absolutely prohibits
to each and all of the entire number of
the stockholders from pledging or
subscribed shares, and it would be difficult to
mortgaging their shares without the consent
determine the unpaid balance to be assumed
of the BOD, it would be violative of the
by each transferee. [Villanueva]
statutory right of the stockholders to
PAGE 205 OF 320
UP LAW BOC CORPORATION CODE
encumber shares of stock as allowed in Sec.
55. However, when the restriction merely
allows the corporation or existing
stockholders to accept the offer within the
option period, and thereafter, if no one
accepts the offer, the stockholder is free to
pledge or mortgage his shares in favor of any
3rd party, such provision is reasonable, valid
and binding.
By the strict application of Sec. 63 of the
Corporation Code to cover only the sale,
assignment or absolute disposition of shares
of stock, the SC has placed a bias against
voluntary sales, assignments or dispositions
of shares of stock vis--vis pledges,
mortgages, attachment or levy thereof. To be
valid and binding on third parties, the
voluntary sale, assignment or disposition of
shares requires the essential element of
registration in the stock and transfer book;
otherwise the sale, assignment or disposition
is considered void as to third parties, even
when they have actual notice. Whereas, when
it comes to pledge, mortgage, encumbrance,
attachment or levy of shares, registration
thereof in the stock and transfer book is not
essential either for validity or as a species of
notifying third parties. [Villanueva].
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MERCANTILE LAW
X. Dissolution and
Liquidation
Dissolution of a corporation is the
extinguishment of its franchise and the
termination of its corporate existence or
business purpose. However, for the purpose
only of winding up its affairs and liquidating
its assets, its corporate existence continues
for a period of 3 years from such dissolution
[Sec. 122].
Upon dissolution, the corporation ceases to
be a juridical person and consequently can no
longer continue transacting its business
[Campos].
Note: If no dissolution papers are filed with
the SEC by a corporation claiming dissolution
voluntarily, such corporation is still deemed
legally existing, notwithstanding the fact that
it has ceased to operate. [De Leon]
A. MODES OF DISSOLUTION
Based on jurisprudence, the methods of
effecting dissolution as prescribed by law are
exclusive, and a corporation cannot be
dissolved except in the manner prescribed by
law. [De Leon]
A.1. VOLUNTARY
I. W HERE NO CREDITORS ARE
AFFECTED [SEC. 118]
Notice of the meeting should be given to
the stockholders or members by personal
delivery or registered mail at least 30
days prior to the meeting.
The notice of meeting should also be
published for 3 consecutive weeks in a
newspaper published in the place where
the principal office of said corporation is
located. If no newspaper is published in
such place, then in a newspaper of
general circulation in the Philippines.
The resolution to dissolve must be
approved by the majority of the BOD/BOT
UP LAW BOC CORPORATION CODE
and approved by the stockholders
representing at least 2/3 of the
Outstanding Capital Stock or 2/3 of
members.
o Non-voting shares are entitled to vote
in this matter [Sec. 6. Par 6(8)]
A copy of the resolution shall be certified
by the majority of the BOD/BOT and
countersigned by the secretary.
The signed and countersigned copy will
be filed with the SEC and the latter will
issue the certificate of dissolution.
Note
Thus, except for the expiration of its term, no
dissolution can be effective without some act
of the State. [Daguhoy Enterprises v. Ponce
(1954)]
II. W HERE CREDITORS ARE
AFFECTED [SEC. 119]
A petition shall be filed with the SEC
containing the following:
o signature by a majority of its BOD or
BOT or other officers having
management of its affairs;
o verified by its president, or secretary
or one of its director or trustees;
o all claims and demands against the
corporation; and
o resolved upon by affirmative vote of
the stockholders representing at least
2/3 of the Outstanding Capital Stock
or 2/3 of members;
If the petition is sufficient in form and
substance, the SEC shall issue an order
fixing the date on or before which
objections to the petition may be filed.
Such date shall not be less than 30 days
nor more than 60 days after the entry of
the order.
A copy of the order shall be published at
least once a week for 3 consecutive weeks
in a newspaper of general circulation, or
if there is no newspaper in the city or
municipality of the principal office,
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MERCANTILE LAW
posting for 3 consecutive weeks in 3
public places is sufficient.
A hearing shall be conducted 5 days after
the lapse of the expiration of the time to
file objections.
If the objections are insufficient or the
material facts in the petition are true,
judgment shall be rendered dissolving
the corporation and directing the
disposition of assets. The judgment may
include appointment of a receiver.
o As long as 2/3 vote is obtained, no
member/ stockholder can prevent
such dissolution unless the majority
stockholders acted in bad faith. The
latter may be held liable for damages
[Campos].
o Even where there are creditors of the
corporation who may be prejudiced
by the dissolution, it is still possible
for the corporation to terminate its
existence prior to the expiration of its
term, provided said creditors are
given the opportunity to present their
claims and objections so that their
interests may be protected [Campos].
III. BY SHORTENING OF CORPORATE
TERM
A voluntary dissolution may be effected by
amending the Articles of Incorporation to
shorten the corporate term; and upon
approval of the expired shortened term, the
corporation shall be deemed dissolved
without any further proceedings.
A publication of notice of dissolution is
required and cannot be dispensed with by
alleging that it was not required in Sec. 120
and that no creditors will be prejudiced by its
dissolution. [SEC Opinion, August 30, 1988]
SEC Opinion No. 06-20, Mar. 13, 2006:
If the shortened term expires before the
SEC approval the corporation will be
dissolved upon the SEC approval
If the shortened term expires after the
SEC approval the corporation will be
dissolved upon the expiration of the
shortened term
UP LAW BOC CORPORATION CODE
If SEC fails to act within 6 months from
filing of the amended Articles of
Incorporation and shortened term expires
after the 6-month period the
corporation will be dissolved upon the
expiration of the shortened term.
If SEC fails to act within 6 months from
filing of the amended Articles of
Incorporation and shortened term expires
before the 6-month period the
corporation will be dissolved at the end of
the 6-month period. [Campos]
A.2. INVOLUNTARY
I. BY EXPIRATION OF CORPORATE
TERM
Once the period expires, the corporation is
automatically dissolved without any other
proceeding and it cannot thereafter be
considered a de facto corporation.
II. FAILURE TO ORGANIZE AND
COMMENCE BUSINESS W ITHIN 2
YEARS FROM INCORPORATION
Failure to formally organize and commence
the transaction of its business or construction
of its works within 2 years - its corporate
powers shall cease and the corporation shall
be deemed dissolved [Sec. 22]
Dissolution in this case is automatic
[Campos].
Contrary view : Since there is a defense
available to the corporation, that is, if its
failure to organize and commence its
business is due to causes beyond the
control of the corporation as may be
determined by the SEC, therefore, the
dissolution is not automatic.
Transacting business implies a continuity of
acts or dealings in the accomplishment of the
purpose for which the corporation was
formed. [Mentholatum v. Mangaliman (1946)]
Formal organization includes not only the
adoption of the by-laws but also the
establishment of the body which will
administer the affairs of the corporation and
exercise its powers
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MERCANTILE LAW
By-laws should be adopted within one
month of receipt of official notice of the
issuance of the certificate of
incorporation, otherwise the certificate
may be suspended or revoked [PD 902-A,
Sec. 6 (i)(5)]
Failure to operate for at least 5 consecutive
years after commencement of business -
ground for suspension or revocation of its
corporate franchise or certificate of
incorporation.
Note:
Dissolution in this case is not automatic.
[Campos]
The corporation may show that the failure to
commence its business or to continuously
operate is due to causes beyond its control
[Sec. 22]
III. LEGISLATIVE DISSOLUTION
The inherent power of Congress to make laws
carries with it the power to amend or repeal
them. Involuntary corporate dissolution may
be effected through the amendment or repeal
of the Corporation Code. [implied from Sec.
145, De Leon]
The limitations on the power to dissolve
corporations by legislative enactment are as
follows:
(1) Under the Constitution, the amendment,
alteration, or repeal of the corporate
franchise of a public utility shall be made
only when the common good so
requires;
(2) Under Sec. 145 of the Code, it is provided
that: No right or remedy in favor of or
against any corporation, its stockholders,
members, directors, trustees, or officers,
nor any liability incurred by any such
corporation, stockholders, members,
directors, trustees, or officers, shall be
removed or impaired either by the
subsequent dissolution of said
corporation or by any subsequent
amendment or repeal of this Code or of
any part thereof;
(3) While Congress may provide for the
dissolution of a corporation, it cannot
UP LAW BOC CORPORATION CODE
impair the obligation of existing contracts
between the corporation and third
persons, or take away the vested rights of
its creditors. [De Leon]
IV. DISSOLUTION BY THE SEC ON
GROUNDS UNDER EXISTING LAW S
A corporation may be dissolved by the SEC,
upon a verified complaint and after proper
notice and hearing, on the following grounds
[Sec. 6, par. i, PD 902-A]:
(1) Fraud in procuring its certificate of
registration
(2) Serious misrepresentation as to what the
corporation can or is doing to the great
prejudice of or damage to the general
public
(3) Refusal to comply or defiance of any
lawful order of the Commission
restraining commission of acts which
would amount to a grave violation of its
franchise
(4) Continuous inoperation for a period of at
least five years
(5) Failure to file by-laws within the required
period
(6) Failure to file required reports in
appropriate forms as determined by the
Commission within the prescribed period
(7) Other grounds
Other grounds:
(a) Violation by the corporation of any
provision of the Corporation Code [Sec.
144 BP 68]
(b) In case of a deadlock in a close
corporation, and the SEC deems it proper
to order the dissolution of the corporation
as the only practical solution to the
dispute (Sec. 104 BP 68)
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MERCANTILE LAW
B. METHODS OF LIQUIDATION
Liquidation is the process by which all the
assets of the corporation are converted into
liquid assets (cash) in order to facilitate the
payment of obligations to creditors, and the
remaining balance if any is to be distributed
to the stockholders. It is a proceeding in rem.
B.1. BY THE CORPORATION ITSELF
Under Sec. 122 of the Corporation Code, a
corporation whose corporate existence is
terminated in any manner continues to be a
body corporate for 3 years after its dissolution
for purposes of prosecuting and defending
suits by and against it and to enable it to
settle and close its affairs, culminating in the
disposition and distribution of its remaining
assets. It may, during the 3-year term,
appoint a trustee or a receiver who may act
beyond that period.
The termination of the life of a corporate
entity does not by itself cause the extinction
or diminution of the rights and liabilities of
such entity. If the 3-year extended life has
expired without a trustee or receiver having
been expressly designated by the corporation,
within that period, the BOD (or trustees) itself,
may be permitted to so continue as "trustees"
by legal implication to complete the
corporate liquidation. [Pepsi-Cola Products
Philippines, Inc. v. CA (2004)]
A corporation under liquidation may not
amend its articles of incorporation to extend
its lifespan. When a corporation is liquidating
pursuant to the statutory period of 3 years to
liquidate, it is only allowed to continue for the
purpose of final closure of its business and no
other purposes. In fact, within that period, the
corporation is enjoined from continuing the
business for which it was established.
[Alhambra Cigar and Cigarette Mfg. v. SEC
(1968)]
B.2. CONVEYANCE TO A TRUSTEE WITHIN
A 3-YEAR PERIOD
In this method, the 3-year limitation does not
apply, provided that the designation of the
trustees is made within the period.
UP LAW BOC CORPORATION CODE
General rule
There is no time limit within which the trustee
must finish the liquidation, and he may sue
and be sued as such even beyond the 3-year
period.
Exception
The trusteeship is limited in its duration by
the deed of trust.
Trustees to whom the corporate assets have
been conveyed pursuant to liquidation may
sue and be sued as such in all matters
connected with the liquidation. [National
Abaca v. Pore (1961)]
The trustee of a dissolved corporation may
commence a suit which can proceed to final
judgment even beyond the 3-year period of
liquidation. No reason can be conceived why
a suit already commenced by the corporation
itself during its existence, not by a mere
trustee who, by fiction, merely continues the
legal personality of the dissolved corporation,
should not be accorded similar treatment
to proceed to final judgment and execution
thereof. [Reburiano v. CA (1999)]
Unless the trusteeship is limited in its
duration by the deed of trust, there is no time
limit within which the trustee must finish
liquidation. [Board of Liquidators v Kalaw
(1967)]
B.3. BY MANAGEMENT COMMITTEE OR
REHABILITATION RECEIVER
In SECs judgment dissolving the corporation
and directing disposition of its assets as
justice requires, it may appoint a receiver to
collect such assets and pay the debts of the
corporation [Sec. 119].
The mere appointment of a receiver, without
anything more, does not result in the
dissolution of the corporation nor bar it from
the exercise of its corporate rights. [Leyte
Asphalt and Mineral Oil Co. Ltd., v. Block
Johnston and Breenbrawn (1928)]
PAGE 210 OF 320
MERCANTILE LAW
B.4. LIQUIDATION AFTER THREE YEARS
Q: What is the difference between
Liquidation and Rehabilitation?
A: Liquidation is the winding up of a
corporation so that assets are distributed to
those entitled to receive them. It is the
process of reducing assets to cash,
discharging liabilities and dividing surplus or
loss. On the other hand, rehabilitation
contemplates a continuance of corporate life
and activities in an effort to restore and
reinstate the corporation to its former
position of successful operation and solvency.
Both cannot be undertaken at the same time.
[Phil. Veterans Bank v. Employees Union
(2001)]
If full liquidation can only be effected after
the 3-year period and there is no trustee, the
directors may be permitted to complete the
liquidation by continuing as trustees by legal
implication. [Reburiano v CA (1999)]
A corporations BOD is not rendered functus
officio by its dissolution. Since Sec. 122 allows
a corporation to continue its existence for a
limited purpose, necessarily there must be a
board that will continue acting for and on
behalf of the dissolved corporation for that
purpose. [Aguirre vs. FQB+, Inc. (2013)]
The trustee of a corporation may continue to
prosecute a case commenced by the
corporation within 3 years from its dissolution
until rendition of the final judgment, even if
such judgment is rendered beyond the 3-year
period allowed by Sec. 122 of the Corporation
Code. However, an already defunct
corporation is barred from initiating a suit
after the lapse of the said 3-year period. If a
petition is filed after the corporate existence,
the effect is that petitioner lacks the capacity
to sue as a corporation. To allow such
petition to prosper, on the ground that it is for
the sole purpose of liquidating the
corporations assets, would be to circumvent
the provisions of Sec. 122 of the Corporation
Code. [Alabang Development Corporation v.
Alabang Hills Village Association and Rafael
Tinio (2014)]
UP LAW BOC CORPORATION CODE
XI. Other Corporations
A. CLOSE CORPORATIONS
General concept:
Most characteristic feature is the identity of
stock ownership and active management, i.e.,
all or most of the stockholders are active in
the corporate business either as directors,
officers or other key men in management
[Campos]
Statutory definition: [Sec. 96]
A close corporation is one whose articles of
incorporation provide that:
(1) All the corporation's issued stock of all
classes, exclusive of treasury shares, shall
be held of record by not more than a
specified number of persons, not
exceeding 20;
(2) All the issued stock of all classes shall be
subject to one or more specified
restrictions on transfer permitted by this
Title; and
(3) The corporation shall not list in any stock
exchange or make any public offering of
any of its stock of any class.
General Rule: Any corporation may
incorporate as a close corporation
Exceptions: mining or oil companies, stock
exchanges, banks, insurance companies,
public utilities, educational institutions and
corporations declared to be vested with
public interest
Notes
Under Sec. 96, the 3 provisions MUST appear
in the Articles of Incorporation, otherwise, a
corporation is not considered as a close
corporation. [San Juan Structural and Steel
Fabricators v CA (1998)]
However, do note that in the earlier case of
Dulay v CA (1993), the court did not look at
Sec. 96 in concluding that the corporation
involved was a close corporation.
PAGE 211 OF 320
MERCANTILE LAW
Also note that, even after satisfying the 3
mandatory provisions, a corporation shall not
be deemed a close corporation when at least
2/3 of its voting stock or voting rights is
owned or controlled by another corporation
which is not a close corporation within the
meaning of this Code.
A narrow distribution of ownership does not,
by itself, make a close corporation.
When a corporations Articles of
Incorporation does not contain the provisions
enumerated under Sec. 96 of the Code, such
corporation is not a close corporation. It
does not become one either, just because
only a few individuals owned 99.866% of its
subscribed capital stock. [San Juan Structural
and Steel Fabricators v. CA (1998)]
General Rule
Free transferability of shares - Shares of stock
so issued are personal property and may be
transferred
Exception
In close corporations:
Restriction on transfer provided in Articles of
Incorporation
Lim it: Restriction on the transfer must NOT
be more onerous than granting the existing
shareholders or corporation the option to
purchase the shares (Right of First Refusal).
Rationale: Considering the special
circumstances attending a close corporation
(e.g. formed by persons who know each other
well, thus they would want to choose the
persons who will be allowed in their group), it
is justifiable and even imperative for its
stockholders to protect themselves from
future conflicts by placing restrictions on the
right of each one of them to transfer his
shares to an outsider.
The stocks cannot be listed in the stock
exchange nor be publicly offered.
UP LAW BOC CORPORATION CODE
A.1. CHARACTERISTICS OF A CLOSE
CORPORATION
Direct m anagem ent by stockholders
(Sec. 97):
The stockholders themselves can directly
manage the corporation and perform the
functions of directors without need of
election:
(1) When they manage, stockholders are
liable as directors;
(2) There is no need to call a meeting to elect
directors;
(3) The stockholders active in the
management of the close corporation are
personally liable for corporate torts
unless the corporation has obtained
reasonably adequate liability insurance
[Sec. 100(5)]
Identity and number of stockholders
(Sec. 96):
(1) Stockholders of record not more than 20
(2) Stocks not publicly listed
(3) Restricted transfer of ownership
A.2. VALIDITY OF RESTRICTIONS ON
TRANSFER OF SHARES
Validity of Restrictions (Sec. 98)
Restrictions must appear in the articles of
incorporation and in the by-laws as
well as in the certificate of stock;
otherwise, the same shall not be binding on
any purchaser thereof in good faith.
Restrictions shall not be m ore onerous
than granting the existing stockholders or the
corporation the option to purchase the
shares of the transferring stockholder with
such reasonable terms, conditions or period
stated therein. After expiration of said period
and upon failure of the existing stockholders
or the corporation to purchase said shares,
the transferring stockholder may sell his
shares to any third person.
PAGE 212 OF 320
MERCANTILE LAW
A.3. ISSUANCE OR TRANSFER OF STOCK
IN BREACH OF QUALIFYING CONDITIONS
If stock of a close corporation is issued or
transferred to any person who is not entitled
under any provision of the articles of
incorporation to be a holder of record of its
stock, and if the certificate for such stock
conspicuously shows the qualifications of the
persons entitled to be holders of record
thereof, such person is conclusively
presumed to have notice of the fact of
his ineligibility to be a stockholder.
If the articles of incorporation of a close
corporation states the number of persons, not
exceeding 20, who are entitled to be holders
of record of its stock, and if the certificate for
such stock conspicuously states such number,
and if the issuance or transfer of stock to any
person would cause the stock to be held by
more than such number of persons, the
person to whom such stock is issued
or transferred is conclusively
presumed to have notice of this fact.
If a stock certificate of any close corporation
conspicuously shows a restriction on transfer
of stock of the corporation, the transferee
of the stock is conclusively presum ed
to have notice of the fact that he has
acquired stock in violation of the
restriction, if such acquisition violates
the restriction.
Whenever any person to whom stock of a
close corporation has been issued or
transferred has, or is conclusively presumed
under this section to have, notice either (a)
that he is a person not eligible to be a holder
of stock of the corporation, or (b) that transfer
of stock to him would cause the stock of the
corporation to be held by more than the
number of persons permitted by its articles of
incorporation to hold stock of the corporation,
or (c) that the transfer of stock is in violation
of a restriction on transfer of stock, the
corporation m ay, at its option, refuse
to register the transfer of stock in the
nam e of the transferee.
The provisions of subsection (4) shall not be
applicable if the transfer of stock, though
contrary to subsections (1), (2) of (3), has been
consented to by all the stockholders of the
close corporation, or if the close corporation
UP LAW BOC CORPORATION CODE
has amended its articles of incorporation in
accordance with this Title.
The term "transfer", as used in this section, is
not limited to a transfer for value.
The provisions of this section shall not impair
any right which the transferee may have to
rescind the transfer or to recover under any
applicable warranty, express or implied [Sec.
99]
Sum m ary:
CONCLUSIVE PRESUMPTION OF
NOTICE: Restriction conspicuously
shown in stock certificate
o that he is a person not eligible to
be a holder of stock of the
corporation
o that transfer of stock to him would
cause the stock of the corporation
to be held by more than the
number of persons permitted by
its articles of incorporation to hold
stock of the corporation
o that the transfer of stock is in
violation of a restriction on
transfer of stock
EFFECTS OF CONCLUSIVE
PRESUMPTION:
o General Rule: Corporation may, at
its option, refuse to register the
transfer of stock in the name of the
transferee
o Exceptions: Corporation may not
refuse if
Transfer is consented to by all
the stockholders
Articles of Incorporation has
been amended to remove the
restrictions
PAGE 213 OF 320
MERCANTILE LAW
A.4. WHEN BOARD MEETING IS
UNNECESSARY OR IMPROPERLY HELD
W hen Unnecessary
Any action by the directors of a close
corporation without a meeting shall
nevertheless be deemed valid if:
(1) Before or after such action is taken,
written consent thereto is signed by all
the directors; or
(2) All the stockholders have actual or
implied knowledge of the action and
make no prompt objection thereto in
writing; or
(3) The directors are accustomed to take
informal action with the express or
implied acquiescence of all the
stockholders; or
(4) All the directors have express or
implied knowledge of the action in
question and none of them makes
prompt objection thereto in writing [Sec.
101]
Manuel R. Dulay Enterprises v. CA
(1993): In a close corporation, a board
resolution authorizing the sale or mortgage
of the subject property is not necessary to
bind the corporation for the action of its
president. At any rate, corporate action taken
at a board meeting without proper call or
notice in a close corporation is deemed
ratified by the absent director unless the
latter promptly files his written objection with
the secretary of the corporation after having
knowledge of the meeting.
W hen Improperly Held
When a directors meeting is held without
proper call or notice, an action taken therein
within the corporate powers is deemed
ratified by a director who failed to attend.
UNLESS he promptly files his written
objection with the secretary of the
corporation after having knowledge thereof
[Sec. 101]
UP LAW BOC CORPORATION CODE
A.5. PRE-EMPTIVE RIGHT
The pre-emptive right of stockholders in close
corporations shall extend to all stock to be
issued, including reissuance of treasury
shares, whether for money, property or
personal services, or in payment of corporate
debts, UNLESS the articles of incorporation
provide otherwise [Sec. 102].
A.6. AMENDMENT OF ARTICLES OF
INCORPORATION
Amendment to the Articles of Incorporation
which seeks to:
(1) delete or remove any provision required
to be contained in the Articles of
Incorporation of Close Corporations
(under the Title on Close Corporations);
or
(2) to reduce a quorum or voting
requirement stated in said Articles of
Incorporation
Requires the affirmative vote of at least 2/3 of
the outstanding capital stock, whether with or
without voting rights, or of such greater
proportion of shares as may be specifically
provided in the Articles of Incorporation at a
meeting duly called.
PAGE 214 OF 320
MERCANTILE LAW
A.7. DEADLOCKS
Requisites:
(1) The directors or stockholders are so
divided respecting the management of
the corporation's business and affairs
(2) The votes required for any corporate
action cannot be obtained that the
business and affairs of the corporation
can no longer be conducted to the
advantage of the stockholders generally
Powers of the SEC in case of Deadlock
in Close Corporations
(1) Cancel or alter any provision in the
articles of incorporation or by-laws
(2) Cancel, alter or enjoin any resolution of
the corporation
(3) Direct or prohibit any act of the
corporation
(4) Require the purchase at their fair value of
shares of any stockholder either by any
stockholder or by the corporation
regardless of the availability of
unrestricted retained earnings.
(5) Appoint a provisional director
(6) Dissolve the corporation
(7) Granting such other relief as the
circumstances may warrant.
UP LAW BOC CORPORATION CODE MERCANTILE LAW

Close Corporations Regular Corporations

1. MANAGEMENT / BOARD AUTHORITY

There can be classification of directors into There is no such classification as in the case of close
one or more classes, each of whom may be corporations.
voted for and elected solely by a particular
class of stock; and

The articles of incorporation of a close Corporate Powers devolved upon BOD whose powers are
corporation may provide that the business executed by officers. Cannot provide that it be managed by
of the corporation shall be managed by stockholders
the stockholders of the corporation rather
BOD must be elected in a stockholders meeting
than by a BOD. So long as this provision
continues in effect: Stockholders of a corporation are separate and distinct from
directors
No meeting of stockholders need be called
to elect directors.
Unless the context clearly requires
otherwise, the stockholders of the
corporation shall be deemed to be
directors for the purpose of applying the
provisions of this Code.
The stockholders of the corporation shall
be subject to all liabilities of directors.

The articles of incorporation may likewise Officers must be elected by the BOD
provide that all officers or employees or
that specified officers or employees shall
be elected or appointed by the
stockholders, instead of by the BOD.

2. MEETINGS

Unless the by-laws provide otherwise, any
action by the directors of a close
corporation without a meeting shall
nevertheless be deemed valid if:
(1) Before or after such action is taken,
written consent thereto is signed by all
the directors; or
(2) All the stockholders have actual or
implied knowledge of the action and
make no prompt objection thereto in
writing; or
(3) The directors are accustomed to take
informal action with the express or
implied acquiescence of all the
stockholders; or
(4) All the directors have express or
implied knowledge of the action in
The directors or trustees shall not act individually nor
separately but as a body in a lawful meeting. They will act
only after discussion and deliberation of matters before
them. Contracts entered into without a formal board
resolution does not bind the corporation except when
ratified or when majority of the board has knowledge of the
contract and the contract benefited the corporation.
Absence of a prompt objection in writing does not ratify acts
done by directors without a valid meeting. There must be
express or implied ratification.
Express ratification may consist of a Board Resolution to
that effect
Implied ratification may consist of acceptance of benefits
from said unauthorized act while having knowledge of said
act
Failure to give notice would render a meeting voidable.
Attendance to a meeting despite want of notice will be

PAGE 215 OF 320

UP LAW BOC
question and none of them makes
prompt objection thereto in writing.
If a director's meeting is held without
proper call or notice, an action taken
therein within the corporate powers is
deemed ratified by a director who failed to
attend, unless he promptly files his written
objection with the secretary of the
corporation after having knowledge
thereof.
3. VOTING/ QUORUM
The Articles of Incorporation may provide
for a classification of directors into one or
more classes, each of which may be voted
for and elected solely by a particular class
of stock.
The Articles of Incorporation may provide
for a greater quorum or voting
requirements in meetings of stockholders
or directors than those provided in this
Code.
4. PRE-EMPTIVE RIGHT
The pre-emptive right of stockholders in
close corporations shall extend to all stock
to be issued, including reissuance of
treasury shares, whether for money,
property or personal services, or in
payment of corporate debts, unless the
articles of incorporation provide otherwise.
5. TRANSFERABILITY
Restrictions on the right to transfer shares
must appear in the Articles of
Incorporation and in the by-laws as well as
in the certificate of stock otherwise the
same shall not be binding on any
purchaser thereof in good faith
CORPORATION CODE MERCANTILE LAW
deemed implied waiver
All proceedings had and any business transacted at any
meeting of the stockholders or members, if within the
powers or authority of the corporation, shall be valid even if
the meeting be improperly held or called, provided all the
stockholders or members of the corporation are present or
duly represented at the meeting. (Sec. 51)
No share may be deprived of voting rights, except Preferred
or Redeemable shares, unless otherwise provided by the
Code
There shall always be a class/series of shares which have
COMPLETE VOTING RIGHTS
EACH SHARE SHALL BE EQUAL IN ALL RESPECTS TO
EVERY OTHER SHARE, except as otherwise provided in the
Articles of Incorporation
For BOD, the by-laws or Articles of Incorporation can
provide for a greater majority in quorum
For stockholders, the Articles of Incorporation can provide
for a different percentage in quorum
Limitations on the exercise of pre-emptive right:
Such pre-emptive right shall not extend to shares to be
issued in compliance with laws requiring stock offerings or
minimum stock ownership by the public;
Not extend to shares to be issued in good faith with the
approval of the stockholders representing 2/3 of the
outstanding capital stock, in exchange for property needed
for corporate purposes or in payment of a previously
contracted debt
Shall not take effect if denied in the Articles of Incorporation
or an amendment thereto.
Restrictions on the right to transfer not allowed
PAGE 216 OF 320
UP LAW BOC CORPORATION CODE
6. APPRAISAL RIGHT
Any stockholder of a close corporation
may, for any reason, compel the said
corporation to purchase his shares at their
fair value, which shall not be less than
their par or issued value, when the
corporation has sufficient assets in its
books to cover its debts and liabilities
exclusive of capital stock
Any stockholder of a close corporation
may, by written petition to the SEC,
compel the dissolution of such corporation
whenever:
(a) Any of acts of the directors, officers or
those in control of the corporation is
illegal, or fraudulent, or dishonest, or
oppressive or unfairly prejudicial to
the corporation or any stockholder, or
Corporate assets are being misapplied or
wasted.
B. NON-STOCK CORPORATIONS
Stock Corporations
Corporations which have capital stock divided
into shares and are authorized to distribute to
the holders of shares dividends or allotments of
the surplus profits on the basis of the shares
(Sec. 3)
Primarily to make profits for its shareholders
MERCANTILE LAW
Stockholders may require the corporation to buy-back their
shares at fair value when the Corporation has Unrestricted
Retained Earnings:
(a) In case of any amendment to the articles of
incorporation which has the effect of:
(i) changing or restricting the rights of any
stockholder or class of shares, or
(ii) authorizing preferences in any respect superior
to those of outstanding shares of any class, or
(iii) extending or shortening the term of corporate
existence
(b) In case of sale, lease, exchange, transfer, mortgage,
pledge or other disposition of all or substantially all of
the corporate property and assets as provided in the
Code; and
(c) In case of merger or consolidation
(d) Investment of corporate funds in another corporation or
business
(e) Diversion of funds of corporation from primary purpose
to secondary purpose (Sec. 41)
The corporation may buy-back shares of stockholders
subject to the following limitations (Treasury shares):
There must be unrestricted retained earnings
Must be for a legitimate purpose
Non-Stock Corporations
DEFINITION
All other private corporations (Sec. 3)
One where no part of its income is distributable as
dividends to its members, trustees or officers. (Sec. 87)
PURPOSE
May be formed or organized for charitable, religious,
educational, professional, cultural, fraternal, literary,
scientific, social, civic service, or similar purposes like
trade, industry, agricultural and like chambers, or any
combination thereof. (Sec. 88)
PAGE 217 OF 320
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Stock Corporations Non-Stock Corporations

DISTRIBUTION OF PROFITS
Profit is distributed to shareholders Whatever incidental profit made is not distributed
among its members but is used for furtherance of its
purpose. AOI or by-laws may provide for the
distribution of its assets among its members upon its
dissolution. Before then, no profit may be made by
members. (Sec. 87)
SCOPE OF VOTING RIGHTS
Each stockholder votes according to the Each member, regardless of class, is entitled to one (1)
proportion of his shares in the corporation. No vote UNLESS such right to vote has been limited,
shares may be deprived of voting rights except broadened, or denied in the AOI or by-laws. (Sec. 89)
those classified and issued as "preferred" or
"redeemable" shares, and as otherwise
provided by the Code. (Sec. 6)
VOTING BY PROXY
Cannot be denied. (Sec. 58) May be denied by the AOI or the by-laws. (Sec. 89)
W HO EXERCISES CORPORATE POW ER
Board of Directors or Trustees, consisting of 5- Board of Trustees, which may consist of more than 15
15 directors / trustees. (Sec. 23, 92) trustees unless otherwise provided by the AOI or by-
laws. (Sec. 23, 92)
TERM OF DIRECTORS OF TRUSTEES
Directors / trustees shall hold office for 1 year Board classified in such a way that the term of office of
and until their successors are elected and 1/3 of their number shall expire every year.
qualified (Sec. 23). Subsequent elections of trustees comprising 1/3 of the
board shall be held annually, and trustees so elected
shall have a term of 3 years. (Sec. 92)
ELECTION OF OFFICERS
Officers are elected by the Board of Directors Officers may directly elected by the members UNLESS
(Sec. 25), except in close corporations where the the AOI or by-laws provide otherwise. (Sec. 92)
stockholders themselves may elect the
officers. (Sec. 97)
TRANSFERABILITY OF INTEREST OR MEMBERSHIP
Transferable. Generally non-transferable since membership and all
rights arising therefrom are personal. However, the
AOI or by-laws can provide otherwise. (Sec. 90)

B.1. DEFINITION
One where no part of its income is
distributable as dividends to its members,
trustees, or officers, subject to the provisions
of this Code on dissolution. [Sec.87]

PAGE 218 OF 320

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B.2. PURPOSES
Charitable
Religious
Educational
Professional
Cultural
Fraternal
Literary
Scientific
Social
Civic services
Similar purposes, such trade, industry
or agriculture and like chambers, or
combinations thereof [Sec. 88]
B.3. TREATMENT OF PROFITS
Any profit which a non-stock corporation may
obtain as an incident to its operations shall,
whenever necessary or proper, be used for the
furtherance of the purpose or purposes for
which the corporation was organized. [Sec.
87,2nd sentence]
B.4. DISTRIBUTION OF ASSETS UPON
DISSOLUTION
Order of distribution of assets upon
dissolution of non-stock corporation
(1) All liabilities and obligations of the
corporation shall be paid, satisfied and
discharged, or adequate provision shall
be made therefore
(2) Assets held subject to return on
dissolution shall be delivered back to the
givers.
(3) Assets held for charitable, religious
purposes, etc., without a condition for
their return on dissolution, shall be
conveyed to one or more organizations
engaged in similar activities as dissolved
corporation
PAGE 219 OF 320
MERCANTILE LAW
(4) All other assets shall be distributed to
members, as provided in the Articles of
Incorporation or by-laws [Sec. 94]
Procedure for the Plan for
Distribution
BOT, by majority vote in a resolution, shall
adopt a plan for distribution of the assets of
the corporation
Written notice for a meeting must be sent to
all members entitled to vote, stating the time
and place of such meeting and the purpose
thereof
At such meeting, the plan must be approved
by 2/3 votes of the members having the right
to vote, who are present or represented by
proxy [Sec. 95; Villanueva]
C. RELIGIOUS CORPORATIONS
C.1. CORPORATION SOLE (SEC. 110)
One formed for the purpose of administering
and managing, as trustee, the affairs,
property and temporalities of any religious
denomination, sect or church by the chief
archbishop, bishop, priest, minister, rabbi or
other presiding elder of such religious
denomination, sect or church. [Sec. 110]
A special form of corporation, usually
associated with clergy and consists of one
person only and his successors, who are
incorporated by law to give some legal
capacities and advantages.
A registered corporation sole can acquire
land if its members constitute at least 60%
Filipinos [SEC Opinion, 8 August 1994].
NATIONALITY
A corporation sole does not have any
nationality but for purposes of applying our
nationalization laws, nationality is
determined by the nationality of the members.
[Roman Catholic Apostolic Church v. Land
Registration Commission (1957)]
UP LAW BOC CORPORATION CODE MERCANTILE LAW

C.2. RELIGIOUS SOCIETIES of the corporation from sole or one

to the greater number authorized by
Non-stock corporation formed by a religious
its amended articles. [Iglesia
society, group, diocese, synod, or district of
Evangelica Metodista En Las Filipinas
any religious denomination, sect, or church
(Corporation Sole) Inc., et al v. Bishop
after getting the approval of 2/3 of its
Nathanael Lazaro, et al (2010)]
members. [Sec. 116]
The Corporation Code provides no specific
mechanism for amending the articles of D. FOREIGN CORPORATIONS
incorporation of a corporation sole. But Sec.
109 allows the application to religious
corporations of the general provisions Foreign Corporation are those formed,
governing non-stock corporations. organized, or existing under any laws other
than those of the Philippines and whose laws
For non-stock corporations, the allow Filipino citizens and corporations to do
power to amend its Articles of business in its own country or state [Sec. 123]
Incorporation lies in its
members. The code requires two-
thirds of their votes for the approval D.1. BASES OF AUTHORITY OVER FOREIGN
of such an amendment. So how will CORPORATIONS
this requirement apply to a corporation
I. CONSENT
sole that has technically but one
member (the head of the religious As a rule, a foreign corporation can have no
organization) who holds in his hands legal existence or status beyond the bounds
its broad corporate powers over the of the State or sovereignty by which it is
properties, rights, and interests of his created or incorporated and organized. It
religious organization? exists only in contemplation of law and by
force of the law and where that law ceases to
Although a non-stock corporation has
operate, the corporation can have no
a personality that is distinct from
existence. This principle, however, does not
those of its members who established
prevent a corporation from acting in another
it, its Articles of Incorporation cannot
State or country with the latters express or
be amended solely through the action
implied consent. This is the consent doctrine
of its BOT. The amendment needs which is provided in Sections 125 and 126. But
the concurrence of at least two-thirds
every power which a corporation exercises as
of its membership. If such approval
such in another State depends for its validity
m echanism is m ade to operate
upon the laws of the sovereignty in which it is
in a corporation sole, its one
exercised. A corporation can exercise none of
m em ber in whom all the powers
the functions and privileges conferred by its
of the corporation technically
charter in another State or country except by
belongs, needs to get the
the comity and consent of such State or
concurrence of two-thirds of its
country. [De Leon]
m em bership. The one member is
but a trustee of its membership.
There is no point to dissolving the II. DOCTRINE OF DOING BUSINESS
corporation sole of one member to (RELATE TO DEFINITION UNDER THE
enable the corporation aggregate to FOREIGN INVESTMENTS ACT, R.A. NO.
emerge from it. The one member, 7042)
with the concurrence of two-thirds of Jurisprudential Tests Of Doing
the membership of the organization Business In The Philippines (Asked in
for whom he acts as trustee, can self- 98 and 02)
will the amendment. He can, with
membership concurrence, increase
the technical number of the members
PAGE 220 OF 320
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1. Twin Characterization Test
Under the Continuity Test, doing
business implies a continuity of
commercial dealings and
arrangements, or performance of acts
normally incidental to the purpose
and object of the organization.
Under the Substance Test, a foreign
corporation is doing business in the
country if it is continuing the body or
substance of the enterprise of
business for which it was organized
[Mentholatum v. Mangaliman (1941)]
2. Contract Test
A foreign corporation is doing business in the
Philippines if the contracts entered into by
the foreign corporation or by an agent acting
under the control and direction of the foreign
corporation are consummated in the
Philippines. [Pacific Vegetable Oil v. Singson
(1955)]
Statutory Definition Of Doing
Business: Foreign Investm ent Act Of
1991 [Sec. 3(D), Ra 7042] (Asked in 98
and 02)
Doing Business
Soliciting orders, service contracts, or
opening offices;
Appointing representatives, distributors
domiciled in the Philippines or who stay
for a period or periods totaling 180 days
or more;
Participating in the management,
supervision, or control of any domestic
business, firm, entity, or corporation in
the Philippines;
Any act or acts that imply a continuity of
commercial dealings or arrangements,
and contemplate to some extent the
performance of acts or works or the
exercise of some functions, normally
incident to and in progressive prosecution
of the purpose and object of its
organization.
PAGE 221 OF 320
MERCANTILE LAW
It relates to business activities not only
casual, but so systematic and regular as to
manifest continuity and permanence of
activity to constitute doing business here
To constitute doing business in the
Philippines, the activity should involve profit-
making. [Cargill v. Intra-Strata Assurance
Corporation (2010)]
It is the performance by a foreign corporation
of the acts for which it was created,
regardless of volume of business, that
determines whether a foreign corporation
needs a license or not. [European Resources
and Technologies Inc. v. Ingenieuburo
Birkhanh + Nolte (2004)]
Not Doing Business
A. Statutory: Sec. 3(d) FIA and Sec. 1
FIA IRR
Mere investment as shareholder and
exercise of rights as investor;
Having a nominee director or officer to
represent its interest in the corporation;
Appointing a representative or distributor
which transacts business in its own name
and for its own account;
The publication of a general
advertisement through any print or
broadcast media
Maintaining a stock of goods in the PH
solely for the purpose of having the same
processed by another entity in the PH
Consignment by a foreign entity of
equipment with a local company to be
used in the processing of products for
export
Collecting information in the Philippines
Performing services auxiliary to an
existing isolated contract of sale which
are not on a continuing basis, such as
installing in the Philippines machinery it
has manufactured or exported to the
Philippines, servicing the same, training
domestic workers to operate it, and
similar incidental services
UP LAW BOC CORPORATION CODE
B. Jurisprudential
Agilents activities were confined to
maintaining a stock of goods in the PH
and consignment of equipmen. [Agilent v
Integrated Silicon (2004)]
The imposition of minimum standards
concerning sales, marketing, finance and
operations is nothing more than an
exercise of sound business practice to
increase sales and maximize profits. For
as long as these requirements do not
impinge on a distributors independence,
then there is nothing wrong with placing
reasonable expectations. [Steelcase v
Design Intl (2010)]
Multiple transactions are still considered
a single transaction where there are
constantly failed attempts in complying
with the contract by one of the
contracting parties. [Antam Consolidated
v CA (1986)]
A foreign firm which does business
through middlemen acting on their own
names shall not be deemed doing
business in the Philippines. [Le Chemise
Lacoste v Fernandez (1984)]
D.2. NECESSITY OF A LICENSE TO DO
BUSINESS
I. REQUISITES FOR ISSUANCE OF A
LICENSE
The foreign corporation should file a copy of
its articles of incorporation and by-laws, and
a verified application (See Sec. 125)
accompanied by the following:
(1) Name and address of its designated
resident agent who will receive summons
and notices for the corporation; a special
power of attorney should also be
submitted for such purpose
(2) An agreement that if it ceases to transact
business or if there is no more resident
agent, summons shall then be served
through the SEC
(3) Oath of Reciprocity stating that the
foreign corporations country allows
Filipino citizens and corporations to do
business in said country
PAGE 222 OF 320
MERCANTILE LAW
Within 60 days from issuance of license, the
corporation should deposit at least P100,000
(cash, property, bond) for the benefit of
creditors subject to further deposit every six
months [See Sec. 126]
II. RATIONALE FOR THE LICENSE
REQUIREMENT: ACQUISITION OF
JURISDICTION
The purpose of the law in requiring that
foreign corporations doing business in the
country be licensed to do so, is to subject the
foreign corporations doing business in the
Philippines to the jurisdiction of the
courts, otherwise, a foreign corporation
illegally doing business here because of its
refusal or neglect to obtain the required
license and authority to do business may
successfully though unfairly plead such
neglect or illegal act so as to avoid service
and thereby impugn the jurisdiction of the
local courts.
The same danger does not exist among
foreign corporations that are indubitably not
doing business in the Philippines. Indeed, if a
foreign corporation does not do business here,
there would be no reason for it to be subject
to the States regulation [Avon Insurance PLC
v. CA (1997)].
III. RESIDENT AGENT
A resident Agent may be an individual,
who must be of good moral character and of
sound financial standing, residing in the
Philippines, or a domestic corporation
lawfully transacting business in the
Philippines, designated in a written power of
attorney by a foreign corporation authorized
to do business in the Philippines, on whom
any summons and other legal processes may
be served in all actions or other legal
proceedings against the foreign corporation
[Sec. 127-128]
D.3. PERSONALITY TO SUE
A foreign corporation transacting business in
the Philippines is required to secure a license
to have the personality to sue before, or
UP LAW BOC CORPORATION CODE
intervene in, any court or administrative
proceeding. [Campos; Sec. 133]
D.4. SUABILITY OF FOREIGN
CORPORATIONS
No foreign corporation 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
proceeding in any court or administrative
agency of the Philippines; but such
corporation m ay be sued or proceeded
against before Philippine courts or
administrative tribunals on any valid
cause of action recognized under
Philippine laws. [Sec 133]
Indeed if a foreign corporation, not engaged
in business in the Philippines, is not barred
from seeking redress from courts in the
Philippines, a fortiori, that same corporation
cannot claim exemption from being sued in
Philippine courts for acts done against a
person or persons in the Philippines.
[Facilities Management Corporation v. De La
Osa (1979)]
D.5. INSTANCES WHEN UNLICENSED
FOREIGN CORPORATIONS MAY BE
ALLOWED TO SUE
When the corporation is considered not
doing business in the PH
When the Philippine citizen or entity is
estopped from challenging the foreign
corporations personality to sue [Merrill
Lynch Futures v. Court of Appeals (1992)]
Sum m ary of Rules on Capacity to Sue
[Agilent Technologies Singapore v. Integrated
Silicon Technologies (2004)]:
Status Consequence
Doing Business in the Can sue and be sued
PH, WITH a license
Doing Business in the GR: Cannot sue, but
PH, WITHOUT a may be sued in the
license PH
Exception: Capacity
PAGE 223 OF 320
MERCANTILE LAW
Status Consequence
to sue may not be
questioned if the
other party is
estopped
NOT doing business May sue, and may be
in the PH, on isolated sued
transactions
D.6. GROUNDS FOR REVOCATION OF
LICENSE
I. UNDER THE CORPORATION CODE
Failure to file its annual report or pay any
fees as required by this Code;
Failure to appoint and maintain a
resident agent in the Philippines as
required by this Title;
Failure, after change of its resident agent
or of his address, to submit to the
Securities and Exchange Commission a
statement of such change as required by
this Title;
Failure to submit to the Securities and
Exchange Commission an authenticated
copy of any amendment to its articles of
incorporation or by laws or of any articles
of merger or consolidation within the
time prescribed by this Title;
A misrepresentation of any material
matter in any application, report, affidavit
or other document submitted by such
corporation pursuant to this Title;
Failure to pay any and all taxes, imposts,
assessments or penalties, if any, lawfully
due to the Philippine Government or any
of its agencies or political subdivisions;
Transacting business in the Philippines
outside of the purpose or purposes for
which such corporation is authorized
under its license;
Transacting business in the Philippines as
agent of or acting for and in behalf of any
foreign corporation or entity not duly
licensed to do business in the Philippines;
or
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Any other ground as would render it unfit
to transact business in the Philippines
(Sec. 134)
D.6.B. UNDER SPECIAL LAWS
I. INSURANCE CODE
The Insurance Commissioner is authorized to
suspend or revoke all certificates of authority
granted to an insurance company, whether
domestic or foreign, when:
(1) it is in unsound condition; or
(2) it has failed to comply with the provisions
of law or regulations obligatory upon it;
or
(3) its condition or method of business is
such as to render its proceedings
hazardous to the public or to its
policyholders; or
(4) its paid-up capital stock, in the case of a
foreign company, is impaired or deficient,
or that the margin of solvency required of
such company is deficient [Sec. 247,
Insurance Code]
II. GENERAL BANKING ACT
The Monetary Board may revoke the license
to transact business in the Philippines of any
foreign bank, if it finds that:
(1) the foreign bank is insolvent; or
(2) in imminent danger thereof; or
(3) its continuance in business will involve
probable loss to those transacting
business with it. [Sec. 78, GBA]
PAGE 224 OF 320
MERCANTILE LAW
XVII. Mergers and
Consolidations
A. DEFINITION AND CONCEPT
Merger a corporation absorbs the other
and remains in existence while the others are
dissolved. [Sec.76]
One of the constituent corporations remains
as an existing juridical person, whereas the
other corporation shall cease to exist. Merger
is the disappearance of one of the
corporations [generally by amending the
articles of incorporation and shortening its
term of existence (Sec.40)] with the other
corporation acquiring all the assets, rights of
action, and assuming all the liabilities of the
disappearing corporation.
Consolidation a new corporation is
created, and consolidating corporations are
extinguished [Sec.76]
If there is consolidation, there will be
disappearance of all constituent corporations
with the emergence of a new corporate entity
which shall obtain all the assets of the
disappearing corporations, and likewise shall
assume all their liabilities.
B. CONSTITUENT VS. CONSOLIDATED
CORPORATION
Constituent Corporations the parties to
a merger or consolidation
Consolidated Corporation - The new
single corporation created through
consolidation.
Surviving Corporation one of the
constituent corporations which remain in
existence after the merger
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C. PLAN OF MERGER OR
CONSOLIDATION [SEC. 76]
Each of the constituent corporations must
draw up a Plan of Merger or Consolidation
which shall set forth:
(1) Names of the corporation involved;
(2) Terms and mode of carrying it;
(3) Statement of changes, if any, in the
present articles of the surviving
corporation to be formed in the case of
merger; and with respect to the
consolidated corporation in case of
consolidation
D. ARTICLES OF MERGER OR
CONSOLIDATION
Each of the constituent corporation shall
execute Articles of Merger or Consolidation
signed by the president/vice-president, and
certified by the secretary/assistant secretary
setting forth:
(1) Plan of merger or consolidation;
(2) For stock corporation, the number of
shares outstanding; for non-stock, the
number of members;
(3) As to each corporation, number of shares
or members voting for and against such
plan respectively.
The Articles of Merger or Consolidation:
(1) take the place of the Articles of
Incorporation of the consolidated
corporation; or
(2) amend the Articles of Incorporation of the
surviving corporation.
CORPORATION CODE MERCANTILE LAW
E. PROCEDURE
E.1. APPROVAL OF PLAN OF MERGER OR
CONSOLIDATION BY BOD AND
STOCKHOLDERS OF CONSTITUENT
CORPORATIONS
Approval by majority vote of each of the
board of directors or trustees of the
constituent corporations of the plan of
merger or consolidation.
Approval by the stockholders or members of
each of such corporations. The affirmative
vote of stockholders representing at least
two-thirds (2/3) of the outstanding capital
stock of each corporation in the case of stock
corporations or at least two-thirds (2/3) of
the members in the case of non-stock
corporations shall be necessary for the
approval of such plan.
Holders of non-voting shares are entitled to
vote on the plan. (Sec. 6, par. 6(6))
Notice of such meetings shall be given to all
stockholders or members of the respective
corporations, at least 2 weeks prior to the
date of the meeting, either personally or by
registered mail. Said notice shall state the
purpose of the meeting and shall include a
copy or a summary of the plan of merger or
consolidation.
Any dissenting stockholder in stock
corporations may exercise his appraisal right
in accordance with the Code. Provided, that if
after the approval by the stockholders of such
plan, the board of directors decides to
abandon the plan, the appraisal right shall be
extinguished.
Amendment to the plan of merger or
consolidation may be made by approval of
the majority vote of the respective boards of
directors or trustees of all the constituent
corporations and ratified by the affirmative
vote of stockholders representing at least
two-thirds (2/3) of the outstanding capital
stock or of two-thirds (2/3) of the members of
each of the constituent corporations. Such
plan, together with any amendment, shall be
considered as the agreement of merger or
consolidation.
PAGE 225 OF 320
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E.2. EXECUTION OF ARTICLES OF MERGER In the case of merger or consolidation of

OR CONSOLIDATION banks or banking institutions, building and
loan associations, trust companies, insurance
Articles of Merger or Articles of Consolidation
companies, public utilities, educational
shall be executed by each of the constituent
institutions and other special corporations
corporations.
governed by special laws, the favorable
recommendation of the appropriate
government agency shall first be obtained
E.3. SUBMISSION TO SEC OF ARTICLES
Submission of Four (4) copies of the Articles
of Merger or Articles of Consolidation to the H. EFFECTS (SEC. 80)
SEC for approval.
H.1. AS TO THE CONSTITUENT
Mergers and consolidations of CORPORATIONS:
corporations governed by special laws
I. CORPORATE EXISTENCE
requires a recommendation from the
appropriate government agency (Sec. 79 The constituent corporations shall become a
(1)) single corporation.
The separate existence of the constituents
shall cease, except that of the surviving or the
E.4. ACTION BY SEC
consolidated corporation.
Conduct hearing or issue certificate If
The absorbed or constituent corporations are
necessary, the SEC shall set a hearing,
ipso facto dissolved by operation of law [SEC
notifying all corporations concerned at least 2
Opinion, July 16, 1981]
weeks before.
II. ASSETS AND LIABILITIES
Issuance of certificate of merger or
consolidation. There is no liquidation of the assets of the
dissolved corporations [Campos].
The surviving or the consolidated corporation
F. EFFECTIVITY shall possess all the rights, privileges,
immunities, powers, and franchises of each
Upon issuance of the certificate of merger or constituent corporation and the properties
consolidation, such merger or consolidation shall be deemed transferred to and vested in
shall become effective [Sec. 79]. the surviving or consolidated corporation
without further act or deed
Merger or consolidation does not become
effective by mere agreement of the The surviving or the consolidated corporation
constituent corporations. The approval of the shall be subject to all the duties and liabilities
SEC is required. [PNB v. Andrada Electric and of the dissolving corporation(s).
Engr. Co., Inc. (2002)]
Notwithstanding Sec. 79, parties may H.2. AS TO CREDITORS
stipulate a specific effective date of merger
(or consolidation) where no 3rd party will be Any claim, action or proceeding pending by or
prejudiced [SEC Opinion No. 09-13, July 1, against any of the constituent corporations
2009] may be prosecuted by or against the surviving
or consolidated corporation; and
The rights of the creditors or lien upon the
G. LIMITATIONS property of any of each constituent
CONSENT OF APPROPRIATE corporation shall not be impaired by such
GOVERNMENT AGENCY [SEC. 79] merger or consolidation.

PAGE 226 OF 320

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MERCANTILE LAW
BANKING

PAGE 227 OF 320

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I. The New Central
Bank Act [RA 7653]
A. STATE POLICIES
The State shall maintain a central monetary
authority that shall function and operate as
an independent and accountable body
corporate in the discharge of its mandated
responsibilities concerning money, banking
and credit. [Sec. 1]
In line with this, the Bangko Sentral ng
Pilipinas is:
(1) A central monetary authority;
(2) An independent and accountable
body; and
(3) A government-owned corporation
that enjoys fiscal and administrative
autonomy. [Secs. 1 & 2, NCBA]
B. SALIENT FEATURES
(1) Assurance of BSP independence by
providing for the majority of the members
of the Monetary Board to come from the
private sector. [Sec. 6]
(2) The BSP may now concentrate on
monetary policy, and will phase out its
fiscal agency functions and its
responsibilities in respect of finance
companies without quasi-banking
functions, which in the past, had
distracted it from its primary function.
The latter has been assumed by the
Securities and Exchange Commission.
[Secs. 3, 129, & 130, NCBA]
(3) Provides safeguards to ensure that unlike
the old Central Bank which sustained
huge losses, the BSP would have a
positive net income position by the
following provisions:
(a) Capitalization of P50B; [Sec.2, NCBA]
(b) Maintenance of positive net foreign
asset position; [Sec.71, NCBA]
(c) Charging interests on all loans and
advances to banks; [Sec. 85, NCBA]
PAGE 228 OF 320
BANKING MERCANTILE LAW
(d) Authority to collect interests on loans
and advances to closed financial
institutions; [Sec. 85, NCBA] and
(e) BSP can't acquire shares, including
by collateral, nor participate in
neither ownership nor management
of enterprises, nor engage in
development banking or financing
[Sec. 128, NCBA]
C. CREATION OF THE BANGKO
SENTRAL NG PILIPINAS (BSP)
There is hereby established an independent
central monetary authority, which shall be a
body corporate known as the Bangko Sentral
ng Pilipinas [Sec. 2, NCBA].
The BSP replaced the Central Bank of the
Philippines, and shares the same functions,
but is a new entity altogether.
C.1. NATURE OF THE BSP
(1) A central monetary authority;
(2) An independent and accountable body;
and
(3) A government-owned corporation but
enjoys fiscal and administrative
autonomy. [Secs. 1 & 2, NCBA]
C.2. CAPITALIZATION
The BSP shall have a capitalization of P50B
to be fully subscribed by the Government.
[Sec. 2, NCBA]
D. RESPONSIBILITY AND PRIMARY
OBJECTIVE
D.1. PRIMARY OBJECTIVES
(1) To maintain price stability conducive to
balanced and sustainable economic
growth.
(2) To promote and maintain monetary
stability and the convertibility of the peso.
UP LAW BOC
D.2. OTHER RESPONSIBILITIES
(1) To provide policy directions in the areas
of money, banking, and credit
(2) To supervise operations of banks
(3) Regulates finance companies and non-
bank financial institutions performing
quasi-banking functions [Sec. 3, NCBA]
D.3. BSP AS TRANSFEREE OF PHILIPPINE
CENTRAL BANK POWERS
All powers, duties and functions vested by
law in the Central Bank of the Philippines not
inconsistent with the NCBA shall be deemed
transferred to the BSP. All references to the
Central Bank of the Philippines in any law or
special charters shall be deemed to refer to
the BSP. [Sec. 136, NCBA]
E. MONETARY BOARD
The body through which the powers and
functions of the Bangko Sentral are exercised
[Sec 6, NCBA]
E.1. POWERS AND FUNCTIONS
(1) Issue rules and regulations it considers
necessary for the effective discharge of
the responsibilities and exercise of the
powers vested in it;
(2) Direct the management, operations, and
administration of the BSP, reorganize its
personnel and issue such rules and
regulations as it may deem necessary or
desirable for this purpose;
(3) Establish a human resource management
system which governs the selection,
hiring, appointment, transfer, promotion,
or dismissal of all personnel;
(4) Adopt an annual budget for and
authorize such expenditures by BSP as
are in the interest of the effective
administration and operations of Bangko
Sentral in accordance with applicable
laws and regulations; and
(5) Indemnify its members and other officials
of the BSP, including personnel of the
PAGE 229 OF 320
BANKING MERCANTILE LAW
departments performing supervision and
examination functions, against all costs
and expenses reasonably incurred by
such persons in connection with any civil
or criminal action, suit or proceeding, to
which any of them may be made a party
by reason of the performance of his
functions or duties, unless such members
or other officials is found to be liable for
negligence or misconduct. [Sec. 15,
NCBA]
E.2. COMPOSITION
The MB shall be composed of 7 members
appointed by the President with a 6-year
term. [Sec. 6, NCBA]
MEMBERS
(1) The BSP Governor or his designated
alternate (a deputy governor);
(2) A Cabinet member to be designated by
the President or his designated alternate
(an Undersecretary in his department);
and
(3) 5 members from the private sector [Sec.
6, NCBA]
E.3. REAPPOINTMENT
No member of the MB may be reappointed
more than once. [Sec. 6, NCBA]
E.4. QUALIFICATIONS
(1) Citizenship Natural-born citizens of the
Philippines;
(2) Age
General Rule: At least 35 years old
Exception: Governor must be at least
40 years old;
(3) Of good moral character;
(4) Of unquestionable integrity;
(5) Of known probity and patriotism; and
(6) With recognized competence in social
and economic disciplines. [Sec. 8, NCBA]
UP LAW BOC
E.5. DISQUALIFICATIONS
In addition to the disqualifications under the
Code of Conduct and Ethical Standards for
Public Officials and Employees [RA 6713], a
member of the Monetary Board is disqualified
by:
(1) Direct connection with any multilateral
banking or financial institution; or
(2) Substantial interest in any private bank in
the Philippines, within 1 year prior to his
appointment [Sec. 9, NCBA]
E.6. PROHIBITION ON MEMBERS OF THE
MB
(1) Being a director, officer, employee,
consultant, lawyer, agent or stockholder
of any bank, quasi-bank, or any other
institution which is subject to supervision
or examination by the BSP (rem edy:
resign and divest interests before
assuming office];
(2) Holding any other public office or public
employment during their tenure; and
(3) Being employed in any multilateral
banking or financial institution within 2
years after the expiration of his term.
Exception: When he serves as an official
representative of the government to such
institution. [Sec. 9, NCBA]
E.7. GROUNDS FOR REMOVAL OF ANY
MEMBER OF THE MB
(1) If the member is subsequently
disqualified under Sec. 8;
(2) If he is physically or mentally
incapacitated that he cannot properly
discharge his duties and responsibilities
and such incapacity has lasted for more
than 6 months;
(3) If he is guilty of acts or operations which
are of fraudulent or illegal character or
which are manifestly opposed to the aims
and interests of the BSP; and
(4) If he no longer possesses the
qualifications under Sec. 8. [Sec. 10,
NCBA]
PAGE 230 OF 320
BANKING MERCANTILE LAW
E.8. VACANCIES, HOW FILLED
Causes:
(1) Death;
(2) Resignation; or
(3) Removal.
Effect: A new member will be appointed to
complete the unexpired period of the term of
the member concerned. [Sec. 7, NCBA]
E.9. CIVIL LIABILITY OF MEMBERS OF THE
MB
Members of the MB, officials, examiners, and
employees of the BSP are liable when they:
(1) Willfully violate the provisions of the
NCBA;
(2) Are guilty of negligence, abuses or acts of
malfeasance or misfeasance; or
(3) Fail to exercise extraordinary diligence in
the performance of his duties;
(4) Disclose confidential information, or
information relating to MB discussions or
resolutions, or about the BSPs
confidential operations
Exceptions:
(a) Disclosure is in connection with the
performance of official functions with
the BSP;
(b) MB or BSP Governors prior
authorization; or
(5) Use confidential information for their
personal gain or to the detriment of
the Government, BSP, or 3rd Parties [Sec.
16, NCBA]
F. HOW THE BSP HANDLES BANKS IN
DISTRESS
W HEN BANKS ARE IN DISTRESS
Illiquidity occurs when the bank is not
liquid. It means that the bank cannot meet its
current liabilities.
Liquidity is the ability of an asset to be
converted into cash. An entity is liquid when
UP LAW BOC
it is able to pay its liabilities when they fall
due.
o Illiquidity is handled
conservatorship.
Insolvency When the actual market value
of assets are insufficient to pay its liabilities,
not considering capital stock and surplus
which are not liabilities for such purpose. An
entity is insolvent when it is unable to meet
current and long-term obligations.
o In contrast, a bank is solvent when
current assets are more than current
liabilities, providing the ability to pay
debts. It is able to meet its long term
obligations/liabilities.
o Insolvency is handled by receivership
and/or closure.
F.1. CONSERVATORSHIP
Conservatorship involves the appointment of
a conservator to preserve the assets of the
bank when the latter is illiquid, and take
measures
I. GROUNDS FOR APPOINTMENT OF
A CONSERVATOR
Whenever, on the basis of a report submitted
by the appropriate supervising or examining
department, the MB finds that a bank or
quasi-bank is:
(1) In a state of continuing inability; or
(2) Unwillingness to maintain a condition of
liquidity deemed adequate to protect the
interest of depositors and creditors [Sec.
29, NCBA]
II. REQUISITES IN PLACING A BANK
UNDER CONSERVATORSHIP
(1) There must be a report submitted by the
appropriate supervising or examining
department of the BSP;
(2) There must be a finding that the bank or
quasi-bank falls under either of the
grounds for conservatorship.
BANKING MERCANTILE LAW
(3) The Board of Directors must be informed
in writing of the order of the Monetary
Board directing conservatorship.
by
III. DURATION
Shall not exceed 1 year [Sec. 29, NCBA]
IV. EXPENSES
The expenses attendant to the
conservatorship shall be borne by the bank or
quasi-bank concerned [Sec. 29, NCBA]
V. GROUNDS FOR TERMINATION OF
CONSERVATORSHIP BY MB
(1) When MB is satisfied that the institution
can continue to operate on its own and
the conservatorship is no longer
necessary; or
(2) When, on the basis of the report of the
conservator or of its own findings, the MB
determines that the continuance in
business of the institution would involve
probable loss to its depositors or
creditors (effect: the bank or quasi-bank
would then be placed under receivership)
[Sec. 29, NCBA]
VI. EFFECTS OF CONSERVATORSHIP
(1) Bank/Quasi-bank retains juridical
personality
(2) Not a precondition to the designation of a
receiver [Sec. 30, NCBA], and;
(3) Perfected transactions cannot be
repudiated [First Philippine International
Bank v. CA, G.R. No. 115849 (1996)]
While the Central Bank law gives vast and far
reaching powers to the conservator of a bank,
such powers must be related to the
preservation of the assets of the bank, the
reorganization of the management and the
restoration of viability. Such powers cannot
extend to the post-facto repudiation of
perfected transactions, otherwise they would
infringe against the non-impairment clause
of the Constitution. [First Philippine
International Bank v. CA, G.R. No. 115849
(1996)]
PAGE 231 OF 320
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VII. QUALIFICATIONS OF
CONSERVATOR
The conservator should be competent and
knowledgeable in bank operations and
management. [Sec. 29, NCBA]
The appointment of a conservator shall be
vested exclusively in the MB. [Sec. 30, NCBA]
Note that the conservator is a natural person
to be appointed by the Monetary Board. In
contrast, the receiver is always the PDIC.
VIII. POW ERS AND DUTIES OF
CONSERVATOR
(1) To take charge of the assets, liabilities,
and the management thereof;
(2) To reorganize the management;
(3) To collect all monies and debts due said
institution;
(4) To exercise all powers necessary to
restore its viability;
(5) To report and be responsible to the MB;
(6) To overrule or revoke the actions of the
previous management and board of
directors of the bank or quasi-bank. [Sec.
29, NCBA]
However, note that the management of the
bank is still with its board of directors and
management. However, the conservator may
revoke their actions. In contrast, in
receivership, the receiver takes over the
management of the bank.
IX. THE CONSERVATOR CANNOT
REPUDIATE PERFECTED CONTRACTS
While the Central Bank law gives vast and far
reaching powers to the conservator of a bank,
such powers must be related to the
preservation of the assets of the bank, the
reorganization of the management and the
restoration of viability. Such powers cannot
extend to the post-facto repudiation of
perfected transactions, otherwise they would
infringe against the non-impairment clause
of the Constitution. [First Philippine
International Bank v. CA, G.R. No. 115849
(1996)]
BANKING MERCANTILE LAW
A X. REM UNERATION
General Rule: The conservator shall receive
remuneration in an amount not to exceed 2/3
of the salary of the president of the institution
in 1 year, payable in 12 equal monthly
payments.
Exception: A conservator connected with
the BSP, in which case said conservator shall
not be entitled to receive any remuneration or
emolument. [Sec. 29, NCBA]
F.2. CLOSURE
A
I. CONCEPT
The MB may summarily and without need for
prior hearing close a banking institution and
place it under receivership.
Receivership is equivalent to an injunction to
restrain the bank in any way. Thus, the
appointment of a receiver operates to
suspend the authority of the bank and of its
directors and officers over its property and
effects [Villanueva v. CA, G.R. No. 114870
(1995)]
Receivership refers to the stage within which
the PDIC manages the affairs of the closed
bank and preserves its assets for the benefit
of creditors [RA 9302, Sec. 10(a,b)]
III. GROUNDS
Under the GBL
When a banking institution:
(1) Notifies the BSP or publicly announces a
bank holiday; or
(2) Suspends the payment of its deposit
liabilities continuously for more than 30
days in any manner[Sec. 53, GBL]
(3) Persistence in conducting business in an
unsafe or unsound manner [Sec. 56, GBL]
Under the NCBA
Whenever the MB finds that a bank or quasi-
bank:
(1) Is unable to pay its liabilities as they
become due in the ordinary course of
business.
PAGE 232 OF 320
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(a) Except for inability to pay caused by
extraordinary demands induced by
financial panic in the banking
community; (bank run)
(b) Has insufficient realizable assets, as
determined by the BSP, to meet its
liabilities; or
(c) Cannot continue in business without
involving probable losses to its depositors
or creditors; or
(d) Has willfully violated a cease-and-desist
order under Sec. 37 that has become
final, involving acts or transactions which
amount to fraud or a dissipation of the
assets of the institution.
(a) Special rule: in this situation, the
MB may act summarily and without
hearing [Sec. 30, NCBA]
F.3. RECEIVERSHIP
I. REQUISITES
(1) Report of the head of the supervising
department involving the bank
(2) Finding of the Monetary Board of the
existence of any of the grounds for
receivership.
(3) Decision of the MB to forbid the
institution from doing business, which
decision may be done summarily and
without need for prior hearing.
(4) Notice in writing to the BOD informing
the institution of the order of the MB.
II. GROUNDS
Whenever the MB finds that a bank or quasi-
bank:
(1) Is unable to pay its liabilities as they
become due in the ordinary course of
business. Exception: This shall not
include inability to pay caused by
extraordinary demands induced by
financial panic in the banking
community;
(2) Has insufficient realizable assets, as
determined by the BSP, to meet its
liabilities; or
PAGE 233 OF 320
BANKING MERCANTILE LAW
(3) Cannot continue in business without
involving probable losses to its depositors
or creditors; or
(4) Has willfully violated a cease-and-desist
order under Sec. 37 that has become
final, involving acts or transactions which
amount to fraud or a dissipation of the
assets of the institution. Special rule:
in this situation, the MB may act
summarily and without hearing [Sec. 30,
NCBA]
III. W HO ACTS AS RECEIVER
(1) If a banking institution: the PDIC
(2) If a quasi-bank: any person of recognized
competence in banking or finance [Sec.
30, NCBA]
IV. W HO APPOINTS RECEIVERS
The appointment of a receiver shall be vested
exclusively in the MB. [Sec. 30, NCBA]
V. CONSERVATORSHIP VIS--VIS
RECEIVERSHIP
The designation of a conservator is not a
precondition to the designation of a receiver.
[Sec. 30, NCBA]
VI. POW ERS AND DUTIES OF A
RECEIVER
(1) Immediately gather and take charge of
all the assets and liabilities of the
institution
(2) Administer the assets for the benefit of
the creditors
(3) Exercise the general powers of a receiver
under the Revised Rules of Court
(4) Not to pay or commit any act that will
involve the transfer or disposition of any
asset of the institution.
Exceptions:
(1) Administrative expenditures;
(2) Receiver may deposit or place funds
in non-speculative investments.
UP LAW BOC
(5) Subject to prior approval of the MB,
determine, as soon as possible, but not
later than 90 days from take-over,
whether the institution may be
rehabilitated or otherwise placed in such
a condition so that it may be permitted to
resume business with safety to its
depositors and creditors and the general
public. [Sec. 30, NCBA]
Exceptions:
(1) Administrative expenditures;
(2) Receiver may deposit or place funds
in non-speculative investments.[Sec. 30,
NCBA]
The assets of the institution under
receivership and liquidation shall be deemed
in custodia legis and shall be exempt from
any order of garnishment, levy, attachment,
or execution. [Sec. 30, NCBA]
So, in contrast to a conservator, the receiver
takes over the operations of the bank and the
management of its assets.
However, the main duty of a receiver is to,
within 90 days of takeover, to determine
whether the bank can be rehabilitated or not.
If it can, receivership will continue, or the
bank will be placed under conservatorship. If
it cannot, the bank will be liquidated.
VII. CLOSE NOW , HEAR LATER
SCHEME
Sec. 29 of the Central Bank Act does not
contemplate prior notice and hearing before
a bank may be directed to stop operations
and placed under receivership. It is enough
that such action is made subject of a
subsequent judicial review. When the law
provides for the filing of a case within 10 days
after the receiver takes charge of the assets of
the bank, it is unmistakable that the assailed
actions should precede the filing of the case.
The legislature could not have intended to
authorize no prior notice and hearing in the
banks closure and at the same time allow a
suit to annul it on the basis of absence
thereof [Central Bank vs. CA and Triumph
Savings Bank, GR No. 76118, March 30, 1993]
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BANKING MERCANTILE LAW
In other words, when there is a ground for
closure and receivership, such closure may be
effected without notice and hearing. The
validity of closure may be challenged
afterwards.
F.4. LIQUIDATION
I. CONCEPT
After undergoing conservatorship, closure,
and/or receivership, if the bank cannot be
rehabilitated, it shall be liquidated
Liquidation refers to the recovery and
conversion of assets into cash for distribution
to all creditors in accordance with the rules
on concurrence and preference of credits.
II. KINDS OF LIQUIDATION
(1) Voluntary liquidation, and
(2) Involuntary liquidation
III. VOLUNTARY LIQUIDATION
The Stockholders and the Board of Directors
can decide to liquidate a bank in accordance
with the procedure under the Corporation
Code.
However, as an additional requirement,
written notice of the liquidation should be
sent to the MB before the liquidation is
undertaken.
Further, the MB shall have the right to
intervene and take such steps as may be
necessary to protect the interests of creditors.
[Sec. 68, GBL]
IV. GROUNDS FOR LIQUIDATION
(1) The condition of the bank is one of
insolvency,
(2) Its continuance would involve probable
loss to its creditors
(3) In both cases, the MB determines that the
bank cannot be rehabilitated.
UP LAW BOC
V. HOW INSTITUTED
Should the determination be that the
institution cannot be rehabilitated or
permitted to resume business, the MB shall
notify in writing the board of directors of the
institution of its findings and direct the
receiver to proceed with the liquidation of the
institution. [Sec. 30, NCBA]
VI. CHALLENGING THE DECISION OF
THE RECEIVER
Only stockholders representing a majority of
the capital stock of the bank have the
personality to file a petition for certiorari to
be filed within 10 days from receipt by the
BOD of the order directing receivership,
conservatorship, or liquidation.
VII. EFFECTS OF LIQUIDATION
(1) Retention of juridical personality;
(2) Suspension of operations / Stoppage of
business;
(3) Assets are deemed in custodia legis, i.e.,
exempt from garnishment, levy or
execution;
(4) Stay of execution of judgment to prevent
depletion of bank assets;
(5) Bank is not liable to pay interest on
deposits which accrued during the period
of suspension of operation;
(6) Restriction of banks capacity to do new
business (new loans, deposits) but with
obligation to collect pre-existing debts.
(a) It cannot take new deposits or grant
new loans.
(b) However, it can collect pre-existing
debts.
(7) Deposits do not become preferred credits
VIII. PROCEDURE
(1) The receiver shall file ex parte with the
proper RTC, and without requirement of
prior notice or any other action, a petition
for assistance in the liquidation of the
institution pursuant to the liquidation
plan adopted by the PDIC.
PAGE 235 OF 320
BANKING MERCANTILE LAW
(a) If a quasi-bank, the liquidation plan is
adopted by the MB;
(2) Upon acquiring jurisdiction, the court
shall, upon motion by the receiver after
due notice:
(a) Adjudicate disputed claims against
the institution;
(b) Assist the enforcement of individual
liabilities of the stockholders,
directors, and officers; and
(c) Decide on other issues as may be
material to implement the liquidation
plan
(3) The receiver shall convert the assets of
the institutions to money, dispose of the
same to creditors and other parties, for
the purpose of paying the debts of such
institution in accordance with the rules on
concurrence and preference of credit
under the Civil Code. [Sec. 30, NCBA]
IX. SUITS BY RECEIVER
The receiver may institute actions to collect
and recover assets or defend actions against
the institution, with the assistance of counsel
as he may retain. [Sec. 30, NCBA]
X. DISPOSITIONS
After payment of the cost of proceedings,
including reasonable expenses and fees of
the receiver to be allowed by the court, the
receiver shall pay the debts of such institution,
under order of the court, in accordance with
the rules on concurrence and preference of
credit in the Civil Code. [Sec. 31, NCBA]
All revenues and earnings realized by the
receiver in winding up the affairs and
administering the assets of any bank or
quasi-bank shall be used to pay the costs of
proceedings, salaries of such personnel
whose employment is rendered necessary in
the discharge of the liquidation together with
other additional expenses caused thereby.
The balance of revenues and earnings, after
the payment of all said expenses, shall form
part of the assets available to creditors. [Sec.
32. NCBA]
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X. COMPARISON OF CONSERVATORSHIP, CLOSURE AND RECEIVERSHIP, AND

LIQUIDATION

Conservatorship Closure/Receivership Liquidation

A bank suffering from
illiquidity is placed under
conservatorship to protect
Concept its creditors and to allow it
to become liquid again.
A bank or quasi-bank is:
(1) In a state of continuing
inability to maintain
liquidity deemed
adequate to protect
the interest of
depositors or creditors,
or
(2) Unwillingness to do
so.
Grounds
Who carries Conservator, who is an
individual appointed by
it out
the BSP.
(1) To take charge of the
Power and assets, liabilities, and
duties the management
thereof;
thereof (2) To reorganize the
management;
An insolvent bank is placed under The assets of a bank,
the control of a receiver, who will which is not capable of
decide whether to rehabilitate it or being rehabilitated,
liquidate it. are sold, and the
proceeds are used to
pay off the banks
debts.
Under the GBL (1) The condition of
When a banking institution: the bank is one of
(1) Notifies the BSP or publicly insolvency,
announces a bank holiday; or (2) Its continuance
(2) Suspends the payment of its would involve
deposit liabilities continuously probable loss to its
for more than 30 days in any creditors
manner (3) In both cases, the
(3) Persistence in conducting MB determines
business in an unsafe or that the bank
unsound manner cannot be
rehabilitated.
Under the NCBA
Whenever the MB finds that a
bank or quasi-bank:
(1) Is unable to pay its liabilities as
they become due in the
ordinary course of business.
(2) Has insufficient realizable
assets, as determined by the
BSP, to meet its liabilities; or
(3) Cannot continue in business
without involving probable
losses to its depositors or
creditors; or
(4) Has willfully violated a cease-
and-desist order under Sec. 37
that has become final,
involving acts or transactions
which amount to fraud or a
dissipation of the assets of the
institution.
Receiver, who in the case of banks Liquidation Court and
is the PDIC Receiver
(1) Immediately gather and take Court:
charge of all the assets and (1) Adjudicate
liabilities of the institution disputed claims
(2) Administer the assets for the against the
benefit of the creditors institution;
(3) Exercise the general powers of (2) Assist the
PAGE 236 OF 320
UP LAW BOC BANKING MERCANTILE LAW

(3) To collect all monies a receiver under the Revised enforcement of

and debts due said Rules of Court individual liabilities
institution; (4) Within 90 days, decide of the stockholders,
(4) To exercise all powers whether the bank can be directors, and
necessary to restore its rehabilitated or should be officers; and
viability; liquidated. (3) Decide on other
(5) To report and be (5) Not to pay or commit any act issues as may be
responsible to the MB; that will involve the transfer or material to
(6) To overrule or revoke disposition of any asset of the implement the
the actions of the institution. liquidation plan
management and Receiver:
board of directors of (1) convert the assets
the bank of the institutions
(7) Notably does not have to money, and
the power to take over (2) dispose of the
bank affairs. same to for the
purpose of paying
the debts of the
institution
After 1 year Within 90 days, if liquidation is When debts have been
When decided upon paid in accordance
terminated Until the bank is viable again, if with the liquidation
rehabilitation decided upon plan.

G. HOW THE BSP HANDLES EXCHANGE G.2. RETIREMENT OF OLD NOTES AND
CRISIS COINS
The BSP may call in for replacement:
G.1. LEGAL TENDER POWER (1) Notes which are more than 5 years old,
and
All notes and coins issued by the BSP shall be
fully guaranteed by the Government of the (2) Coins which are more than 10 years old.
Republic of the Philippines and shall be legal
Those called in for replacement remain legal
tender in the Philippines for all debts, both
tender until one year from call
public and private. [Sec. 52, NCBA]
After that period, they will no longer be legal
Lim itation: Coins shall be legal tender in
tender, but may be exchanged for new
amounts not exceeding P50 for
tender, for a period to be determined by the
denominations of 25 centavos and above,
BSP.
and in amounts not exceeding P20 for
denominations of 10 centavos or less. After the period for exchange, they cease to
be a liability of the BSP and will be
Exception to Lim itation: MB may fix
demonetized.
otherwise. [Sec. 52, NCBA]
In times of exchange crises, the BSP may, in
The maximum amount of coins to be
its discretion, stop issuing legal tender, or
considered as legal tender is: [BSP Circular
issue more legal tender, as the case may be,
537 (2006)]
in order to achieve exchange stability.
(1) P1,000.00 for denominations of 1-Piso, 5-
Piso and 10-Piso coins; and
(2) P100.00 for denominations of 1-sentimo,
5-sentimo, 10-sentimo, and 25-sentimo
coins.

PAGE 237 OF 320

UP LAW BOC
G.3. RATE OF EXCHANGE
The MB shall:
(1) Determine the exchange rate policy of the
country;
(2) Determine the rates at which the BSP
shall buy and sell spot exchange;
(3) Establish deviation limits from the
effective exchange rate or rates as it may
deem proper.
(4) Determine the rates for other types of
foreign exchange transactions by the
BSP, including purchases and sales of
foreign notes and coins. [Sec. 74, NCBA]
Lim itation: The margins between the
effective exchange rates and the rates
established by the MB may not exceed the
corresponding margins for spot exchange
transactions by more than the additional
costs or expenses involved in each type of
transactions. [Sec. 74, NCBA]
I. IN TIMES OF CRISES
The MB may exercise its emergency
restrictions on Exchange Operations
These restrictions may be exercised by a
majority vote of the entire MB, i.e. 5 votes.
The vote must be approved by the
President.
These restrictions the BSP may choose to
impose are:
(1) Temporary suspension or restriction of
sales of exchange by the BSP.
(2) Subjecting all transactions in gold and
foreign to license by the BSP, or
(3) Requiring that any foreign exchange
thereafter obtained by any person
residing in or any entity operating in the
Philippines be delivered to the BSP or to
an agent bank, at effective exchange
rates.(Sec. 74)
Note: These restrictions do not apply to
Foreign Currency Deposits under RA 6426.
PAGE 238 OF 320
BANKING MERCANTILE LAW
II. Law on Secrecy of
Bank Deposits [RA No.
1405, as amended]
A. POLICY
(1) To give encouragement to the people to
deposit their money in banking
institutions; and
(2) To discourage private hoarding. [Sec. 1]
B. PURPOSE
(1) To encourage the people to deposit their
money in banks
(2) To discourage private hoarding, so that
the funds can be used by the bank to
grant loans to assist in economic
development.
The absolute confidentiality rule in R.A. No.
1405 actually aims at protection from
unwarranted inquiry or investigation if the
purpose of such inquiry or investigation is
merely to determine the existence and
nature, as well as the amount of the deposit
in any given bank account.[China Banking
Corporation v. Ortega, G.R. No. L-34964
(1973)]
C. PROHIBITED ACTS
(1) Examination, inquiry, or looking into
deposits by persons, government
officials, bureaus, or offices; [Sec. 2, RA
1405]
(2) Disclosure by banking institutions'
officials or employees to unauthorized
persons regarding information about
covered accounts. [Sec. 3, RA 1405]
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D. DEPOSITS COVERED
D.1. GENERAL RULE
All deposits of whatever nature with banks
or banking institutions in the Philippines are
considered as of an absolutely confidential
nature. [Sec. 2,]
This includes investments in bonds issued by
the Government of the Philippines, its
political subdivisions and its instrumentalities.
Note that investments in bonds in foreign
currency are still covered by RA 1405, and
have not been exempted by the Foreign
Currency Deposit Act.
Exceptions:
(1) Foreign Currency Deposits, which are
governed by the Foreign Currency
Deposit Act, infra.
(2) Funds placed in a bank not in the nature
of a deposit by private individuals.
However, these may also not be disclosed,
under Sec. 55.1 of the GBL of 2000.
However, take note of the ruling in
Ejercito v. SB.
D. 2 TRUST ACCOUNTS
The term "deposits" is to be understood
broadly and not limited to accounts giving
rise to creditor-debtor relations between the
bank and depositor. The deposit of money
which may be used by banks for authorized
loans to 3rd persons also falls under RA
1405. Therefore, trust accounts are also
covered. [Ejercito v. SB Special Division, G.R.
Nos. 157294-95 (2006)]
D.3 CONSTRUCTION OF CONFIDENTIALITY
By force of statute, all bank deposits are
absolutely confidential, and that nature is
unaltered even by the legislated exceptions.
There is disfavor towards construing these
exceptions in such a manner that would
authorize unlimited discretion on the part of
the government or of any party seeking to
enforce those exceptions and inquire into
bank deposits. If there are doubts in
upholding the absolutely confidential nature
of bank deposits against affirming the
PAGE 239 OF 320
BANKING MERCANTILE LAW
authority to inquire into such accounts, then
such doubts must be resolved in favor of
confidentiality. [Republic v. Eugenio, G.R. No.
174629 (2008)]
D.4 ZONES OF PRIVACY
Under the RA 1405, bank deposits are
statutorily protected or recognized zones of
privacy. [People v. Estrada, G.R. No. 164368
(2009); Marquez v. Desierto, G.R. No. 135882
(2001); Ople v. Torres, G.R. No. 107737 (1999)]
It is conceded that while the fundamental law
has not bothered with the triviality of
specifically addressing privacy rights relative
to banking accounts, there, nevertheless,
exists in our jurisdiction a legitimate
expectation of privacy governing such
accounts. The source of this right of
expectation is statutory, and it is found in
R.A. No. 1405, otherwise known as the Bank
Secrecy Act of 1955. [BSB Group, Inc., v. Go,
G.R. No. 168644 (2010)]
E. EXCEPTIONS
Deposits:
(1) Upon written permission of the depositor
(2) In cases of impeachment
(3) Upon order of competent court in cases of
bribery and dereliction of duty.
(4) In cases where the money deposited or
invested is the subject matter of litigation
If the case is for the recovery of money as a
result of failure to inform regarding improper
crediting, the money in the account is not the
subject matter of litigation. This is because
the amount sought to be recovered is
different from the amount that is already in
the account. By the terms of RA 1405, the
money deposited itself should be the
subject matter of the litigation [Union
Bank v. Court of Appeals, G.R. No. 134699
(1999)]
In contrast, where the case is for the recovery
of amounts converted by the depositors, the
amount sought to be recovered is exactly the
money that is supposedly in the account. If
the case necessarily involves inquiring into
UP LAW BOC
the whereabouts of the illegally-acquired
amount, this falls under the exceptions to
bank secrecy under RA 1405. [Mellon Bank,
N.A. v. Magsino, G.R. No. 71479 1990]
OTHER EXCEPTIONS:
(1) The Commissioner of Internal Revenue
can inquire into the bank accounts of the
ff. taxpayers:
(a) A decedent in order to determine his
gross estate, or
(b) A taxpayer who has filed an
application to compromise his tax
liability on the ground of financial
incapacity. (NIRC, Sec. 6(f))
(c) A taxpayer, information on whose
account is requested by a foreign tax
authority
(2) Unexplained wealth under Sec. 8 of the
Anti-Graft and Corrupt Practices Act [RA
3019]. [PNB v. Gancayco, G.R. No. L-18343
(1965); Banco Filipino v. Purisima, G.R. No.
L-56429 (1988); Marquez v. Desierto, G.R.
No. 135882 (2001)]
(3) Cases under the AMLA [RA 9160, the
Anti-Money Laundering Act of 2001] when
there is probable cause that the deposits
or investments involved are in any way
related to an unlawful activity or a money
laundering offense. [Sec. 11, AMLA, see
infra.]
(a) Under the Human Security Act of
2007, cases involving:
(i) Kidnapping for Ransom [RPC]
(ii) Dangerous Drugs [2002
Comprehensive Dangerous Drugs
Act]
(iii) Hijacking and other violations of
RA 6235, and
(iv) Destructive arson and murder,
are exceptions to the requirement of a
court order in order to examine the
accounts.
(4) BSP inquiry or examination in the course
of its periodic or special examination of
the bank. [Sec. 11, AMLA]
PAGE 240 OF 320
BANKING MERCANTILE LAW
(5) Disclosure of certain information about
bank deposits which have been dormant
for at least 10 years, to the Treasurer of
the Philippine in a sworn statement, a
copy of which is posted in the bank
premises. [Sec. 2, Unclaimed Balances
Law, Act No. 3926, as amended by PD
679]
(6) The PDIC and/or the BSP can inquire into
or examine deposit accounts and all
information related thereto in case there
is a finding of unsafe and unsound
banking practice [Sec. 8, paragraph 8,
R.A. 3591, as amended by R.A. 9576].
Not an exception: Power of the
Ombudsman to examine and have access to
bank accounts and records under Sec. 15[8]
of RA 6770 [Morales, The Philippine General
Banking Law (2004)]
F. POWER OF THE OMBUDSMAN TO
EXAMINE ACCOUNTS
While the Ombudsman is empowered to
examine and have access to bank accounts
and records under Sec. 15[8] of RA 6770,
this power was limited in Marquez v. Desierto
[G.R. No.135882 (2001)], where the SC ruled
that before an inspection could be allowed,
there m ust be a pending case before a
court of com petent jurisdiction. This is,
in turn, subject to the ff. additional
requirements:
(1) The account must be clearly identified,
(2) The inspection limited to the subject
matter of the pending case before the
court of competent jurisdiction,
(3) The bank personnel and the account
holder must be notified to be present
during the inspection, and
(4) Such inspection may cover only the
account identified in the pending case.
UP LAW BOC BANKING MERCANTILE LAW

G. GARNISHMENT OF DEPOSITS (2) On grounds of equity, garnishment was

allowed in a case where a Filipino child
was raped by a foreigner, the SC allowed,
General rule: The prohibition against pro hac vice, garnishment of foreign
examination of or inquiry into a bank deposit currency deposits stating[Salvacion v. CA,
under Republic Act 1405 does not preclude G.R. No. 94723 (1997)]
its being garnished to insure satisfaction of a
judgment. [China Banking Corporation v. (a) However, again, this was pro hac vice,
Ortega, G.R. No. L-34964 (1973); Philippine so it is doubtful if this applies in other
Commercial and Industrial Bank v. Court of cases.
Appeals, G.R. No. 84526 (1991)]
[T]he prohibition against examination of or I. PENALTIES
inquiry into a bank deposit under Republic
Act 1405 does not preclude its being
garnished to insure satisfaction of a (1) Imprisonment of not more than 5 years;
judgment. Indeed there is no real inquiry or
in such a case, and if the existence of the (2) Fine of not more than P20,000; or
deposit is disclosed the disclosure is
purely incidental to the execution (3) Both, in the discretion of the court [Sec. 5,
process. It is hard to conceive that it was RA 1405]
ever within the intention of Congress to
enable debtors to evade payment of their just
debts, even if ordered by the Court, through
the expedient of converting their assets into
cash and depositing the same in a
bank.[China Banking Corporation v. Ortega,
G.R. No. L-34964 (1973)]
Exception: Foreign Currency Deposits
The foreign currency deposits shall be
exempt from attachment, garnishment, or
any other order or process of any court,
legislative body, government agency or any
administrative body whatsoever. [Sec. 8,
FCDA Foreign Currency Deposit Act]

H. CONFIDENTIALITY OF FOREIGN
CURRENCY DEPOSITS

General rule: Foreign currency deposits are

confidential.
Exceptions:
(1) Upon written permission of the depositor
[Sec. 8, Foreign Currency Deposit Act ;
Intengan vs CA, G.R. No. 128996 (2002)]
(a) This is the only exception given by
law. [GSIS v. CA, G.R. No. 189206
(2011)]
(b) However, jurisprudence provides
another exception for garnishment.

PAGE 241 OF 320

UP LAW BOC
III. General Banking
Law of 2000 [RA 8791]
A. INTRODUCTION
A.1. DEFINITION OF BANKS
"Banks" shall refer to entities engaged in the
lending of funds obtained in the form of
deposits. (Sec. 3.1)
I. HOW BANKS ARE STRUCTURED
Generally, Banks are corporations.
However, cooperative banks may also be
formed under the Cooperatives Code.
NB. Note that under RA 10641, banks may
now be fully foreign owned, through any of
the ff. modes of entry:
(1) Acquiring, purchasing, or owning up to
100% of the voting stock of an existing
bank,
(2) Investing in up to 100% of the voting
stock of a new banking subsidiary
incorporated under the laws of the
Philippines, or
(3) Establishing branches with full banking
authority.
However, the foreign bank must be
established, reputable, and
financially sound.
Further, it must be widely-owned and
publicly listed in the country of origin.
A.2. CLASSIFICATION OF BANKS
I. UNIVERSAL BANK (UB)
As the name implies, a universal bank has the
most banking power, as it has the same
powers as a commercial bank, plus the
powers:
(1) To operate an investment house, whether
as an integral unit or as a subsidiary.
(a) In turn, an investment house
underwrites securities either on firm
underwriting (good as sold) or best
PAGE 242 OF 320
BANKING MERCANTILE LAW
efforts (excess to be returned to the
firm)
B. To invest in non-allied enterprises
II. COMMERCIAL BANK (KB)
- Has the powers defined in Secs. 29. And
53, infra.
- This is the most common kind of bank.
III. THRIFT BANK
Thrift banks are banks that focus on basic
banking services for their clients, with an
emphasis on individuals and small
businesses. (Some Financial Textbook
since the Thrift Banks Act doesnt have a
working definition of thrift banks)
Thrift banks are primarily governed by RA
7906, the Thrift Banks Act.
Thrift banks include:
o Savings and mortgage banks
o Savings and loan associations, and
o Private development banks.
D. RURAL BANKS
Are banks that are formed for the
purpose of providing adequate credit
facilities to farmers and merchants, or to
cooperatives of such farmers and
merchants and in general, the people of
the rural communities.
They are primarily governed by RA 7353,
the Rural Banks Act.
V. COOPERATIVE BANKS
Are those which are organized as
cooperatives under RA 6938, the
Cooperatives Code.
VI. ISLAMIC BANKS
There is exactly one Islamic Bank in the
Philippines, the Al-Amanah Islamic Bank,
which aims to provide banking under the
Sharia principles governing banking.
UP LAW BOC BANKING MERCANTILE LAW

The General Banking Law of 2000) or

to perform investment management
VII. OTHER BANKS AS CLASSIFIED BY
services under Section 53 of RA 8791.
THE BSP
This includes Land Bank, the Philippine
Veterans Bank, and Development Bank of A.6 CORE BANKING FUNCTIONS
the Philippines.
As defined, (1) the taking of deposits and (2)
the lending of the funds coming from the
same.
A.3. QUASI-BANKS AND TRUST ENTITIES
Quasi-banks refer to entities engaged in
the borrowing of funds through the issuance, I. RELATIONSHIP BETW EEN
endorsement or assignment with recourse or DEPOSITOR AND BANK
acceptance of deposit substitutes as
Creditor(bank) and Debtor (Depositor)
defined in Section 95 of the "New Central
Bank Act" for purposes of relending or
purchasing of receivables and other
II. NATURE OF DEPOSITED FUNDS
obligations.
Thus, the deposit is a contract of loan, with
the bank being lent money by the depositor.
A.4. DEPOSIT SUBSTITUTES Under the Civil Code provisions on loan, this
means that the money deposited with the
A deposit is an alternative form of obtaining
bank becomes its property, which it is free to
funds from the public, other than deposits,
use, subject to the condition that the
through the issuance, endorsement, or
depositor can demand repayment, in the
acceptance of debt instruments for the
form of withdrawals, at any time.
borrower's own account, for the purpose of
relending or purchasing of receivables and
other obligations.
III. QUASI-DEPOSITS
o These instruments may include, but need
o Funds placed with bank, but which is not
not be limited to, bankers acceptances,
in the nature of a deposit
promissory notes, participations,
certificates of assignment and similar o Must be on with recourse basis
instruments with recourse, and o As banks no longer have to apply for
repurchase agreements authority to accept deposit substitutes,
o Instead, the funds are received from this may now be considered a core
investors in exchange for a financial banking function.
instrument like a bond or a loan, which
will be paid at a given time.
B. POWERS OF A COMMERCIAL BANK
o However, the deposit substitute must be
on a with recourse basis. (SEC. 29)

A.5. TRUST ENTITIES (MANUAL OF A commercial bank shall have, in addition to

REGULATION OF BANKS) the general powers incident to corporations,
all such powers as may be necessary to carry
Trust entity (TE) shall refer to a: on the business of commercial banking such
(1) bank or an NBFI, through its as:
specifically designated business unit (1) accepting drafts and
to perform trust functions; or
(2) issuing letters of credit;
(2) trust corporation, authorized by the
Bangko Sentral to engage in trust
and other fiduciary business under
PAGE 243 OF 320
UP LAW BOC BANKING MERCANTILE LAW

(3) discounting and negotiating promissory
notes, drafts, bills of exchange, and other
evidences of debt;
(4) accepting or creating demand deposits;
(5) receiving other types of deposits and
deposit substitutes;
(6) buying and selling foreign exchange and
gold or silver bullion;
(7) acquiring marketable bonds and other
debt securities; and
(8) extending credit.
B.1 CORPORATE POWERS
Aside from the powers listed above, banks,
generally being in the form of a corporation,
also have all the powers a corporation has.
o The exception is cooperative banks, which
are in the form of a cooperative, and have
all the powers of a cooperative under the
Cooperatives Code.
B.2. GRANTING OF LOANS; SECURITY
REQUIREMENT
The GBL no longer requires credit to be
secured.
o This is in contrast to the General Banking
Act it replaced, which requires all loans to
be secured.
o A 3% monthly interest rate has been
ruled iniquitous. [Macalinao v. BPI, G.R.
No. 175490 (2009)]
o Also, while it is acceptable for banks to
stipulate that interest rates on a loan not
be fixed and instead be made dependent
on market conditions, there should
always be a reference rate upon which to
peg the rates.[Consolidated Bank v. CA,
G.R. No. 114286 (2011)]
B. 4. INCIDENTAL BANKING POWERS
In addition to the operations specifically
authorized in this Act, a bank may perform
the following services:
(1) Receive in custody funds, documents and
valuable objects;
(2) Act as financial agent and buy and sell,
by order of and for the account of their
customers, shares, evidences of
indebtedness and all types of securities;
(3) Make collections and payments for the
account of others and perform such other
services for their customers as are not
incompatible with banking business;
(4) Upon prior approval of the Monetary
Board, act as managing agent, adviser,
consultant or administrator of investment
management/advisory/consultancy
accounts; and
(5) Rent out safety deposit boxes.

B. 3. STIPULATIONS ON INTEREST
As an accessory to its power to grant loans, C. DISTINCTION OF BANKS FROM
banks may stipulate interests. QUASI-BANKS AND TRUST
o With the removal of the limit on ENTITIES
imposable interest under CB Circular 905, See p. 243, supra
banks may impose interest past the legal
interest rate of 6% (CB Circular 799-13)
o However, this does not give banks the
right to impose excessive interests. A
stipulated interest rate may nevertheless
be equitably reduced should the same be
found to be iniquitous, unconscionable,
and exorbitant under Art. 1556 of the CC.
If such is the case, there is no stipulated
rate, and the legal rate applies. [Dio v.
Japor, G.R. No. 154129 (2005)]

PAGE 244 OF 320

UP LAW BOC
D. BANK POWERS AND LIABILITIES
D.1. CORPORATE POWERS [SEC. 36,
CORPORATION CODE]
(1) Sue and be sued in its corporate name;
(2) Succession;
(3) Adopt and use a corporate seal;
(4) Amend its Articles of Incorporation;
(5) Adopt and amend by-laws;
(6) For stock corporations - issue or sell
stocks to subscribers and sell treasury
stocks; for non-stock corporation - admit
members to the corporation;
(7) Purchase, receive, take or grant, hold,
convey, sell, lease, pledge, mortgage and
otherwise deal with such real and
personal property, pursuant to its lawful
business;
(8) Enter into merger or consolidation with
other corporations as provided in the
Code;
(9) Make reasonable donations, including
those for the public welfare or for hospital,
charitable, cultural, scientific, civic, or
similar purposes: Provided, no
corporation, domestic or foreign, shall
give donations in aid of any political party
or candidate or for purposes of partisan
political activity;
(10) Establish pension, retirement, and other
plans for the benefit of its directors,
trustees, officers and employees; and
(11) Exercise such other powers as may be
essential or necessary to carry out its
purposes
D.2. BANKING AND INCIDENTAL POWERS
All such powers as may be necessary to carry
on the business of commercial banking [Sec.
29, GBL]
(1) Accepting drafts
(2) Issuing letters of credit
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BANKING MERCANTILE LAW
(3) Discounting and negotiating promissory
notes, drafts, bills of exchange, and other
evidence of debt
(4) Accepting or creating demand deposits
(5) Receiving other types of deposits and
deposit substitutes
(6) Buying and selling foreign exchange and
gold or silver bullion
(7) Acquiring marketable bonds and other
debt securities
(8) Extending credit
I. ACCEPTING DRAFTS
II. ISSUING LETTERS OF CREDIT
III. DISCOUNTING AND NEGOTIATING
PROMISSORY NOTES, DRAFTS, BILLS
OF EXCHANGE, AND OTHER
EVIDENCE OF DEBT
IV. ACCEPTING OR CREATIN G
DEMAND DEPOSITS
General rule: Only a UB KB can accept or
create demand deposits [Sec. 33, GBL]
Exception: Banks other than a UB or KB
with prior approval of, and subject to such
conditions and rules as may be prescribed by
the Monetary Board [Sec. 33, GBL]
Fixed, savings, and current deposits of money
in banks and similar institutions shall be
governed by the provisions concerning simple
loan. [Art. 1980, NCC]
Presumption of ownership of deposits
It is presumed that money deposited in a
bank account belongs to the person in whose
name the deposit account is opened.
A depositor is presumed to be the owner of
funds standing in his name in a bank deposit;
and where a bank is not chargeable with
notice that the money deposited in such
account is the property of some other person
than the depositor, the bank is justified in
paying out the money to the depositor or
UP LAW BOC
upon his order, and cannot be liable to any
other person as the true owner. [Fulton Iron
Works Co. v. China Banking Corporation, G.R.
No. 32576 (1930)]
No duty to set-off
A bank is under no duty or obligation to make
an application or set-off against the deposit
accounts of a borrower. To apply the deposit
to the payment of a loan is a privilege, a right
of set-off which the bank has the option [but
not the obligation] to exercise. [BPI v. CA and
Eastern Plywood, G.R. No. 104612 (1994)]
Safety deposit boxes
The rent of safety deposit boxes is a special
kind of deposit and cannot be characterized
as an ordinary contract of lease because the
full and absolute possession and control of
the deposit box is not given to the renters.
The prevailing rule is that the relation
between the bank renting out and the renter
is that of bailor and bailee the bailment being
for hire and mutual benefit. [CA Agro-
industrial Dev. Corp. v. CA, G.R. No. 90027
(1993)]
V. RECEIVING OTHER TYPES OF
DEPOSITS AND DEPOSIT
SUBSTITUTES
Types of Deposits
(1) Time Deposit - Interest rate stipulated
depending on the number of days. During
this period, the money deposited may not
be withdrawn without incurring penalty.
High interest rates.
(2) Savings Deposit - Bank pays an
interest rate, but not as high as time
deposits.
(3) Dem and Deposits/Current
Accounts - No interest is paid by the
bank because the depositor can take out
his funds any time. It is called demand
deposit because the depositor can
withdraw the money he deposited on the
very same day when he deposited it or at
any time thereafter. [Villanueva,
Commercial Law Review (2012)]
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BANKING MERCANTILE LAW
(4) Negotiable Order of W ithdrawal
Accounts Interest-bearing deposit
accounts that combine the payable on
demand feature of checks and
investment feature of savings accounts
[Sec. X223, Manual of Regulations for
Banks]
VI. BUYING AND SELLING FOREIGN
EXCHANGE AND GOLD OR SILVER
BULLION
VII. ACQUIRING MARKETABLE BONDS
AND OTHER DEBT SECURITIES
VIII. EXTENDING CREDIT
Know your customer rule
Before granting a loan or other credit
accommodation, a bank must ascertain that
the debtor is capable of fulfilling its
commitments to the bank. [Sec. 40, GBL]
The bank may demand from its credit
applicants a statement of their assets and
liabilities and of their income and
expenditure and such information as may be
prescribed by law or by rules and regulations
of MB to enable the bank to properly evaluate
the credit application which includes the
corresponding financial statements
submitted for taxation purposes to the BIR.
[Sec. 40, GBL]
Credit enhancement
If the borrower is less than creditworthy, third
persons may enhance his credit by providing
guarantees and other security devices in favor
of the bank. [Morales (2004)]
A bank cannot lend pesos to a non-resident
[BSP Circular No. 22; Sec. 22, Manual of
Regulations on Foreign Exchange
Transactions]. [Morales (2004)]
UP LAW BOC
Material misrepresentation
If there is material misrepresentation, bank
(1) May terminate any loan or other credit
accommodation granted on the basis of
said statements; and
(2) Shall have the right to demand
immediate repayment or liquidation of
the obligation [Sec. 40, GBL]
Lim it on loans, credit
accom m odations and guarantees
General rule: Shall not
exceed 75% of the
appraised value of the
respective real estate
security, plus 60% of the
appraised value of the
Against Real
insured improvements, and
estate
such loans may be made to
the owner of the real estate
or to his assignees
Exception: Where the
Monetary Board otherwise
prescribes [Sec. 37, GBL]
General rule: Shall not
exceed 75% of the
On security of appraised value of the
chattels and security, and such loans
intangible and other credit
properties accommodations may be
(patents, made to the title-holder of
trademarks, the chattels and intangible
trade names, properties or his assignees
and copyrights)
Exception: The Monetary
Board otherwise prescribes
[Sec. 38, GBL]
Grant of loans
(1) Only in amounts and for the periods of
time essential for the effective completion
of the operations to be financed; and
(2) Consistent with safe and sound banking
practices. [Sec. 39, GBL]
PAGE 247 OF 320
BANKING MERCANTILE LAW
Purpose of loans
The purpose shall be stated in the application
and in the contract between the bank and the
borrower. [Sec. 39, GBL]
Effect of usage of loan proceeds for
purposes other than those agreed
upon with the bank
The bank shall have the right to terminate the
loan or other credit accommodation and
demand immediate repayment of the
obligation. [Sec. 39, GBL]
Amortization on loans and other
credit accom m odations
(1) Loans and other credit accommodations
with maturities of more than 5 years
Requirement: Provisions must be made
for periodic amortization payments, but
such payments must be made at least
annually. Special rule: That when the
borrowed funds are to be used for
purposes which do not initially produce
revenues adequate for regular
amortization payments therefrom, the
bank may permit the initial amortization
payment to be deferred until such time as
said revenues are sufficient for such
purpose. Exception to the special
rule: In no case shall the initial
amortization date be later than 5 years
from the date on which the loan or other
credit accommodation is granted.
(2) In case of loans and other credit
accommodations to microfinance sectors
The schedule of loan amortization shall
take into consideration the projected cash
flow of the borrower and adopt this into
the terms and conditions formulated by
banks. [Sec. 44, GBL]
All are subject to such rules as the Monetary
Board may promulgate. [Sec. 29, GBL]
UP LAW BOC
E. DILIGENCE REQUIRED OF BANKS
Sec. 2. Declaration Of Policy. - The State
recognizes the vital role of banks providing
an environment conducive to the sustained
development of the national economy and
the fiduciary nature of banking that requires
high standards of integrity and
performance. In furtherance thereof, the
State shall promote and maintain a stable
and efficient banking and financial system
that is globally competitive, dynamic and
responsive to the demands of a developing
economy.
o Under the old General Banking Act, no
standard was given. However,
jurisprudence consistently held that
banks were to be held to the highest
degree of diligence.
o Under the General Banking Law of 2000,
however, the standard, as emphasized
above, is merely high standards of
integrity and performance.
o In theory, this only means that a higher
standard of diligence than ordinary
diligence, but not necessarily the highest
degree of diligence.
o In practice, however, the SC has
consistently imposed the duty on banks
to observe the utmost fidelity in
handling the deposits in their hands.
o However, the distinction seems to have
been clarified by BSP Circular 857, which
says that financial institutions must
adhere to the highest service
standards.
E.1 RELEVANT JURISPRUDENCE (ALSO A
HISTORY OF THE STANDARDS REQUIRED
OF A BANK.)
I. METICULOUS CARE, ALW AYS
HAVING IN MIND THE FIDUCIARY
NATURE OF THEIR RELATIONSHIP)
When the bank fails to credit funds deposited
to the depositors account, it is negligent,
because the bank has the obligation to treat
the accounts of its depositors with meticulous
care, always having in mind the fiduciary
PAGE 248 OF 320
BANKING MERCANTILE LAW
nature of their relationship. [Simex v. CA, G.R.
No. 88013 (1990)]
Likewise, it is negligent for withdrawals to be
allowed from an account, if the bank itself
failed to follow its own rules and procedures
[BPI v. IAC, G.R. No. L-66826 (1988)]
II. UTMOST FIDELITY
The bank is not expected to be infallible but it
must hear the blame for not discovering the
mistake of its teller despite the established
procedure requiring the papers and bank
books to pass through a battery of bank
personnel whose duty it is to check and
countercheck them for possible errors. The
depositor expects the bank to treat his
account with the utmost fidelity. (BPI v. CA)
III. DILIGENCE HIGHER THAN THAT
OF A GOOD FATHER OF A FAMILY
When the teller lost the passbook, the bank
failed to meet the high standards of integrity
and performance, pursuant to its fiduciary
duty under the law. The fiduciary nature of
banking requires banks to assume a degree
of diligence higher than that of a good father
of a family. .[Consolidated Bank v. CA, G.R. No.
114286 (2011)]
Failure to meet these high standards bars the
bank from claiming due diligence in the
selection and supervision of the employees.
[Phil. Banking Corp v. CA, G.R. No. 112392
(2000)]
As is failure to compare the signatures on the
withdrawal slip and signature cards. [PNB v.
Pike, G.R. No. 157845 (2005)]
IV. HIGHEST DEGREE OF CARE AND
DILIGENCE
Banks were first made subject to the highest
degree of care and diligence in Samsung
Construction v. FEBTC [G.R. No. 129015
(2004)].
Because of this, banks cant rely on the mirror
principle of LTD, i.e. it cannot rely on the
certificate of title when dealing with real
estate. [Heirs of Manlapat v. CA, G.R. No.
125585 (2005)]
UP LAW BOC
These standards apply not only to the bank
per se, but also to its employees. [Cadiz v. CA,
G.R. No. 153784 (2005)]
E.2. ACTS NOT CONSTITUTING
NEGLIGENCE
Closing a bank account after the depositor
handled his account improperly. [Far East
Bank and Trust v. Pacilan, G.R. No. 157314
(2005)]
Failure to pay interest after bank suspension
by the BSP (Fidelity Savings v. Cenzon, G.R.
No. L-46208 (1990))
The banking industry is impressed with public
interest. As such, the highest degree of
diligence is expected, and high standards of
integrity and performance are even required.
Banks must treat depositors accounts with
meticulous care and always to have in mind
the fiduciary nature of its relationship with
them. [Metrobank v. Rosales, G.R. No. 183204
(2014); Comsavings Bank v. Sps. Capistrano,
G.R. No. 170942 (2013); Equitable Banking v.
Special Steel Products, G.R. No. 175350 (2012)]
The Rural Bank of Cabadbaran should not
have simply relied on the face of SPAs since
its undertaking to lend P200k as a banking
institution requires a greater degree of
diligence. [RBCI v. Melecio-Yap, G.R. No.
178451 (2014)]
The fiduciary nature of banking requires
banks to assume a degree of diligence higher
than that of a good father of a family. [People
v. Go, G.R. No. 168539 (2014); Metrobank v.
Centro Development, G.R. No. 180974 (2012)]
Banks are required to observe a higher
standard of diligence. [Land Bank v. Poblete,
G.R. No. 178347 (2013)]
The banking business is so impressed with
public interest where the trust and
confidence of the public in general is of
paramount importance such that the
appropriate standard of diligence must be
very high, if not the highest degree of
diligence. [Far East Bank and Trust Company
v. Tentmakers, G.R. No. 171050 (2012)]
The degree of diligence required of banks is
more than that of a good father of a family
where the fiduciary nature of their
relationship with their depositors is
PAGE 249 OF 320
BANKING MERCANTILE LAW
concerned. [PNB v. Tria, G.R. No. 193250
(2012)]
Banks assume a degree of diligence higher
than that of a good father of a family. Its
fiduciary duty imposes upon it a higher level
of accountability than that expected of a
depositor.[Philippine Banking Corporation vs.
CA, G.R. No. 127469 (2004)]
The General Banking Law of 2000 requires of
banks the highest standards of integrity and
performance. The banking business is
impressed with public interest. Of paramount
importance is the trust and confidence of the
public in general in the banking industry.
Consequently, the diligence required of banks
is more than that of a bonus pater familias or
a good father of a family. The highest degree
of diligence is expected. [Philippine
Commercial Bank vs. Balmaceda, G.R. No.
158143, September 21, 2011]
Notwithstanding the degree of diligence
required, a bank is not expected to be
infallible [Prudential Bank vs. CA, G.R. No.
125536 (2000)].
F. FIDUCIARY DUTY
(1) Failure on the part of the bank to satisfy
the degree of diligence required of banks
may warrant the award of damages.
(2) Under Sec. 2, the degree of diligence is
high standards of integrity and
performance and no longer highest
degree of diligence as was decided prior
to the effectivity of the General Banking
Law of 2000 but also [mistakenly] even
thereafter. In numerous cases, the
Supreme Court has held that the highest
degree of diligence and care is expected
from banks [Simex International v. CA,
G.R. No. 88013 (1990); Philippine Bank of
Commerce v. CA, G.R. No. 97626. (1997);
Philippine Savings Bank v. Chowking Food
Corporation, G.R. No. 177526 (2008); Bank
of America NT &SA v. Philippine Racing
Club (2009)].
The fiduciary nature of banking requires
banks to assume a degree of diligence higher
than that of a good father of a family. [People
UP LAW BOC
v. Go, G.R. No. 168539 (2014); Metrobank v.
Centro Development, G.R. No. 180974 (2012)]
The degree of diligence required of banks is
more than that of a good father of a family
where the fiduciary nature of their
relationship with their depositors is
concerned. [PNB v. Tria, G.R. No. 193250
(2012)]
The laws policy recognizes the fiduciary
nature of banking. [Sps. Serfino v. Far East
Bank and Trust Company, G.R. No. 171845
(2012)]
As a business affected with public interest
and because of the nature of its functions, the
bank is under obligation to treat the accounts
of its depositors with meticulous care, always
having in mind the fiduciary nature of their
relationship.
In every case, the depositor expects the bank
to treat his account with the utmost fidelity,
whether such account consists only of a few
hundred pesos or of millions. The bank must
record every single transaction accurately,
down to the last centavo, and as promptly as
possible. This has to be done if the account is
to reflect at any given time the amount of
money the depositor can dispose as he sees
fit, confident that the bank will deliver it as
and to whomever he directs. A blunder on the
part of the bank, such as the failure to duly
credit him his deposits as soon as they are
made, can cause the depositor not a little
embarrassment if not financial loss and
perhaps even civil and criminal litigation
[Simex International v. CA, G.R. No. 88013
(1990)].
This fiduciary relationship means that the
banks obligation to observe high standards
of integrity and performance is deemed
written into every deposit agreement
between a bank and its depositor [Philippine
Banking Corporation vs. CA, G.R. No. 127469,
January 15, 2004].
Banks are expected to exercise the highest
degree of diligence in the selection and
supervision of their employees [Philippine
Commercial International Bank v. CA, G.R. No.
121413, 121479 and 128604 (2001)].
It cannot be over emphasized that the
banking business is impressed with public
interest. Of paramount importance is the
PAGE 250 OF 320
BANKING MERCANTILE LAW
trust and confidence of the public in general
in the banking industry. Consequently, the
diligence required of banks is more than that
of a Roman pater familias or a good father of
a family. The highest degree of diligence is
expected [Phil. Savings Bank v. Chowking
Food Corporation, G.R. No. 177526 (2008)
The banking business is so impressed with
public interest where the trust and
confidence of the public in general is of
paramount importance such that the
appropriate standard of diligence must be a
high degree of diligence, if not the utmost
diligence [Bank of America NT&SA v. Phil.
Racing Club, GR No. 150228 (2009)].
Under the doctrine of last clear chance, a
bank may be held liable for loss despite the
negligence of a depositor. Examples of these
cases are the following:
(1) For disbursing funds to a dishonest
employee despite the employees failure
to strictly abide with the banks internal
procedure. [Philippine Bank of Commerce
v. CA, G.R. No. 97626 (1997)]
(2) Allowing the execution of a mortgage on
parcels of land as security for a loan not
owned by the prospective borrower.
[Canlas v. CA, G.R. No. 112160 (2000)]
(3) Crediting the deposit in favor of another
depositor, a check where the signature of
the drawer was forged. [Westmont Bank
v. Ong, G.R. No. 132560 (2002)]
G. NATURE OF BANK FUNDS AND
BANK DEPOSITS
The relationship between a depositor and a
bank is that of a creditor and debtor in
relation to the banks deposit functions
[Gullas vs. PNB, G.R. No. L-43191, (1935)] and
not that of depositor and depositary.
The contract between the bank and its
depositor is governed by the provisions of the
NCC on simple loan [Consolidated Bank
and Trust Corporation vs. CA, G.R. No. 138569
(2003)].
Bank deposits are in the nature of irregular
deposits [Serrano vs. Central Bank, G.R. No. L-
UP LAW BOC
30511 (1980)]. Therefore, Art. 1287 of the Civil
Code, which prohibits compensation when
one of the debts arises from depositum, does
not apply.
Current and savings deposits are loans to a
bank because the bank can use the same and
they earn interest [BPI vs. CA, G.R. No. 104612
(1994)].
The relationship being contractual in nature,
mandamus is therefore not an available
remedy since mandamus does not lie to
enforce the performance of contractual
obligations [Maclaring Lucman vs. Alimatar
Malawi, G.R. No. 159794 (2006)]
Money deposited is commingled with other
money constituting a common fund.
H. STIPULATION ON INTERESTS
The Monetary Board may prescribe the
maturities, as well as related terms and
conditions for various types of bank loans and
other credit accommodations.
Any change by the Board in the maximum
maturities shall apply only to loans and other
credit accommodations made after the date
of such action.
The Monetary Board shall regulate the
interest imposed on micro finance borrowers
by lending investors and similar lenders such
as, but not limited to, the unconscionable
rates of interest collected on salary loans and
similar credit accommodations [Sec. 43, GBL]
I. GRANT OF LOANS AND SECURITY
REQUIREMENTS (PRUDENTIAL
MEASURES)
I.1. RATIO OF NET WORTH TO TOTAL RISK
ASSETS
Concept: The minimum ratio which the net
worth of a bank must bear to its total risk
assets which may include contingent
accounts [i.e. net worth: total risk assets]
[Sec. 34, GBL]
PAGE 251 OF 320
BANKING MERCANTILE LAW
General rule: A bank must conform to the
risk-based capital ratio prescribed by the MB
Expectations: The MB may alter or suspend
compliance with such ratio whenever
necessary for a maximum period of 1 year.
(1) In case of a bank merger or consolidation;
OR
(2) When a bank is under rehabilitation
under a program approved by the BSP;
[Sec. 34]
I.2. PURPOSE
A bank must not be allowed to expand the
volume of its loans and investments in a
manner that is disproportionate to its net
worth. [Morales (2004)]
I.3. EFFECT OF NON-COMPLIANCE
(1) The MB may limit or prohibit the
distribution of net profits by such bank
and may require that part or all of the net
profits be used to increase the capital
accounts of the bank until the minimum
requirement has been met.
(2) The MB may restrict or prohibit the
acquisition of major assets and the
making of new investments by the bank,
with the exception of purchases of readily
marketable evidences of indebtedness of
the RP and the BSP and any other
evidences of indebtedness or obligations
the servicing and repayment of which are
fully guaranteed by the RP, until the
minimum required capital ratio has been
restored. [Sec. 34, GBL]
I.4. SINGLE BORROWERS LIMIT
General rule: The total loans, credit
accommodations and guarantees that may
be extended by a bank to any person,
partnership, association, or corporation or
other entity shall at no time exceed 20% of
the net worth of such bank. [Sec. 35.1, GBL]
Exceptions:
(1) The Monetary Board otherwise prescribes
for reasons of national interest. [Sec. 35.1]
Now, the single borrowers limit is 25% of
the net worth of the lending bank.
UP LAW BOC
(2) Wholesale lending activities of
government banks to participating
institutions for relending to end-user
borrowers: separate limit of 35% net
worth. [BSP Circular No. 425 dated March
25, 2004]
I. INCREASE OF LIMIT
The Monetary Board may increase the limit
prescribed by an additional 10% of the net
worth, when:
(1) The additional liabilities of any borrower
are adequately secured by trust receipts,
shipping documents, warehouse receipts
or other similar documents transferring
or securing title;
(2) Covering readily marketable, non-
perishable goods; and
(3) Which must be fully covered by insurance
[Sec. 35.2]
II. PURPOSE
To prevent the bank from making excessive
loans and other credit accommodations to a
single borrower or corporate group, including
guarantees for the account of such borrower
or group. The bank is prohibited from
placing many eggs in the basket of one client.
[It] is a damage-control mechanism [and] a
device for risk amelioration. [Morales (2004)]
III. BASIS FOR DETERMINING
COMPLIANCE
The basis for determining compliance with
the SBL is the total credit commitment of the
bank to the borrower. [Sec. 35.1, GBL]
IV. INCLUSIONS IN THE CEILING
(1) The direct liability of the maker or
acceptor of paper discounted with or sold
to such bank and the liability of a general
indorser, drawer or guarantor who
obtains a loan or other credit
accommodation from or discounts paper
with or sells papers to such bank;
(2) In the case of an individual who owns or
controls a majority interest in a
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BANKING MERCANTILE LAW
corporation, partnership, association or
any other entity, the liabilities of said
entities to such bank;
(3) In the case of a corporation, all liabilities
to such bank of all subsidiaries in which
such corporation owns or controls a
majority interest; and
(4) In the case of a partnership, association
or other entity, the liabilities of the
members thereof to such bank. [Sec. 35.3,
GBL]
V. GUIDELINES ON THE W HOLESALE
LENDING OF GOVERNM ENT BANKS
(1) It shall apply only to loans granted by
participating financial institutions [PFIs]
on a wholesale basis for on-lending to
end-user borrowers;
(2) It shall apply only to loan programs
funded by multilateral, international, or
local development agencies,
organizations, or institutions, especially
designed for wholesale lending activities
of government banks;
(3) The end-user borrowers of the PFIs shall
be subject to the 25% SBL, not the
increased ceiling of 35%; and
(4) Government banks shall observe
appropriate criteria for accrediting PFIs
and for the grant/renewal of credit lines
to accredited PFIs. [BSP Circular No. 425
dated March 25, 2004]
VI. EXCLUSIONS FROM THE CEILING
(NON-RISK LOANS)
Loans and other credit accommodations
(1) Secured by obligations of the BSP or of
the Philippine Government;
(2) Fully guaranteed by the government as to
the payment of principal and interest;
(3) Covered by assignment of deposits
maintained in the lending bank and held
in the Philippines;
(4) Under letters of credits to the extent
covered by margin deposits; and
(5) Specified by the Monetary Board as non-
risk items [Sec. 35.5, GBL]
UP LAW BOC
VII. COMBINATION OF LIABILITIES
The MB may prescribe the combination of the
liabilities of subsidiary corporations or
members of the partnership, association,
entity or such individual under certain
circumstances, including but not limited to
any of the following situations:
(1) The parent-corporation, partnership,
association, entity or individual
guarantees the repayment of the
liabilities;
(2) The liabilities were incurred for the
accommodation of the parent corporation
or another subsidiary or of the
partnership or association or entity or
such individual; or
(3) The subsidiaries though separate entities
operate merely as departments or
divisions of a single entity. [Sec. 35.4,
GBL]
Loans and other credit accommodations,
deposits maintained with, and usual
guarantees by a bank to any other bank or
non-bank entity, whether locally or abroad,
shall be subject to the prescribed limits. [Sec.
35.6, GBL]
I.5. RESTRICTIONS ON BANK EXPOSURE
TO DOSRI (DIRECTORS, OFFICERS,
STOCKHOLDERS, AND THEIR RELATED
INTERESTS)
General rule [Sec. 36, GBL]: No director or
officer of any bank
(1) Shall, directly or indirectly, for himself or
as the representative or agent of others,
borrow from such bank, nor
(2) Shall he become a guarantor, endorser or
surety for loans from such bank to others,
or in any manner be an obligor or incur
any contractual liability to the bank
Exceptions [SEC. 36, GBL]:
(1) Valid insider lending;
(2) Loans, credit accommodations and
guarantees extended by a cooperative
bank to its cooperative shareholders.
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BANKING MERCANTILE LAW
I. REQUIREMENTS FOR VALID
INSIDER LENDING
(1) In the regular course of business;
(2) Upon terms not less favorable to the
bank than those offered to others;
(3) There is a written approval of the majority
of all the directors of the bank, excluding
the director concerned.
Exception: Not required where granted
to officers under a fringe benefit plan
approved by the BSP;
(4) The required approval shall be entered
upon the record of the bank and a copy of
such entry shall be transmitted forthwith
to the appropriate supervising and
examining department of the BSP;
(5) Limited to an amount equivalent to the
DOSRI borrowers unencumbered
deposits and book value of his paid-in
capital contribution in the bank [Sec. 36]
II. EXCEPTIONS [SEC. 36, GBL]:
(1) Non-risk items; and
(2) Loans in the form of fringe benefits.
III. W AIVER OF BANK SECRECY
A DOSRI borrower is required to waive the
secrecy of his deposits of whatever nature in
all banks in the Philippines. [Sec. 26, NCBA]
IV. PURPOSE
The general policy behind DOSRI rules is to
level the lending field between the insiders
and the outsiders. The objective is to
prevent the bank from becoming a captive
source of finance for DOSRI. [Morales (2004)]
I.6. LOAN-LOSS PROVISIONING
The following are subject to regulation by the
Monetary Board:
(1) The amount of reserves for bad debts or
doubtful accounts or other contingencies;
and
UP LAW BOC
(2) The writing off of loans, other credit
accommodations, advances and other
assets. [Sec. 49, GBL]
I. PURPOSE
For effective banking supervision. There is a
problem of mismatch when a loan becomes
non-performing. The bank is paying interest
on the money it borrowed from the depositors
or other placers of funds, but is not recouping
that interest from the loan it made.
Eventually, the bank may have to write off
loan losses against profits. To cushion this
eventuality, the bank is required to set aside
reserved for bad debts and other doubtful
accounts or contingencies. [Morales (2004)]
To address the non-performing asset
problem, RA 9182 Special Purpose Vehicle
Act was passed. The Monetary Board
approved certain accounting guidelines on
the sale by banks and other financial
institutions for housing under the said Act.
[Morales (2004)] [N.B. RA 9182 is no longer in
effect.]
I.7. RESERVES
I. PURPOSES
(1) To control the volume of money created
by the credit operations of the banking
system, the BSP requires all banks to
maintain reserves against their deposit
and deposit-substitute liabilities.
(2) As a ready source of funds that will
respond to unusually large number of
withdrawals or preterminations of
deposits or deposit-substitutes, taking in
the shape of a bank run. [Morales (2004)]
II. UNIFIED RESERVE
(1) Statutory or legal and liquidity reserve
[N.B. The two reserves have been
combined or unified: 18% for deposits
and deposit substitutes] [BSP Circular No.
753 dated March 29, 2012]
(a) For deposit-substitutes evidenced by
repurchase agreements covering
government securities: 2% [BSP
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BANKING MERCANTILE LAW
Circular No. 444 dated August 18,
2004]
(b) For foreign currency deposit units:
100% [BSP Circular No. 1389 dated
April 13, 1993, as amended]; 30% of
this cover must be in the form of
liquid assets [BSP Circular-Letter
dated June 6, 1997, as cited in Morales
(2004)]
(2) Reserve: The required reserves are to be
kept in the form of deposits placed in the
banks Demand Deposit Account with the
BSP [BSP Circular No. 753 dated March
29, 2012]
III. INTEREST ON RESERVES [SEC. 94,
NCBA]
General rule: The BSP shall not pay
interest on the reserves maintained with it.
Exception: Unless the Monetary Board
decides otherwise as warranted by
circumstances.
I.8. PDIC INSURANCE
I. CONCEPT
Banks are required to insure their deposit
liabilities with the PDIC [Philippine Deposit
Insurance Corporation].
II. PARTIAL INSURANCE
Each depositor is a beneficiary of the
insurance for a maximum amount of
P500,000, or its foreign currency equivalent
in the case of an FCDU deposit. [Act
Amending PDIC Charter, 2009, RA 9576]
III. COVERAGE
PDIC only insures deposit [not deposit
substitute] liabilities of a bank or banking
institution [Sec. 5, RA 3591, as amended]
IV. PURPOSE
Full insurance might encourage risky banking
activities. A limited insurance of bank
deposits serves to limit moral hazard.
UP LAW BOC BANKING MERCANTILE LAW

(1) Financial Allied Enterprises Up to

100% of the equity in a thrift bank, rural
I.9. EQUITY INVESTMENT LIMITS (ALLIED
bank, or financial allied enterprise. A
VS. NON-ALLIED)
publicly-listed UB or KN may own up to
This is a prudential measure by limiting the 100% of the voting stock of only one other
exposure of banks in different businesses for UB or KB. [Sec. 25, GBL]
the purpose of control, affiliation or other
(2) Non-Financial Allied Enterprises
continuing business advantage.
Up to 100% of the equity of that
General Rule UB [Sec. 24] KB [Sec. 30] enterprise [Sec. 26, GBL]
[Allied & Non- [of Allied (3) Non-Allied Enterprises Not
Allied enterprises] exceeding 35% of the total equity in a
Total enterprises] single non-allied enterprise not shall it
Not
investment exceed 35% of the voting stock in that
Not exceeding exceeding
in equities: enterprise. This extends to investments
50% of the 35% of the
by the UBs wholly or majority-owned
net worth of net worth of
subsidiaries. [Sec 27 GBL]
the bank the bank
(4) Quasi-banks 40% of the equity of
[Allied/Non- [Allied]
quasi-banks [Sec. 28, GBL]
The equity Allied]
Not
investment The equity investment of Commercial
Not exceeding exceeding
in any one Banks in
25% of the 25% of the
enterprise: net worth of net worth of (1) Financial Allied enterprises Up to
the bank the bank 100% of the equity of a thrift or rural
bank. [Sec 31 GBL]. Special rule: Where
Net Worth The total of the unimpaired paid- the equity investment of a KB is in other
in capital including paid-in surplus, retained financial allied enterprises, including
earnings and undivided profit, net of other KBs, such investment shall remain
valuation reserves and other adjustments. a minority holding in that enterprise. [Sec.
[Sec. 24, GBL] 31, GBL]
The acquisition of such equity is subject to the (2) Non-Financial Allied enterprises
prior approval of the MB. [Sec. 24, GBL] Up to 100% of the equity of said
enterprises. [Sec. 32, GBL]
The equity investment of a Universal Bank (3) Quasi-banks 40% of the equity of
in quasi-banks. [Sec. 28, GBL]

PAGE 255 OF 320

UP LAW BOC INTELLECTUAL PROPERTY LAW MERCANTILE LAW

MERCANTILE LAW
INTELLECTUAL
PROPERTY LAW

PAGE 256 OF 320

UP LAW BOC INTELLECTUAL PROPERTY LAW
I. Intellectual Property
Rights in General
A. STATE POLICIES
A.1. INTELLECTUAL PROPERTY CODE
(1) To protect and secure the exclusive
rights of scientists, inventors, artists
and other gifted citizens to their
intellectual property and creations,
particularly when beneficial to the
people, for such periods as provided in
this Act.
(2) To promote the diffusion of knowledge
and information for the promotion of
national development and progress and
the common good.
(3) To streamline administrative
procedures of registering patents,
trademarks and copyright, to liberalize
the registration on the transfer of
technology, and to enhance the
enforcement of intellectual property
rights in the Philippines. [Sec. 2, RA
8293]
A.2. 1987 CONSTITUTION
(1) The use of property bears a social
function, and all economic agents shall
contribute to the common good.
Individuals and private groups,
including corporations, cooperatives,
and similar collective organizations,
shall have the right to own, establish,
and operate economic enterprises,
subject to the duty of the State to
promote distributive justice and to
intervene when the common good so
demands. [Art. XII, Sec. 6]
(2) The sustained development of a
reservoir of national talents consisting
of Filipino scientists, entrepreneurs,
PAGE 257 OF 320
MERCANTILE LAW
professionals, managers, high-level
technical manpower and skilled
workers and craftsmen in all fields
shall be promoted by the State. The
State shall encourage appropriate
technology and regulate its transfer for
the national benefit. [Art. XII, Sec. 14]
(3) The State shall protect and secure the
exclusive rights of scientists, inventors,
artists, and other gifted citizens to their
intellectual property and creations,
particularly when beneficial to the
people, for such period as may be
provided by law. [Art. XIV, Sec. 13]
B. INTERNATIONAL
CONVENTIONS GOVERNING
INTELLECTUAL PROPERTY RIGHTS
(1) Berne Convention for the Protection of
Literary and Artistic Works as revised by
the Brussels Act (August 1, 1951)
(2) Paris Convention for the Protection of
Industrial Property Rights (September
27, 1965)
(3) International Convention for the
Protection of Performers, Producers of
Phonograms and Broadcasting
Organizations (Rome Convention,
September 25, 2984)
(4) Convention Establishing the World
Intellectual Property Organization (July
14, 1980)
(5) Budapest Treaty on the International
Recognition of the Deposit of
Microorganisms for the Purposes of
Patent Procedure (October 21, 1981)
(6) Agreement on Trade Related Aspects of
Intellectual Property Including Trade in
Counterfeit Goods of General
Agreement on Tariffs and Trade.
(7) Patent Cooperation Treaty (August 17,
2001)
(8) Madrid Protocol
UP LAW BOC INTELLECTUAL PROPERTY LAW
C. INTELLECTUAL PROPERTY
RIGHTS
C.1. DEFINITION
Those property rights which result from the
physical manifestation of original thought.
[Ballantines Law Dictionary]
Note: There are no property rights
protected by law in mere ideas or mental
conceptions. When creations of mind are
put in tangible form, there is appropriate
subject of property that is protected by law.
[63A Am Jur 3rd Property, Section 5]
C.2. INTELLECTUAL PROPERTY
RIGHTS UNDER THE INTELLECTUAL
PROPERTY CODE
(1) Copyright;
(2) Related Rights of copyright;
(3) Trademarks and Service Marks;
(4) Geographic Indications;
(5) Industrial Designs;
(6) Patents;
(7) Layout-Designs (Topographies) of
Integrated Circuits; [Sec. 4, RA 8293]
(8) Protection of Undisclosed Information
(TRIPS Agreement).
D. DIFFERENCES BETWEEN
COPYRIGHTS, TRADEMARKS AND
PATENT
D.1. PATENTABLE INVENTIONS
Refer to any technical solution of a problem
in any field of human activity, which is new,
involves an inventive step and is industrially
applicable. It may be, or refer to, any
product, process, or an improvement of any
of the foregoing. [Sec. 21, RA 8293] It is
vested from the issuance of letters of patent.
D.2. TRADEMARK
Any visible sign capable of distinguishing
the goods (trademark) or services (service
mark) of an enterprise and shall include a
PAGE 258 OF 320
MERCANTILE LAW
stamped or marked container of goods.
[Kho v. CA, G.R. No. 115758 (2002)] It is
vested from registration.
D.3. TRADE NAME
The name or designation identifying or
distinguishing an enterprise [Sec. 121.3, RA
8293]
D.4. COPYRIGHT
Right granted by statute to the author or
originator of literary, scholarly, scientific, or
artistic productions, including computer
programs. A copyright gives him the legal
right to determine how the work is used and
to obtain economic benefits from the work.
For example, the owner of a copyright for a
book or a piece of software has the exclusive
rights to use, copy, distribute, and sell
copies of the work, including later editions
or versions of the work. If another person
improperly uses material covered by a
copyright, the copyright owner can obtain
legal relief. [Rule 2, Copyright Safeguards
and Regulations]
Copyright or economic rights shall consist
of the exclusive right to carry out, authorize
or prevent the following acts:
(1) Reproduction of the work or substantial
portion of the work
(2) Dramatization, translation or
adaptation, abridgment, arrangement
or other transformation of the work.
(3) The first public distribution of the
original and each copy of the work by
sale or other forms of transfer of
ownership.
(4) Rental of the original or a copy of an
audiovisual or cinematographic work, a
work embodied in a sound recording, a
computer program, a compilation of
data and other materials or a musical
work in graphic form, irrespective of the
ownership of the original or the copy
which is the subject of the rental.
UP LAW BOC INTELLECTUAL PROPERTY LAW
(5) Public Display of the original or a copy
of the work.
(6) Public Performance of the Work;
(7) Other Communication to the public of
the work. [Sec. 177, IPC]
Copyright is confined to literary and artistic
works which are original intellectual
creations in the literary and artistic domain
protected from the moment of their creation.
[Kho v. CA, G.R. No. 115758 (2002)] It is
vested from the moment of creation.
D.5. OTHER FORMS OF
INTELLECTUAL PROPERTY
i. Geographic Indication
One which identifies a good as originating
in the territory of a TRIPS member, or a
region or locality in that territory where a
given quality, reputation or other
characteristic of a good is essentially
attributable to its geographical origin [Art.
22, TRIPS Agreement]
ii. Industrial Design
Any composition of lines or colors or any
three-dimensional form, whether or not
associated with lines or colors: Provided,
that such composition or form gives a
special appearance to and can serve as
pattern for an industrial product or
handicraft. (Sec. 112.1, RA 8293)
iii. Layout Design (Topography) of an
Integrated Circuit
Layout Design (Topography) The
three-dimensional disposition, however
expressed, of the elements, at least one of
which is an active element, and of some or
all the interconnections of an integrated
circuit, or such a three-dimensional
disposition prepared for an integrated
circuit intended for manufacture. (Sec. 112.3,
RA 8293)
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MERCANTILE LAW
iv. Integrated Circuit a product, in its
final form, or an intermediate form, in which
the elements, at least one of which is an
active element and some or all of the
interconnections are integrally formed
and/or on a piece of material, and which is
intended to perform an electronic function.
(Sec. 112.2, RA 8293)
v. Undisclosed Inform ation
Information which:
(1) Is a secret in a sense that it is not, as a
body or in the precise configuration and
assembly of components, generally
known among or readily accessible to
persons within the circles that normally
deal with the kind of information in
question;
(2) Has a commercial value because it is
secret; and
(3) Has been subject to reasonable steps
under the circumstances, by the person
lawfully in control of the information, to
keep it secret [Art. 39, TRIPS]
E. TECHNOLOGY TRANSFER
ARRANGEMENTS
Refers to contracts or agreements involving:
(1) the transfer of systematic knowledge for
the manufacture of a product;
(2) the application of a process, or
rendering of a service including
management contracts;
(3) The transfer, assignment or licensing of
all forms of intellectual property rights,
including licensing of computer
software except computer software
developed for mass market. [Sec. 4.2,
RA 8293]
UP LAW BOC INTELLECTUAL PROPERTY LAW
II. Patents
A. WHAT ARE PATENTABLE?
(1) Inventions
(2) Utility Model
(3) Industrial Designs
(4) Lay-Out Designs (Topographies of
Integrated Circuits)
A.1. INVENTIONS
A patentable invention is any technical
solution of a problem in any field of human
activity which is new, involves an inventive
step and is industrially applicable shall be
Patentable. It may be, or may relate to, a
product, or process, or an improvement of
any of the foregoing. [Sec. 21, RA 8293]
Standards of Patentable Inventions
(1) Novelty An invention shall not be
considered new if it forms part of a prior art.
[Sec. 23, RA 8293]
Prior art shall consist of:
(1) Everything which has been made
available to the public anywhere in the
world, before the filing date or the
priority date of the application claiming
the invention; [Sec. 24.1, RA 8293]
(2) The whole contents of an application for
a patent, utility model, or industrial
design registration, published in
accordance with this Act, filed or
effective in the Philippines, with a filing
or priority date that is earlier than the
filing or priority date of the application:
Provided, That the application which
has validly claimed the filing date of an
earlier application under Section 31 of
this Act, shall be prior art with effect as
of the filing date of such earlier
application: Provided further, That the
applicant or the inventor identified in
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MERCANTILE LAW
both applications are not one and the
same. [Sec. 24.2, RA 8293]
Non-Prejudicial Disclosures This is an
exception to the General Rule on Prior Art
under Sec. 24. It provides that the
disclosure of the information contained in
the application during the 12 months
preceding the filing date or the priority date
of the application shall not prejudice the
applicant on the ground of lack of novelty if
such disclosure was made by:
(1) The inventor
(2) A patent office and the information
contained (1) in another application filed
by the inventor and should not have
been disclosed by the office, or (2) in an
application filed without the knowledge
or consent of the inventor by a third
party which obtained the information
directly or indirectly from the inventor
(3) A third party which obtained the
information directly or indirectly from
the inventor [Sec. 25, RA 8293]
An invention must possess the essential
elements of novelty, originality and
precedence and for the patentee to be
entitled to protection, the invention must be
new to the world. [Maguan vs. CA, G.R. L-
45101 (1986)]
(2) Inventive Step An invention
involves an inventive step if, having regard
to prior art, it is not obvious to a person
skilled in the art at the time of the filing
date or priority date of the application
claiming the invention. [Sec. 26.1, RA 8293,
as amended by RA 9502]
Cheaper Medicines Act In case of drugs
and medicines, there is no inventive step if
the invention results from the mere
discovery of a new form or new property of a
known substance which does not result in
enhancement of the known efficacy of that
substance, or the mere discovery of any new
property or new use of a known substance
UP LAW BOC INTELLECTUAL PROPERTY LAW
or the mere use of a known process unless
such known process results in a new
product that employs at least one reactant.
[Sec. 26.2, RA 8293 as amended by RA
9502]
(3) Industrial Applicability An
invention that can be produced and used in
any industry shall be industrially applicable.
[Sec. 27, RA 8293]
A.2. UTILITY MODEL
It is any technical solution of a problem in
any field of human activity which is new and
industrially applicable. Unlike an invention
patent, a utility model need not be inventive.
The law merely requires that it be novel and
industrially applicable. [Sec. 109.1, RA 8293]
A utility model registration shall expire,
without any possibility of renewal, at the
end of the seventh year after the date of the
filing of the application. [Sec. 109.3, RA
8293]
Statutory Classes of Utility Models
A Utility Model may be, or may relate to:
(1) A useful machine;
(2) An implement or tool;
(3) A product or composition;
(4) A method or process; or
(5) An improvement of any of the foregoing.
[Rule 201, Rules and Regulations on
Utility Models and Industrial Designs as
amended]
Grounds for Cancellation of Utility
Models
(1) That the claimed invention does not
qualify for registration as a utility model
and does not meet the requirements of
registrability;
(2) That the description and the claims do
not comply with the prescribed
requirements;
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MERCANTILE LAW
(3) That any drawing which is necessary for
the understanding of the invention has
not been furnished;
(4) That the owner of the utility model
registration is not the inventor or his
successor in title [Sec 109.4, RA 8293]
A.3. INDUSTRIAL DESIGNS
An industrial design is any composition of
lines or colors or any three-dimensional
form, whether or not associated with lines
or colors: Provided that such composition or
form gives a special appearance to and can
serve as pattern for an industrial product or
handicraft. [Sec. 112.1, RA 8293 as amended
by RA 9150]
A.4. LAY-OUT DESIGNS
(TOPOGRAPHIES OF INTEGRATED
CIRCUITS)
Integrated Circuit means a product, in
its final form, or an intermediate form, in
which the elements, at least one of which is
an active element and some or all of the
interconnections are integrally formed in
and/or on a piece of material, and which is
intended to perform an electronic function.
[Sec. 112.2, RA 8293 as amended by RA
9150]
Layout-Design is synonymous with
'Topography' and means the three-
dimensional disposition, however expressed,
of the elements, at least one of which is an
active element, and of some or all of the
interconnections of an integrated circuit, or
such a three-dimensional disposition
prepared for an integrated circuit intended
for manufacture. [Sec. 112.3, RA 8293 as
amended by RA 9150]
UP LAW BOC INTELLECTUAL PROPERTY LAW MERCANTILE LAW

B. NON-PATENTABLE INVENTIONS
Cheaper Medicines Act: In addition to
discoveries, scientific theories and
The following shall be excluded from patent
mathematical methods, the IP Code now
protection:
includes (as non-patentable), in case of
(1) Discoveries, scientific theories and
drugs and medicines:
mathematical methods, and in the case
(1) The mere discovery of a new form or
of drugs and medicines, the mere
new property of a known substance
discovery of a new form or new property
which does not result in the
of a known substance which does not
enhancement of the known efficacy of
result in the enhancement of the known
that substance
efficacy of that substance, or the mere
(2) the mere discovery of any new property
discovery of any new property or new
or new use of a known substance
use for a known substance, or the mere
(3) the mere use of a known process unless
use of a known process unless such
such known process results in a new
known process results in a new product
product that employs at least one
that employs at least one new reactant.
reactant [Sec. 26.2, RA 8293 as
Salts, esters, ethers, polymorphs,
amended by RA 9502]
metabolites, pure form, particle size,
isomers, mixtures of isomers,
C. OWNERSHIP OF A PATENT
complexes, combinations, and other
derivatives of a known substance shall
C.1. RIGHT TO A PATENT
be considered to be the same substance,
unless they differ significantly in
General Rule: The right to patent belongs
properties with regard to efficacy; [Sec.
to the inventor, his heirs, or assigns. When
22.1, RA 8293 as amended by RA 9502]
two (2) or more persons have jointly made
(2) Schemes, rules and methods of
an invention, the right to a patent shall
performing mental acts, playing games
belong to them jointly. [Sec.28, RA 8293]
or doing business, and programs for
computers; [Sec. 22.2, RA 8293]
Exception: Inventions created pursuant to
(3) Methods for treatment of the human or
a commission (Work for Hire Doctrine)
animal body by surgery or therapy and
(1) The employer has the right to the
diagnostic methods practiced on the
patent if the invention is the result of
human or animal body. This provision
the performance of the employees
shall not apply to products and
regularly assigned duties [Sec. 30.2, RA
composition for use in any of these
8293]
methods; [Sec. 22.3, RA 8293]
(2) In case of inventions created pursuant
(4) Plant varieties or animal breeds or
to a commission, the person who
essentially biological process for the
commissions the work shall own the
production of plants or animals. This
patent [Sec. 30.1, RA 8293]
provision shall not apply to micro-
organisms and non-biological and C.2. FIRST-TO-FILE RULE
microbiological processes; [Sec. 22.4,
RA 8293] If two (2) or more persons have made the
(5) Aesthetic creations; [Sec. 22.5, RA invention separately and independently of
8293] each other, the right to the patent shall
(6) Anything which is contrary to public belong to the person who filed an
order or morality. [Sec. 22.6, RA 8293]
PAGE 262 OF 320
UP LAW BOC INTELLECTUAL PROPERTY LAW
application for such invention, or where two
or more applications are filed for the same
invention, to the applicant who has the
earliest filing date or, the earliest priority
date. [Sec. 29, RA 8293]
C.3. INVENTIONS CREATED
PURSUANT TO A COMMISSION
Commission: Person who commissions
the work shall own the patent, unless
otherwise provided in the contract [Sec. 30.1,
RA 8293)
Employm ent Contract: Patent belongs
to the employee if the inventive activity is
not a part of his regular duties even if the
employee uses the time, facilities and
materials of the employer. [Sec. 30.2 (a), RA
8293]
Patent belongs to the employer if the
invention is the result of the performance of
his regularly-assigned duties, unless there
is an agreement, express or implied, to the
contrary. [Sec. 30.2 (b), RA 8293]
C.4. RIGHT OF PRIORITY
An application for patent filed by any
person who has previously applied for the
same invention in another country which by
treaty, convention, or law affords similar
privileges to Filipino citizens, shall be
considered as filed as of the date of filing
the foreign application: Provided, That: (a)
the local application expressly claims
priority; (b) it is filed within twelve (12)
months from the date the earliest foreign
application was filed; and (c) a certified
copy of the foreign application together
with an English translation is filed within six
(6) months from the date of filing in the
Philippines. [Sec. 31, RA 8293]
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MERCANTILE LAW
C.5. REMEDY OF PERSONS NOT
HAVING THE RIGHT TO A PATENT
If a person other than the applicant, is
declared by final court order or decision as
having the right to the patent, such person
may, within three (3) months after the
decision has become final:
(1) Prosecute the application as his
own application in place of the applicant;
(2) File a new patent application in
respect of the same invention;
(3) Request that the application be
refused; or
(4) Seek cancellation of the patent, if
one has already been issued. [Sec. 67, RA
8293]
D. TERM OF PATENT
D.1. TERM OF INVENTION PATENT
The term of a patent shall be twenty (20)
years from the filing date of the application.
[Sec. 54, RA 8293]
A patent shall take effect on the date of the
publication of the grant of the patent in the
IPO Gazette. [Sec. 50.3, RA 8293]
D.2. TERM OF UTILITY MODEL
A utility model registration shall expire,
without any possibility of renewal, at the
end of the seventh year after the date of the
filing of the application. [Sec. 109.3, RA
8293]
D.3. TERM OF INDUSTRIAL DESIGN
The registration of an industrial design shall
be for a period of five (5) years from the
filing date of the application. [Sec. 118.1, RA
8293]
UP LAW BOC INTELLECTUAL PROPERTY LAW MERCANTILE LAW

E. CANCELLATION OF PATENT covered thereby, as appears of record in the

E.1. GROUNDS FOR
CANCELLATION OF A PATENT
Any interested person may, upon payment
of the required fee, petition to cancel the
patent or any claim thereof, or parts of the
claim, on any of the following grounds:
(1) That what is claimed as the invention is
not new or patentable;
(2) That the patent does not disclose the
invention in a manner sufficiently clear
and complete for it to be carried out by
any person skilled in the art; or
(3) That the patent is contrary to public
order or morality. [Sec. 61.1, RA 8293]
Where the grounds for cancellation relate to
some of the claims or parts of the claim,
cancellation may be effected to such extent
only. [Sec. 61.2, RA 8293]
E.2. REQUIREMENT OF THE PETITION
The petition for cancellation shall be in
writing, verified by the petitioner or by any
person in his behalf who knows the facts,
specify the grounds upon which it is based,
include a statement of the facts to be relied
upon, and filed with the Office. Copies of
printed publications or of patents of other
countries, and other supporting documents
mentioned in the petition shall be attached
thereto, together with the translation
thereof in English, if not in English
language. [Sec. 62, RA 8293]
E.3. NOTICE OF HEARING
Office, and of notice of the date of hearing
thereon on such persons and the petitioner.
Notice of the filing of the petition shall be
published in the IPO Gazette. [Sec. 63, RA
8293]
E.4. EFFECT OF CANCELLATION OF
PATENT OR CLAIM
The rights conferred by the patent or any
specified claim or claims cancelled shall
terminate. Notice of the cancellation shall
be published in the IPO Gazette. Unless
restrained by the Director General, the
decision or order to cancel by Director of
Legal Affairs shall be immediately
executory even pending appeal. [Sec. 66, RA
8293]
F. REMEDY OF THE TRUE AND
ACTUAL INVENTOR
If a person, who was deprived of the patent
without his consent or through fraud is
declared by final court order or decision to
be the true and actual inventor, the court
shall order for his substitution as patentee,
or at the option of the true inventor, cancel
the patent, and award actual and other
damages in his favor if warranted by the
circumstances. [Sec. 68, RA 8293]
F.1. TIME TO FILE ACTION IN COURT
The action shall be filed within one (1) year
from the date of publication made in
accordance with Sections 44 and 51,
respectively. (Sec. 70, RA 8293)

Upon filing of a petition for cancellation, the

Director of Legal Affairs shall forthwith
serve notice of the filing thereof upon the
patentee and all persons having grants or
licenses, or any other right, title or interest
in and to the patent and the invention

PAGE 264 OF 320

UP LAW BOC INTELLECTUAL PROPERTY LAW
G. RIGHTS CONFERRED BY A
PATENT
A patent shall confer on its owner the
following exclusive rights:
(1) Where the subject matter of a patent is
a product, to restrain, prohibit and
prevent any unauthorized person or
entity from making, using, offering for
sale, selling or importing that product.
[Sec. 71.1(a), RA 8293]
(2) Where the subject matter of a patent is
a process, to restrain, prevent or
prohibit any unauthorized person or
entity from using the process, and from
manufacturing, dealing in, using,
selling or offering for sale, or importing
any product obtained directly or
indirectly from such process. [Sec.
71.1(b), RA 8293]
(3) Patent owners shall also have the right
to assign, or transfer by succession the
patent, and to conclude licensing
contracts for the same. [Sec. 71.2, RA
8293]
To be able to effectively and legally
preclude others from copying and profiting
from the invention, a patent is a primordial
requirement. No patent, no protection. The
ultimate goal of a patent system is to bring
new designs and technologies into the
public domain through disclosure Ideas,
once disclosed to the public without the
protection of a valid patent, are subject to
appropriation without significant restraint.
[Pearl Dean, Inc. v. Shoemart, Inc., G.R. No.
148222 (2003)]
PAGE 265 OF 320
MERCANTILE LAW
H. LIMITATIONS OF PATENT
RIGHTS
The owner of a patent has no right to
prevent third parties from performing,
without his authorization, the acts referred
to in Section 71 hereof in the following
circumstances:
(1) Using a patented product which has
been put on the market in the
Philippines by the owner of the product,
or with his express consent, insofar as
such use is performed after that product
has been so put on the said market:
Provided, That, with regard to drugs
and medicines, the limitation on patent
rights shall apply after a drug or
medicine has been introduced in the
Philippines or anywhere else in the
world by the patent owner, or by any
party authorized to use the invention:
Provided, further, That the right to
import the drugs and medicines
contemplated in this section shall be
available to any government agency or
any private third party; [Sec. 72.1, RA
8293 as amended by RA 9502]
(2) Where the act is done privately and on a
non-commercial scale or for a non-
commercial purpose: Provided, That it
does not significantly prejudice the
economic interests of the owner of the
patent; [Sec. 72.2, RA 8293 as amended
by RA 9502]
(3) Where the act consists of making or
using exclusively for experimental use
of the invention for scientific purposes
or educational purposes and such other
activities directly related to such
scientific or educational experimental
use; [Sec. 72.3, RA 8293 as amended by
RA 9502]
(4) In the case of drugs and medicines,
where the act includes testing, using,
making or selling the invention
including any data related thereto,
UP LAW BOC INTELLECTUAL PROPERTY LAW
solely for purposes reasonably related
to the development and submission of
information and issuance of approvals
by government regulatory agencies
required under any law of the
Philippines or of another country that
regulates the manufacture, construction,
use or sale of any product: Provided,
That, in order to protect the data
submitted by the original patent holder
from unfair commercial use provided in
Article 39.3 of the Agreement on Trade-
Related Aspects of Intellectual Property
Rights (TRIPS Agreement), the
Intellectual Property Office, in
consultation with the appropriate
government agencies, shall issue the
appropriate rules and regulations
necessary therein not later than one
hundred twenty (120) days after the
enactment of this law; (Sec. 72.4, RA
8293 as amended by RA 9502)
(5) Where the act consists of the
preparation for individual cases, in a
pharmacy or by a medical professional,
of a medicine in accordance with a
medical shall apply after a drug or
medicine has been introduced in the
Philippines or anywhere else in the
world by the patent owner, or by any
party authorized to use the invention:
Provided, further, That the right to
import the drugs and medicines
contemplated in this section shall be
available to any government agency or
any private third party; (Sec. 72.5, RA
8293 as amended by RA 9502)
There shall be no infringement of
trademarks or tradenames of imported or
sold drugs and medicines allowed as well
as imported or sold off-patent drugs and
medicines: Provided, That said drugs and
medicines bear the registered marks that
have not been tampered, unlawfully
PAGE 266 OF 320
MERCANTILE LAW
modified, or infringed. (Sec.159.4 RA 8293
as amended by RA 9502)
H.1. PRIOR USER
Notwithstanding Section 72 hereof, any
prior user, who, in good faith was using the
invention or has undertaken serious
preparations to use the invention in his
enterprise or business, before the filing date
or priority date of the application on which a
patent is granted, shall have the right to
continue the use thereof as envisaged in
such preparations within the territory where
the patent produces its effect. [Sec. 73.1, RA
8293]
The right of the prior user may only be
transferred or assigned together with his
enterprise or business, or with that part of
his enterprise or business in which the use
or preparations for use have been made.
[Sec. 73.2, RA 8293]
H.2. USE BY THE GOVERNMENT
A Government agency or third person
authorized by the Government may exploit
the invention even without agreement of
the patent owner where:
(1) The public interest, in particular,
national security, nutrition, health or
the development of other sectors, as
determined by the appropriate agency
of the government, so requires; [Sec.
74.1(a), RA 8293]
(2) A judicial or administrative body has
determined that the manner of
exploitation, by the owner of the patent
or his licensee, is anti-competitive. [Sec.
74.1(b), RA 8293]
The use by the Government, or third person
authorized by the Government shall be
subject, mutatis mutandis, to the conditions
set forth in Sections 95 to 97 and 100 to 102
UP LAW BOC INTELLECTUAL PROPERTY LAW
on compulsory licensing. [Sec. 74.2, RA
8293]
All cases arising from the implementation
of this provision shall be cognizable by
courts with appropriate jurisdiction
provided by law. No court except the
Supreme Court of the Philippines, shall
issue any temporary restraining order or
preliminary injunction or such other
provisional remedies that will prevent its
immediate execution. [Sec. 74.3, RA 8293 as
amended by RA 9502]
I. PATENT INFRINGEMENT
It is the making, using, offering for sale,
selling, or importing a patented product or
a product obtained directly or indirectly
from a patented process, or the use of a
patented process without the authorization
of the patentee. [Sec 76.1, RA 8293 as
amended by RA 9502]
I.1. CONTRIBUTORY INFRINGER
One who actively induces the infringement
of a patent or provides the infringer with a
component of a patented product or of a
product produced because of a patented
process knowing it to be especially adopted
for infringing and not suitable for
substantial non-infringing. He is jointly and
severally liable with the infringer. [Sec. 76.6,
RA 8293]
I.2. DOCTRINE OF PATENT
EXHAUSTION
It espouses that the patentee who has
already sold his invention and has received
all the royalty and consideration for the
same will be deemed to have released the
invention from his monopoly. The invention
thus becomes open to use of the purchaser
without further restriction. [Adams v.
PAGE 267 OF 320
MERCANTILE LAW
Burke,in Notes on Selected Commercial Laws,
Catindig 2003 ed.]
I.3. TESTS IN PATENT INFRINGEMENT
i. Literal infringem ent
In using literal infringement as a test, resort
must be had in the first instance to the
words of the claim. To determine whether
the particular item falls within the literal
meaning of the patent claims, the court
must juxtapose the claims of the patent and
the accused product within the overall
context of the claims and specifications, to
determine whether there is exact identity of
all material elements. [Godinez v. CA, G.R.
No. L-97343 (1993)]
ii. Doctrine of equivalents
Under the doctrine of equivalents, an
infringement also occurs when a device
appropriates a prior invention by
incorporating its innovative concept and,
albeit with some modification and change,
performs substantially the same function in
substantially the same way to achieve
substantially the same result. [Godinez v.
CA, G.R. No. L-97343 (1993)]
In order to infringe a patent, a machine or
device must perform the same function, or
accomplish the same result by identical or
substantially identical means and the
principle or mode of operation must be
substantially the same. [Del Rosario v. CA,
G.R. No. 115106 (1996)]
The doctrine of equivalents provides that an
infringement also takes place when a device
appropriates a prior invention by
incorporating its innovative concept and,
although with some modification and
change, performs substantially the same
function in substantially the same way to
achieve substantially the same result. The
principle or mode of operation must be the
same or substantially the same. The
UP LAW BOC INTELLECTUAL PROPERTY LAW
doctrine of equivalents thus requires
satisfaction of the function-means-and-
result test, the patentee having the burden
to show that all three components of such
equivalency test are met. [Smith Klein
Beckman Corp. v. CA, G. R. No. 126627
(2003)]
I.4. CRIMINAL ACTION FOR
REPETITION OF INFRINGEMENT
If infringement is repeated by the infringer
or by anyone in connivance with him after
finality of the judgment of the court against
the infringer, the offenders shall, without
prejudice to the institution of a civil action
for damages, be criminally liable therefor
and, upon conviction, shall suffer
imprisonment for the period of not less than
six (6) months but not more than three (3)
years and/or a fine of not less than One
hundred thousand pesos (P100,000) but
not more than Three hundred thousand
pesos (P300,000), at the discretion of the
court. The criminal action herein provided
shall prescribe in three (3) years from date
of the commission of the crime. [Sec. 84, RA
8293]
I.5. INFRINGEMENT ACTION BY
FOREIGN NATIONAL
Any foreign national or juridical entity who
meets the requirements of Section 3 (RA
8293) and not engaged in business in the
Philippines, to which a patent has been
granted or assigned under RA 8293, may
bring an action for infringement of patent,
whether or not it is licensed to do business
in the Philippines under existing law. [Sec.
77, RA 8293]
Any person who is a 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
PAGE 268 OF 320
MERCANTILE LAW
agreement relating to intellectual property
rights or the repression of unfair
competition, to which the Philippines is also
a party, or extends reciprocal rights to
nationals of the Philippines by law, shall be
entitled to benefits to the extent necessary
to give effect to any provision of such
convention, treaty or reciprocal law, in
addition to the rights to which any owner of
an intellectual property right is otherwise
entitled by this Act. [Sec. 3, RA 8293]
I.6. DEFENSES IN ACTION FOR
INFRINGEMENT
In an action for infringement, the defendant,
in addition to other defenses available to
him, may show the invalidity of the patent,
or any claim thereof, on any of the grounds
on which a petition of cancellation can be
brought under Section 61. [Sec 81, RA 8293]
i. Patent found invalid m ay be
cancelled:
In an action for infringement, if the court
shall find the patent or any claim to be
invalid, it shall cancel the same, and the
Director of Legal Affairs upon receipt of the
final judgment of cancellation by the court,
shall record that fact in the register of the
Office and shall publish a notice to that
effect in the IPO Gazette. [Sec 82, RA 8293]
ii. Doctrine of File W rapper Estoppel
Patentee is precluded from claiming as part
of patented product that which he had to
excise or modify in order to avoid patent
office rejection, and he may omit any
additions he was compelled to add by
patent office regulations. [Advance
Transformer Co. v. Levinson 837 F.2d
1081(1988)]
UP LAW BOC INTELLECTUAL PROPERTY LAW
J. LICENSING
J.1. VOLUNTARY
Voluntary Licensing is the grant by the
patent owner to a third person of the right
to exploit the patented invention. [Sec. 85,
RA 8293]
Mandatory Provisions
The following provisions shall be included
in voluntary license contracts:
(1) That the laws of the Philippines shall
govern the interpretation of the same
and in the event of litigation, the venue
shall be the proper court in the place
where the licensee has its principal
office; [Sec. 88.1, RA 8293]
(2) Continued access to improvements in
techniques and processes related to the
technology shall be made available
during the period of the technology
transfer arrangement; [Sec. 88.2, RA
8293]
(3) In the event the technology transfer
arrangement shall provide for
arbitration, the Procedure of Arbitration
of the Arbitration Law of the Philippines
or the Arbitration Rules of the United
Nations Commission on International
Trade Law (UNCITRAL) or the Rules of
Conciliation and Arbitration of the
International Chamber of Commerce
(ICC) shall apply and the venue of
arbitration shall be the Philippines or
any neutral country; [Sec. 88.3, RA
8293]
(4) The Philippine taxes on all payments
relating to the technology transfer
arrangement shall be borne by the
licensor. [Sec. 88.4, RA 8293]
Prohibited clauses
The following provisions shall be deemed
prima facie to have an adverse effect on
competition and trade:
PAGE 269 OF 320
MERCANTILE LAW
(1) Those which impose upon the licensee
the obligation to acquire from a specific
source capital goods, intermediate
products, raw materials, and other
technologies, or of permanently
employing personnel indicated by the
licensor; [Sec. 87.1, RA 8293]
(2) Those pursuant to which the licensor
reserves the right to fix the sale or
resale prices of the products
manufactured on the basis of the
license; [Sec. 87.2, RA 8293]
(3) Those that contain restrictions
regarding the volume and structure of
production; [Sec. 87.3, RA 8293]
(4) Those that prohibit the use of
competitive technologies in a non-
exclusive technology transfer
agreement; [Sec. 87.4, RA 8293]
(5) Those that establish a full or partial
purchase option in favor of the licensor;
(Sec. 87.5, RA 8293)
(6) Those that obligate the licensee to
transfer for free to the licensor the
inventions or improvements that may be
obtained through the use of the
licensed technology; (Sec. 87.6, RA
8293)
(7) Those that require payment of royalties
to the owners of patents for patents
which are not used; (Sec. 87.7, RA 8293)
(8) Those that prohibit the licensee to
export the licensed product unless
justified for the protection of the
legitimate interest of the licensor such
as exports to countries where exclusive
licenses to manufacture and/or
distribute the licensed product(s) have
already been granted; (Sec. 87.8, RA
8293)
(9) Those which restrict the use of the
technology supplied after the expiration
of the technology transfer arrangement,
except in cases of early termination of
the technology transfer arrangement
UP LAW BOC INTELLECTUAL PROPERTY LAW
due to reason(s) attributable to the
licensee; (Sec. 87.9, RA 8293)
(10) Those which require payments for
patents and other industrial property
rights after their expiration, termination
arrangement; (Sec. 87.10, RA 8293)
(11) Those which require that the technology
recipient shall not contest the validity of
any of the patents of the technology
supplier; (Sec. 87.11, RA 8293)
(12) Those which restrict the research and
development activities of the licensee
designed to absorb and adapt the
transferred technology to local
conditions or to initiate research and
development programs in connection
with new products, processes or
equipment; (Sec. 87.12, RA 8293)
(13) Those which prevent the licensee from
adapting the imported technology to
local conditions, or introducing
innovation to it, as long as it does not
impair the quality standards prescribed
by the licensor; (Sec. 87.13, RA 8293)
(14) Those which exempt the licensor for
liability for non-fulfillment of his
responsibilities under the technology
transfer arrangement and/or liability
arising from third party suits brought
about by the use of the licensed product
or the licensed technology; (Sec. 87.14,
RA 8293)
(15) Other clauses with equivalent effects.
(Sec. 87.15, RA 8293)
Effect of Non-com pliance with any
provisions of Secs. 87 and 88
The technology transfer arrangement shall
automatically be rendered unenforceable,
unless said technology transfer
arrangement is approved and registered
with the Documentation, Information and
Technology Transfer Bureau under the
provisions of Section 91 on exceptional
cases. [Sec. 92, RA 8293]
Right of Licensor
PAGE 270 OF 320
MERCANTILE LAW
Unless otherwise provided in the technology
transfer agreement, the licensor shall have
the right to:
(1) Grant further licenses to third person
(2) Exploit the subject matter of the
technology transfer agreement [Sec. 89,
RA 8293]
Right of the Licensee.
To exploit the subject matter of the
technology transfer agreement during the
whole term of the agreement. [Sec. 90, RA
8293]
Exceptional cases
(1) In exceptional or meritorious cases
where substantial benefits will accrue to
the economy, such as high technology
content, increase in foreign exchange
earnings, employment generation,
regional dispersal of industries and/or
substitution with or use of local raw
materials
(2) The case of BOI-registered companies
with pioneer status [Sec. 91, RA 8293]
J.2. COMPULSORY
Compulsory Licensing is the grant of the
Director of Legal Affairs of a license to
exploit a patented invention, even without
the agreement of the patent owner, in favor
of any person who has shown his capability
to exploit the invention. (Sec. 93, Ra 8293 as
amended by RA 9502)
i. Grounds
The Director General of the Intellectual
Property Office may grant a license to
exploit a patented invention, even without
the agreement of the patent owner, in favor
of any person who has shown his capability
to exploit the invention, under any of the
following circumstances:
(1) National emergency or other
circumstances of extreme urgency; [Sec.
93.1, RA 8293 as amended by RA 9502]
UP LAW BOC INTELLECTUAL PROPERTY LAW
(2) Where the public interest, in particular,
national security, nutrition, health or
the development of other vital sectors of
the national economy as determined by
the appropriate agency of the
Government, so requires; [Sec. 93.2, RA
8293 as amended by RA 9502]
(3) Where a judicial or administrative body
has determined that the manner of
exploitation by the owner of the patent
or his licensee is anti-competitive; [Sec.
93.3, RA 8293 as amended by RA 9502]
(4) In case of public non-commercial use of
the patent by the patentee, without
satisfactory reason; [Sec. 93.4, RA 8293
as amended by RA 9502]
(5) If the patented invention is not being
worked in the Philippines on a
commercial scale, although capable of
being worked, without satisfactory
reason: Provided, That the importation
of the patented article shall constitute
working or using the patent; [Sec. 93.5,
RA 8293 as amended by RA 9502]
(6) Where the demand for patented drugs
and medicines is not being met to an
adequate extent and on reasonable
terms, as determined by the Secretary
of the Department of Health. [Sec. 93.6,
RA 8293 as amended by RA 9502]
(7) If the invention protected by a patent,
hereafter referred to as the "second
patent," within the country cannot be
worked without infringing another
patent, hereafter referred to as the "first
patent," granted on a prior application
or benefiting from an earlier priority, a
compulsory license may be granted to
the owner of the second patent to the
extent necessary for the working of his
invention, subject to certain conditions.
[Sec. 97, RA 8293]
(8) Manufacture and export of drugs and
medicines to any country having
insufficient or no manufacturing
capacity in the pharmaceutical sector to
address public health problems:
PAGE 271 OF 320
MERCANTILE LAW
Provided, That, a compulsory license
has been granted by such country or
such country has, by notification or
otherwise, allowed importation into its
jurisdiction of the patented drugs and
medicines from the Philippines in
compliance with the TRIPS Agreement.
[Sec. 93-A.2, RA 8293 as amended by
RA 9502]
ii. Period of filing a Petition for
Compulsory License
At any time after the grant of patent.
However, a compulsory license may not be
applied for on the ground stated in Sec. 93.5
before the expiration of a period of four (4)
years from the date of filing of the
application or three (3) years from the date
of the patent whichever period expires last.
[Sec. 94, RA 8293 as amended by RA 9502]
iii. Requirem ent to Obtain a License
on Reasonable Com m ercial Term s
General Rule: The license will only be
granted after the petitioner has made
efforts to obtain authorization from the
patent owner on reasonable commercial
terms and conditions but such efforts have
not been successful within a reasonable
period of time. [Sec. 95.1, RA 8293 as
amended by RA 9502]
Exceptions: The requirement of
authorization shall not apply in the
following cases:
(1) Where the petition for compulsory
license seeks to remedy a practice
determined after judicial or
administrative process to be anti-
competitive;
(2) In situations of national emergency or
other circumstances of extreme
urgency;
(3) In cases of public non-commercial use.
(4) In cases where the demand for the
patented drugs and medicines in the
Philippines is not being met to an
adequate extent and on reasonable
UP LAW BOC INTELLECTUAL PROPERTY LAW MERCANTILE LAW

terms, as determined by the Secretary

of the Department of Health. [Sec. 95.2,
RA 8293 as amended by RA 9502]
iv. Term s and Conditions of
Compulsory License
(1) The scope and duration of such license
shall be limited to the purpose for which
it was authorized; [Sec. 100.1, RA 8293]
(2) The license shall be non-exclusive; [Sec.
100.2, RA 8293]
(3) The license shall be non-assignable,
except with that part of the enterprise
or business with which the invention is
being exploited; ; [Sec. 100.3, RA 8293]
(4) Use of the subject matter of the license
shall be devoted predominantly for the
supply of the Philippine market:
Provided, that this limitation shall not
apply where the grant of the license is
based on the ground that the patentee's
manner of exploiting the patent is
determined by judicial or administrative
process, to be anti-competitive. ;[Sec.
100.4, RA 8293]
(5) The license may be terminated upon
proper showing that circumstances
which led to its grant have ceased to
exist and are unlikely to recur: Provided,
That adequate protection shall be
afforded to the legitimate interest of the
licensee; ; [Sec. 100.5, RA 8293]
(6) The patentee shall be paid adequate
remuneration taking into account the
economic value of the grant or
authorization, except that in cases
where the license was granted to
remedy a practice which was
determined after judicial or
administrative process, to be anti-
competitive, the need to correct the
anti-competitive practice may be taken
into account in fixing the amount of
remuneration. [Sec. 100.6, RA 8293]
III. Trademarks
A. DEFINITION OF MARKS,
COLLECTIVE MARKS, TRADE
NAMES
A.1. MARKS
Any visible sign capable of distinguishing
the goods (trademark) or services (service
mark) of an enterprise and shall include a
stamped or marked container of goods (Sec.
121.1, RA 8293)
A trademark refers to a word, name, symbol,
emblem, sign or device or any combination
thereof adopted and used by a merchant to
identify, and distinguish from others, his
goods of commerce. It is basically an
intellectual creation that is susceptible to
ownership and, consistently therewith, gives
rise to its own elements of ownership. The
incorporeal right, however, is distinct from
the property in the material object subject
to it. Ownership in one does not necessarily
vest ownership in the other. Thus, the
transfer or assignment of the intellectual
property will not necessarily constitute a
conveyance of the thing it covers, nor would
a conveyance of the latter imply the transfer
or assignment of the intellectual right.
[Distilleria Washington vs. CA, G.R. No.
120961 (1996)]
Tradem ark Service Mark
Any visible sign Any visible sign
which is adopted and capable of
used to identify the distinguishing the
source of origin of services of an
goods, and which is enterprise from the
capable of service of other
distinguishing them enterprises.
from goods
emanating from a
competitor.

PAGE 272 OF 320

UP LAW BOC INTELLECTUAL PROPERTY LAW
Protection
Is not limited to similar marks but also
products that may case insidious damage.
Collective Marks
Any visible sign designated as such in the
application for registration and capable of
distinguishing the origin or any other
common characteristic, including the
quality of goods or services of different
enterprises which use the sign under the
control of the registered owner of the
collective mark. (Sec. 121.2, RA 8293)
Trade Name
The name or designation identifying or
distinguishing an enterprise (Sec. 121.3, RA
8293).
Any individual name or surname, firm name,
device or word used by manufacturers,
industrialists, merchants, and others to
identify their businesses, vocations or
occupations. [Converse Rubber Corp. v.
Universal Rubber Products, Inc., G.R. No. L-
27906 (1987)]
A.2. FUNCTIONS OF A TRADEMARK
(1) To point out distinctly the origin or
ownership of the goods and to which it
is affixed;
(2) To secure him, who has been
instrumental in bringing into the market
a superior article of merchandise, the
fruit of his industry and skill;
(3) To assure the public that they are
producing the genuine article;
(4) To prevent fraud and imposition; and
(5) To protect the manufacturer against
substitution and sale of an inferior and
different article as its product [Mirpuri v.
CA, G.R. No. 114508 (1999)]
The objects of a trademark are to point out
distinctly the origin or ownership of the
articles to which it is affixed, to secure to
him who has been instrumental in bringing
into market a superior article or
PAGE 273 OF 320
MERCANTILE LAW
merchandise the fruit of his industry and
skill, and to prevent fraud and imposition.
[Etepha v. Director of Patents, G.R. No. L-
20635 (1966)]
B. ACQUISITION OF OWNERSHIP
OF MARK
The rights to a mark shall be acquired
through registration made validly in
accordance with law. [Sec. 122, RA 8293]
B.1. DURATION OF CERTIFICATE
A certificate of registration shall remain in
force for 10 years and may be renewed for
periods of 10 years at its expiration upon
payment of the prescribed fee and upon
filing of a request. [Sec 145-146, RA 8293]
C. ACQUISITION OF OWNERSHIP
OF TRADE NAME
Notwithstanding any laws or regulations
providing for any obligation to register trade
names, such names shall be protected, even
prior to or without registration, against any
unlawful act committed by third parties.
[Sec. 165.2 (a), RA 8293) The ownership of a
trade name is acquired through adoption
and use.
A name or designation may not be used as a
trade name if by its nature or the use to
which such name or designation may be put,
it is contrary to public order or morals and if,
in particular, it is liable to deceive trade
circles or the public as to the nature of the
enterprise identified by that name. [Sec.
165.1, RA 8293]
Any change in the ownership of a trade
name shall be made with the transfer of the
enterprise or part thereof identified by that
name. [Sec. 165.4, RA 8293]
UP LAW BOC INTELLECTUAL PROPERTY LAW
D. NON-REGISTRABLE MARKS
A mark cannot be registered if it:
(1) Consists of immoral, deceptive or
scandalous matter, or matter which
may disparage or falsely suggest a
connection with persons, living or dead,
institutions, beliefs, or national symbols,
or bring them into contempt or
disrepute; [Sec 123.1(a), RA 8293]
(2) Consists of flags, coat of arms or other
insignia of the Philippines or any foreign
country; [Sec 123.1(b), RA 8293]
(3) Consists of a name, portrait or signature
identifying a particular living individual
except by his written consent, or of a
deceased President of the Philippines,
during the life of his widow, except by
written consent of the widow; [Sec
123.1(c), RA 8293]
(4) Is identical with a registered mark of
another or a mark with an earlier filing
or priority date, in respect of:
(a) The same goods or services, or
(b) Closely related goods or services, or
(c) If it nearly resembles such a mark as
to be likely to deceive or cause
confusion; [Sec 123.1(d), RA 8293]
(5) Is identical with, or confusingly similar
to, or constitutes a translation of a well-
known mark, whether or not registered
in the Philippines, and used for identical
or similar goods or services; [Sec 123.1(e),
RA 8293]
(6) Is identical with, or confusingly similar
to, or constitutes a translation of a well-
known mark which is registered in the
Philippines, and used for goods or
services which are not similar; [Sec
123.1(f), RA 8293]
(7) Likely to mislead the public, particularly
as to the nature, quality, characteristics
or geographical origin of the goods or
services; [Sec 123.1(g), RA 8293]
(8) Consists exclusively of signs that are
generic for the goods or services that
PAGE 274 OF 320
MERCANTILE LAW
they seek to identify; [Sec 123.1(h), RA
8293]
(9) Consists exclusively of signs or of
indications that have become
customary or usual to designate the
goods or services in everyday language
or in a bona fide and established trade
practice; [Sec 123.1(i), RA 8293]
(10) Consists exclusively of signs or of
indications that may serve in trade to
designate the kind, quality, quantity,
intended purpose, value, geographical
origin, time or production of the goods
or rendering of the services, or other
characteristics of the goods or services;
[Sec 123.1(j), RA 8293]
(11) Consists of shapes that may be
necessitated by technical factors or by
the nature of the goods themselves or
factors that affect their intrinsic value;
[Sec 123.1(k), RA 8293]
(12) Consists of color alone, unless defined
by a given form; [Sec 123.1(l), RA 8293]
(13) Is contrary to public order or morality.
[Sec 123.1(m), RA 8293]
If Merely Descriptive
"Tussin" was derived from the Latin
"tussis" meaning cough. "Tussin" is merely
descriptive; it is generic; it furnishes to the
buyer no indication of the origin of the
goods; it is open for appropriation by
anyone. It is barred from registration as
trademark. While "tussin" by itself cannot
thus be used exclusively to identify one's
goods, it may properly become the subject
of a trademark "by combination with
another word or phrase", e.g. Atussin,
Pertussin. [Etepha vs. Director of Patents,
G.R. No. L-20635 (1966)]
The phrase Ang tibay! is never used
adjectively to define or describe an object.
One does not say, Ang tibay sapatos or
sapatos ang tibay to mean durable
shoes; rather we say matibay na sapatos
or sapatos na matibay.Thus, the name
Ang Tibay is a fanciful or coined phrase
and not a descriptive term, and therefore
may be legally appropriated as a trademark
UP LAW BOC INTELLECTUAL PROPERTY LAW
or trade-name. [Ang vs. Teodoro, G.R. No.
L-48226 (1942)]
D.1. DOCTRINE OF SECONDARY
MEANING
When the marks referred to in nos. 10, 11
and 12 has become distinctive, because of
its long, continuous and exclusive use for 5
years, as used in connection with the
applicants goods or services in commerce
and in the mind of the public indicates a
single source to consumers, it may be
registered. The Office may accept as prima
facie evidence that the mark has become
distinctive, as used in connection with the
applicant's goods or services in commerce,
proof of substantially exclusive and
continuous use thereof by the applicant in
commerce in the Philippines for five (5)
years before the date on which the claim of
distinctiveness is made. [Sec 123.2, RA
8293]
The nature of the goods to which the mark
is applied will not constitute an obstacle to
registration. [Sec 123.3, RA 8293]
E. PRIOR USE OF MARK AS A
REQUIREMENT
E.1. USE OF MARK AS A
REQUIREMENT
The applicant or the registrant shall file a
declaration of actual use of the mark with
evidence to that effect, as prescribed by the
Regulations within three (3) years from the
filing date of the application. Otherwise, the
application shall be refused or the mark
shall be removed from the Register by the
Director. [Sec. 124.2, RA 8293]
For the requirement of actual use in
commerce in the Philippines before one
may register a trademark, trade name and
service mark under the law pertains to the
territorial jurisdiction of the Philippines and
is not only confined to a certain region,
province, city or barangay. [McDonalds
Corporation v. MacJoy Fastfood, G.R. No.
166115 (2007)]
PAGE 275 OF 320
MERCANTILE LAW
Trademark is a creation of use and,
therefore, actual use is a pre-requisite to
exclusive ownership; registration is only an
administrative confirmation of the existence
of the right of ownership of the mark, but
does not perfect such right; actual use
thereof is the perfecting ingredient.
[Shangri-La International Hotel v. Developers
Group of Companies, G.R. No. 159938
(2006)]
E.2. NON-USE OF MARK WHEN
EXCUSED
(1) If caused by circumstances arising
independently of the will of the
trademark owner. Lack of funds shall
not excuse non-use of a mark; [Sec.
152.1, RA 8293]
(2) A use which does not alter its distinctive
character though the use is different
from the form in which it is registered.
[Sec. 152.2, RA 8293]
(3) Use of a mark in connection with one or
more of the goods/services belonging
to the class in which the mark is
registered. [Sec. 152.3, RA 8293]
(4) The use of mark by a company related
to the applicant or registrant
(5) The use of mark by a person controlled
by the registrant. [Sec. 152.4, RA 8293]
The use of a mark by a company related
with the registrant or applicant shall inure
to the latter's benefit, and such use shall
not affect the validity of such mark or of its
registration: Provided, that such mark is not
used in such manner as to deceive the
public. [Sec.152.4, Ra 8293]
F. WELL-KNOWN MARKS
A well-known mark is a mark which a
competent authority of the Philippines has
designated to be well-known internationally
and in the Philippines.
In determining whether a mark is well-
known, account shall be taken of the
knowledge of the relevant sector of the
UP LAW BOC INTELLECTUAL PROPERTY LAW
public, rather than the public at large,
including knowledge in the Philippines
which has been obtained as a result of the
promotion of the mark. (Sec 123.1(e), RA
8293)
F.1. DETERMINANTS (NEED NOT
CONCUR)
(1) The duration, extent and geographical
area of any use of the mark;
(2) The market share in the Philippines and
other countries of the goods/services to
which the mark applies;
(3) The degree of the inherent or acquired
distinction of the mark;
(4) The quality-image or reputation
acquired by the mark;
(5) The extent to which the mark has been
registered in the world;
(6) The exclusivity of the registration
attained by the mark in the world;
(7) The extent of use of the mark in the
world;
(8) The exclusivity of use in the world;
(9) The commercial value attributed to the
mark in the world;
(10) The record of successful protection of
the rights in the mark;
(11) The outcome of litigations dealing with
the issue of whether the mar is well-
known; and
(12) The presence or absence of identical or
similar test marks validly registered or
used on other similar goods [Rule 102,
Rule on Trademarks]
F.2. PROTECTION EXTENDED TO
WELL-KNOWN MARKS
If not registered in the Philippines
A mark cannot be registered if it is identical
with or confusingly similar to, or constitutes
a translation of a mark which is considered
by the competent authority of the
Philippines to be well-known internationally
and in the Philippines, whether or not it is
PAGE 276 OF 320
MERCANTILE LAW
registered here, as being already the mark
of a person other than the applicant for
registration and used for identical goods or
services. [(Sec 123.1(e), RA 8293]
If registered in the Philippines
A mark cannot be registered if it is identical
with or confusingly similar to, or constitutes
a translation of a mark considered well-
known in accordance with the Sec. 123.1 (e),
which is registered in the Philippines with
respect to goods or services which are not
similar to those with respect to which
registration is applied for. [Sec 123.1(f), RA
8293]
Priority Right
An application for registration of a mark
filed in the Philippines by a person referred
to in Section 3, and who previously duly
filed an application for registration of the
same mark in one of those countries, shall
be considered as filed as of the day the
application was first filed in the foreign
country. [Sec. 131.1, RA 8293]
No registration of a mark in the Philippines
by a person described in this section shall
be granted until such mark has been
registered in the country of origin of the
applicant. [Sec. 131.2, RA 8293]
Significance of Priority Right
A Philippine application filed by another
applicant after the priority date but earlier
than the foreign applicants actual filing
may be refused registration if it is identical
to the mark with a priority date. [Agpalo,
The Law on Trademark, Infringement and
Unfair Competition (2000)]
F.3. RIGHTS CONFERRED BY A WELL-
KNOWN MARK
(1) Right to be protected whether or not it
is registered in the Philippines;
(2) If registered under Sec 123.1(e),
extension of protection to goods and
services which are not similar to those in
UP LAW BOC INTELLECTUAL PROPERTY LAW
respect of which the mark is registered,
provided that:
(a) The use of the mark in relation
to unrelated or dissimilar goods
or services would indicate a
connection between those
goods or services and the owner
of the mark; and
(b) The interests of the owner of the
registered mark are likely to be
damaged by such use. [Sec.
147.2, RA 8293]
G. RIGHTS CONFERRED BY
REGISTRATION
Except in cases of importation of drugs and
medicines allowed under Section 72.1 of this
Act and of off-patent drugs and medicines,
the owner of a registered mark shall have
the exclusive right to prevent all third
parties not having the owner's consent from
using in the course of trade identical or
similar signs or containers for goods or
services which are identical or similar to
those in respect of which the trademark is
registered where such use would result in a
likelihood of confusion. In case of the use of
an identical sign for identical goods or
services, a likelihood of confusion shall be
presumed. [Sec. 147.1, RA 8293 as amended
by RA 9502]
G.1. LIMITATIONS ON SUCH RIGHTS
(1) Duration (except that, inasmuch as the
registration of a trademark could be
renewed every 10 years, a trademark
could conceivably remain registered
forever);
(2) Territorial (except well-known marks).
Registration of the mark shall not confer on
the registered owner the right to preclude
third parties from using bona fide their
names, addresses, pseudonyms, a therefor, shall provide for effective control
geographical name, or exact indications
concerning the kind, quality, quantity,
destination, value, place of origin, or time of
PAGE 277 OF 320
MERCANTILE LAW
production or of supply, of their goods or
services: Provided, That such use is confined
to the purposes of mere identification or
information and cannot mislead the public
as to the source of the goods or services.
[Sec. 148, RA 8293]
G.2. ASSIGNMENT AND TRANSFER OF
APPLICATION AND REGISTRATION
(1) An application for registration of a mark,
or its registration, may be assigned or
transferred with or without the transfer
of the business using the mark. [Sec.
149.1, RA 8293]
(2) Such assignment or transfer shall,
however, be null and void if it is liable to
mislead the public, particularly as
regards the nature, source,
manufacturing process, characteristics,
or suitability for their purpose, of the
goods or services to which the mark is
applied. [Sec. 149.2, RA 8293]
(3) The assignment of the application for
registration of a mark, or of its
registration, shall be in writing and
require the signatures of the contracting
parties. Transfers by mergers or other
forms of succession may be made by
any document supporting such transfer.
[Sec. 149.3, RA 8293]
(4) Assignments and transfers of
registrations of marks shall be recorded
at the Office on payment of the
prescribed fee; assignment and
transfers of applications for registration
shall, on payment of the same fee, be
provisionally recorded, and the mark,
when registered, shall be in the name of
the assignee or transferee. [Sec. 149.4,
RA 8293]
(5) Assignments and transfers shall have
no effect against third parties until they
are recorded at the Office. [Sec. 149.5,
RA 8293]
Any license contract concerning the
registration of a mark, or an application
by the licensor of the quality of the goods or
services of the licensee in connection with
which the mark is used. If the license
UP LAW BOC INTELLECTUAL PROPERTY LAW
contract does not provide for such quality
control, or if such quality control is not
effectively carried out, the license contract
shall not be valid. [Sec. 150.1, RA 8293]
G.3. PROTECTION LIMITED TO GOODS
SPECIFIED IN REGISTRATION
CERTIFICATE
The certificate of registration can confer
upon the petitioner the exclusive right to
use its own symbol only to those goods
specified in the certificate, subject to any
conditions a limitations stated therein. One
who has adopted and used a trademark on
his goods does not prevent the adoption
and use of the same trademark by others for
products which are of a different description.
[Faberge, Inc. v. IAC and Co Beng Kay, G.R.
No. 71189 (1992)]
H. USE BY THIRD PARTIES OF
NAMES, ETC. SIMILAR TO
REGISTERED MARK
The IPC deems unlawful any subsequent
use of the trade name by a third party,
whether as a trade name or a mark or
collective mark, or any such use of a similar
trade name or mark, likely to mislead the
public. [Sec. 165.2 (b), RA 8293]
I. INFRINGEMENT AND REMEDIES
I.1. TRADEMARK INFRINGEMENT
Any person who shall, without the consent
of the owner of the registered mark:
(1) Use in commerce any reproduction,
counterfeit, copy, or colorable imitation
of a registered mark or the same
container or a dominant feature thereof
in connection with the sale, offering for
sale, distribution, advertising of any
goods or services including other
preparatory steps necessary to carry out
the sale of any goods or services on or in
connection with which such use is likely
PAGE 278 OF 320
MERCANTILE LAW
to cause confusion, or to cause mistake,
or to deceive; [Sec. 155.1, RA 8293]
(2) Reproduce, counterfeit, copy or
colorably imitate a registered mark or a
dominant feature thereof and apply
such reproduction, counterfeit, copy or
colorable imitation to labels, signs,
prints, packages, wrappers, receptacles
or advertisements intended to be used
in commerce upon or in connection with
the sale, offering for sale, distribution,
or advertising of goods or services on or
in connection with which such use is
likely to cause confusion, or to cause
mistake, or to deceive. [Sec. 155.2, RA
8293]
A crucial issue in any trademark
infringement case is the likelihood of
confusion, mistake or deceit as to the
identity, source or origin of the goods or
identity of the business as a consequence of
using a certain mark. Likelihood of
confusion is admittedly a relative term, to
be determined rigidly according to the
particular (and sometimes peculiar)
circumstances of each case. In determining
likelihood of confusion, the court must
consider: (a) the resemblance between the
trademarks; (b) the similarity of the goods
to which the trademarks are attached; (c)
the likely effect on the purchaser; and (d)
the registrants express or implied consent
and other fair and equitable considerations.
[Mighty Corporation v. E. & J. Gallo Winery,
G.R. No. 154342 (2004)]
To establish trademark infringement, the
following elements must be shown: (1) the
validity of the mark; (2) the plaintiffs
ownership of the mark; and (3) the use of
the mark or its colorable imitation by the
alleged infringer results in likelihood of
confusion. Of these, it is the element of
likelihood of confusion that is the gravamen
of trademark infringement. Two types of
confusion arise from the use of similar or
colorable imitation marks, namely,
confusion of goods (product confusion) and
confusion of business (source or origin
confusion). While there is confusion of
goods when the products are competing,
confusion of business exists when the
products are non-competing but related
UP LAW BOC INTELLECTUAL PROPERTY LAW
enough to produce confusion or affiliation.
[McDonalds Corporation v. L.C. Big Mak
Burger, Inc., et al., G.R. No. 143993 (2004)]
In order to bring a civil action for
infringement, it is not required that there is
an actual sale of the goods or services using
the infringing material. [Sec. 155.2, RA
8293] Infringement takes place upon the
mere use or reproduction of the registered
mark.
No article of imported merchandise which
shall copy or simulate the name of any
domestic product, or manufacturer, or
dealer, or which shall copy or simulate a
mark registered in accordance with the
provisions of this Act, or shall bear a mark
or trade name calculated to induce the
public to believe that the article is
manufactured in the Philippines, or that it is
manufactured in any foreign country or
locality other than the country or locality
where it is in fact manufactured, shall be
admitted to entry at any customhouse of
the Philippines. [Sec. 166, RA 8293]
A mere distributor and not the owner
cannot assert any protection from
trademark infringement as it had no right in
the first place to the registration of the
disputed trademarks. [Superior Commercial
Enterprises v. Kunnan Enterprises, G.R. No.
169974 (2010)]
I.2. TESTS TO DETERMINE
INFRINGEMENT
Dom inancy test
Infringement is determined by the test of
dominancy rather than by differences or
variations in the details of one trademark
and of another. Similarity in size, form and
color, while relevant is not conclusive. If the
competing trademark contains the main or
essential or dominant features of another,
and confusion is likely to result,
infringement takes place. [Asia Brewery v.
CA and San Miguel, G.R. No. 103543 (1993)]
The dominancy test considers the dominant
features in the competing marks in
determining whether they are confusingly
PAGE 279 OF 320
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similar. Under the dominancy test, courts
give greater weight to the similarity of the
appearance of the product arising from the
adoption of the dominant features of the
registered mark, disregarding minor
differences. Courts will consider more the
aural and visual impressions created by the
marks in the public mind, giving little
weight to factors like prices, quality, sales
outlets and market segments. [McDonalds
Corporation v. L.C. Big Mak Burger, Inc., et al.,
G.R. No. 143993 (2004)]
Holistic test
To determine whether a trademark has
been infringed, we must consider the mark
as a whole and not as dissected. If the buyer
is deceived, it is attributable to the marks as
a totality, not usually to any part of it. The
court therefore should be guided by its first
impression, for the buyer acts quickly and is
governed by a casual glance, the value of
which may be dissipated as soon as the
court assumed to analyze carefully the
respective features of the mark. [Del Monte
Corporation, et al. v. CA, G.R. No. L-78325
(1990)]
Doctrine of Related Goods/Services
(1) Goods are related when they belong to
the same class or have the same
descriptive properties or physical
attributes, or they serve the same
purpose or flow through the same
channel of trade.
(2) The use of identical marks on non-
competing but related goods may likely
cause confusion.
(3) Corollarily, the use of identical marks on
non-competing and unrelated goods is
not likely to cause confusion.
W hen Goods are Non-Competing
Undoubtedly, the paints, chemical
products, toner and dyestuff of CKK that
carry the trademark CANON are unrelated
to sandals, the product of NSR. The 2
classes of products in this case flow through
UP LAW BOC INTELLECTUAL PROPERTY LAW
different trade channels. The products of
CKK are sold through special chemical
stores or distributors while the products of
NSR are sold in grocery stores, sari-sari
stores and department stores. Thus, the
evident disparity of these products renders
unfounded the apprehension of CKK that
confusion of business or origin might occur
if NSR is allowed to use the mark CANON.
[Canon Kabushiki Kaisha vs. CA, G.R. No.
12090 (2000)]
I.3. FALSE DESIGNATIONS OF ORIGIN;
FALSE DESCRIPTION OR
REPRESENTATION
Any person who, on or in connection with
any goods or services, or any container for
goods, uses in commerce any word, term,
name, symbol, or device, or any
combination thereof, or any false
designation of origin, false or misleading
description of fact, or false or misleading
representation of fact, which:
(1) Is likely to cause confusion, or to cause
mistake, or to deceive as to the
affiliation, connection, or association of
such person with another person, or as
to the origin, sponsorship, or approval
of his or her goods, services, or
commercial activities by another
person; [Sec. 169.1(a), RA 8293]
(2) In commercial advertising or promotion,
misrepresents the nature,
characteristics, qualities, or geographic
origin of his or her or another person's
goods, services, or commercial activities,
shall be liable to a civil action for
damages and injunction [Sec. 169.1 (b),
RA 8293]
Any goods marked or labeled in
contravention of the provisions of this
Section shall not be imported into the
Philippines or admitted entry at any
customhouse of the Philippines. The owner,
importer, or consignee of goods refused
entry at any customhouse under this section
may have any recourse under the customs
revenue laws or may have the remedy given
by this Act in cases involving goods refused
entry or seized. [Sec. 169.2, RA 8293]
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I.4. INFRINGEMENT OF NAME AND
MARKS OF OWNERSHIP STAMP ON
CONTAINERS
General Rule: It is unlawful for any
person, without the consent of the
manufacturer, bottler or seller who has
registered the mark of ownership to fill such
bottles, boxes, kegs, barrels or other
containers so marked and stamped, for the
purpose of sale, dispose of, or wantonly
destroy the same, whether filled or not, to
use the same for drinking vessels or drain
pipes, foundation pipes, for any other
purpose than that registered. [Sec. 2, RA
623 as amended by RA 5700]
The use of the same without apparent
permission from the trademark owners
thereof shall be prima facie presumption
that such possession or use is unlawful. [Sec.
3, RA 623 as amended by RA 5700]
Exceptions:
(1) Use of the bottles as containers for sisi,
bagoong, patis, and similar native
products [Sec. 6 RA 623 as amended by
RA 5700]
(2) Persons in whose favor the containers
were sold [Distelleria Washington v. LA
Tondena Distillers, G.R. No. 120961
(1997)]
I.5. DAMAGES
The owner of a registered mark may recover
damages from any person who infringes his
rights, and the measure of the damages
suffered shall be either the reasonable
profit which the complaining party would
have made, had the defendant not infringed
his rights, or the profit which the defendant
actually made out of the infringement, or in
the event such measure of damages cannot
be readily ascertained with reasonable
certainty, then the court may award as
damages a reasonable percentage based
upon the amount of gross sales of the
defendant or the value of the services in
connection with which the mark or trade
name was used in the infringement of the
rights of the complaining party. [Sec. 156.1,
RA 8293]
UP LAW BOC INTELLECTUAL PROPERTY LAW
The owner of the registered mark shall not
be entitled to recover profits or damages
unless the acts have been committed with
knowledge that such imitation is likely to
cause confusion, or to cause mistake, or to
deceive. Such knowledge is presumed if the
registrant gives notice that his mark is
registered by displaying with the mark the
words '"Registered Mark" or the letter R
within a circle or if the defendant had
otherwise actual notice of the registration.
[Sec. 158, RA 8293]
Should damages be recoverable, the
measure of the damages suffered shall be
either:
(1) The reasonable profit which the
complaining party would have made,
had the defendant not infringed his
rights; or
(2) The profit which the defendant actually
made out of the infringement; or
(3) A reasonable percentage based upon
the amount of gross sales of the
defendant or the value of the services in
connection with which the mark or trade
name was used in the infringement of
the rights of the complaining party if
such measure of damages cannot be
readily ascertained with reasonable
certainty. [Sec. 156.1, RA 8293]
I.6. REQUIREMENT OF NOTICE
Notice of registration of trademark is
necessary for an owner of a trademark to
recover damages in an action for
infringement since knowledge that such
imitation is likely to cause confusion, or to
cause mistake, or to deceive is an element
of infringement. Requirement of notice may
be complied by displaying with the mark the
words '"Registered Mark" or the letter R
within a circle. [Sec. 158, RA 8293]
I.7. OTHER REMEDIES AVAILABLE:
(1) Injunction [Sec. 156.4];
(2) Impounding of sales invoices and other
documents [Sec. 156.2];
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(3) Double damages in case of actual intent
to defraud or to mislead [Sec. 156.3];
(4) Court order for the disposal or
destruction of the infringing goods [Sec.
157];
(5) Criminal Action;
(6) Administration sanctions
Any foreign national, who qualifies under
the principle on reciprocity and does not
engage in business in the Philippines,
whether or not it is licensed to do business
in the Philippines, may bring civil or
administrative action for:
(1) Opposition
(2) Cancellation
(3) Infringement
(4) Unfair Competition
(5) False designation of origin or false
description (Sec. 160. RA 8293)
I.8. LIMITATIONS TO ACTIONS FOR
INFRINGEMENT
The remedies given to the owner of a right
infringed shall be limited as follows:
(1) Registered mark shall have no effect
against any person who, in good faith,
before the filing date or the priority date,
was using the mark for the purposes of
his business or enterprise: Provided,
That his right may only be transferred or
assigned together with his enterprise or
business or with that part of his
enterprise or business in which the mark
is used. [Sec. 159.1, RA 8293]
(2) Where an infringer who is engaged
solely in the business of printing the
mark or other infringing materials for
others is an innocent infringer, the
owner of the right infringed shall be
entitled as against such infringer only to
an injunction against future printing.
[Sec. 159.2, RA 8293]
(3) Where the infringement complained of
is contained in or is part of paid
advertisement in a newspaper,
magazine, or other similar periodical or
UP LAW BOC INTELLECTUAL PROPERTY LAW
in an electronic communication, the
remedies of the owner of the right
infringed as against the publisher or
distributor of such newspaper,
magazine, or other similar periodical or
electronic communication shall be
limited to an injunction against the
presentation of such advertising matter
in future issues of such newspapers,
magazines, or other similar periodicals
or in future transmissions of such
electronic communications.
The limitations shall apply only to
innocent infringers: Provided, That such
injunctive relief shall not be available to
the owner of the right infringed with
respect to an issue of a newspaper,
magazine, or other similar periodical or
an electronic communication containing
infringing matter where restraining the
dissemination of such infringing matter
in any particular issue of such periodical
or in an electronic communication
would delay the delivery of such issue or
transmission of such electronic
communication is customarily
conducted in accordance with the sound
business practice, and not due to any
method or device adopted to evade this
section or to prevent or delay the
issuance of an injunction or restraining
order with respect to such infringing
matter. [Sec. 159.3, RA 8293]
(4) There shall be no infringement of
trademarks or tradenames of imported
or sold drugs and medicines allowed
under Section 72.1 as well as imported
or sold off-patent drugs and medicines:
Provided, That said drugs and
medicines bear the registered marks
that have not been tampered,
unlawfully modified, or infringed upon
as defined under Section 155. [Sec. 159.4
RA 8293 as amended by RA 9502]
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MERCANTILE LAW
J. UNFAIR COMPETITION
A person who has identified in the mind of
the public the goods he manufactures or
deals in, his business or services from those
of others, whether or not a registered mark
is employed, has a property right in the
goodwill of the said goods, business or
services so identified, which will be
protected in the same manner as other
property rights. [Sec. 168.1, RA 8293]
Any person who shall employ deception or
any other means contrary to good faith by
which he shall pass off the goods
manufactured by him or in which he deals,
or his business, or services for those of the
one having established such goodwill, or
who shall commit any acts calculated to
produce said result, shall be guilty of unfair
competition, and shall be subject to an
action therefor. [Sec. 168.2, RA 8293]
The following shall be deemed guilty of
unfair competition:
(1) Any person, who is selling his goods
and gives them the general appearance
of goods of another manufacturer or
dealer, either as to the goods
themselves or in the wrapping of the
packages in which they are contained,
or the devices or words thereon, or in
any other feature of their appearance,
which would be likely to influence
purchasers to believe that the goods
offered are those of a manufacturer or
dealer, other than the actual
manufacturer or dealer, or who
otherwise clothes the goods with such
appearance as shall deceive the public
and defraud another of his legitimate
trade, or any subsequent vendor of such
goods or any agent of any vendor
engaged in selling such goods with a
like purpose; [Sec. 168.3(a), RA 8293]
(2) Any person who by any artifice, or
device, or who employs any other
means calculated to induce the false
belief that such person is offering the
services of another who has identified
such services in the mind of the public;
[Sec. 168.3(b), RA 8293]
UP LAW BOC INTELLECTUAL PROPERTY LAW
(3) Any person who shall make any false
statement in the course of trade or who
shall commit any other act contrary to
good faith of a nature calculated to
discredit the goods, business or services
of another. (Sec. 168.3(c), RA 8293)
The elements of an action for unfair
competition are: (1) confusing similarity in
the general appearance of the goods, and
(2) intent to deceive the public and defraud
a competitor. The confusing similarity may
or may not result from similarity in the
marks, but may result from other external
factors in the packaging or presentation of
the goods. The intent to deceive and
defraud may be inferred from the similarity
in appearance of the goods as offered for
sale to the public. Actual fraudulent intent
need not be shown. [McDonalds
Corporation v. L.G. Big Mak Burger, Inc., et
al., G.R. No. 143993 (2004)]
An action for unfair competition is based on
the proposition that no dealer in
merchandise should be allowed to dress his
goods in simulation of the goods of another
dealer, so that purchasers desiring to buy
the goods of the latter would be induced to
buy the goods of the former. The most usual
devices employed in committing this crime
are the simulation of labels and the
reproduction of form, color and general
appearance of the package used by the
pioneer manufacturer or dealer. [Caterpillar,
Inc v. Samson, G.R. No. 164605 (2006)]
Articles 168.1 and 168.2 provide the concept
and general rule on the definition of unfair
competition. The law does not thereby
cover every unfair act committed in the
course of business; it covers only acts
characterized by deception or any other
means contrary to good faith in the
passing off of goods and services as those
of another who has established goodwill in
relation with these goods or services, or any
other act calculated to produce the same
result.
What unfair competition is, is further
particularized under Section 168.3 when it
provides specifics of what unfair
competition is without in any way limiting
the scope of protection against unfair
competition. Part of these particulars is
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provided under Section 168.3(c) which
provides the general catch-all phrase that
the petitioner cites. Under this phrase, a
person shall be guilty of unfair competition
who shall commit any other act contrary to
good faith of a nature calculated to
discredit the goods, business or services of
another. [Coca-Cola v. Gomez, G.R. No.
154491 (2008)]
From jurisprudence, unfair competition has
been defined as the passing off (or palming
off) or attempting to pass off upon the
public the goods or business of one person
as the goods or business of another with the
end and probable effect of deceiving the
public. It formulated the true test of
unfair competition: whether the acts of
defendant are such as are calculated to
deceive the ordinary buyer making his
purchases under the ordinary conditions
which prevail in the particular trade to
which the controversy relates. One of the
essential requisites in an action to restrain
unfair competition is proof of fraud; the
intent to deceive must be shown before the
right to recover can exist. The advent of the
IP Code has not significantly changed these
rulings as they are fully in accord with what
Section 168 of the Code in its entirety
provides. Deception, passing off and fraud
upon the public are still the key elements
that must be present for unfair competition
to exist.
Infringement of
Unfair Competition
Trademark
Unauthorized use of Passing off of ones
a trademark goods as those of
another
Fraudulent intent is Fraudulent intent is
unnecessary essential
Prior registration of Registration is not
the trademark is a necessary
prerequisite to the
action
[In and Out Burger vs Sehwani, G.R. No.
179127 (2008)]
UP LAW BOC INTELLECTUAL PROPERTY LAW
The law on unfair competition is broader
and more inclusive than the law on
trademark infringement. The latter is more
limited but it recognizes a more exclusive
right derived from the trademark adoption
and registration by the person whose goods
or business is first associated with it. Hence,
even if one fails to establish his exclusive
property right to a trademark, he may still
obtain relief on the ground of his
competitors unfairness or fraud. Conduct
constitutes unfair competition if the effect is
to pass off on the public the goods of one
man as the goods of another. [Mighty
Corporation v. E. & J. Gallo Winery, G.R. No.
154342 (2004)]
K. TRADE NAMES OR BUSINESS
NAMES
It is the name or designation identifying or
distinguishing an enterprise. [Sec. 121.3, RA
8293]
Any individual name or surname, firm name,
device or word used by manufacturers,
industrialists, merchants, and others to
identify their businesses, vocations or
occupations [Converse Rubber Corp. v.
Universal Rubber Products, Inc., G.R. No. L-
27906 (1987)]
K.1. WHAT MAY NOT BE USED AS
TRADE NAME
(1) If by its nature or the use to which the
name or designation may be put, it is
contrary to public order or morals.
(2) If it is liable to deceive trade circles or
the public as to the nature of the
enterprise identified by the name
(3) If the trade name is similar to a mark or
a trade name owned by another person
and its use would likely mislead the
public. [Sec.165.1, RA 8293]
Acquisition of ownership: Trade names
are protected even prior to or without
registration. The ownership of a trade name
is acquired through adoption and use.
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Right of owner: The IPC deems unlawful
any subsequent use of the trade name by a
third party, whether as a trade name or a
mark or collective mark, or any such use of a
similar trade name or mark, likely to
mislead the public. [Sec. 165.2 (b), RA 8293]
Trade names, unlike trademarks, need not
be registered with the IPO before an
infringement suit may be filed by its owner
against the owner of an infringing
trademark. All that is required is that the
trade name is previously used in trade or
commerce in the Philippines. [Prosource
International v. Horphag Research
Management, G.R. No. 180073 (2009)]
L. COLLECTIVE MARKS
A Collective mark is any visible sign
designated as such in the application for
registration and capable of distinguishing
the origin or any other common
characteristic, including the quality of
goods or services of different enterprises
which use the sign under the control of the
registered owner of the collective mark [Sec.
121.2, RA 8293]
An application for registration of a collective
mark shall designate the mark as a
collective mark and shall be accompanied
by a copy of the agreement, if any,
governing the use of the collective mark.
[Sec. 167.2, Ra 8293]
L.1. GROUNDS FOR CANCELLATION
In addition to the grounds under Section 149,
the Court shall cancel the registration of a
collective mark if the person requesting the
cancellation proves:
(1) That only the registered owner uses the
mark; or
(2) That he uses or permits its use in
contravention of the agreements
referred to in Subsection 166.2; or
(3) That he uses or permits its use in a
manner liable to deceive trade circles or
the public as to the origin or any other
common characteristics of the goods or
UP LAW BOC INTELLECTUAL PROPERTY LAW
services concerned. [Sec. 167.3, RA
8293]
The registration of a collective mark, or an
application therefor shall not be the subject
of a license contract. [Sec. 167.4, RA 8293]
PAGE 285 OF 320
MERCANTILE LAW
IV. Copyrights
A. DEFINITION
Is that system of legal protection an author
enjoys of the form of expression of ideas.
[Aquino, Intellectual Property Law]
Copyright or economic rights shall consist
of the exclusive right to carry out, authorize
or prevent the following acts:
(1) Reproduction of the work or
substantial portion of the work;
(2) Dramatization, translation, adapta-
tion, abridgment, arrangement or
other transformation of the work;
(3) The first public distribution of the
original and each copy of the work
by sale or other forms of transfer of
ownership;
(4) Rental of the original or a copy of an
audiovisual or cinematographic
work, a work embodied in a sound
recording, a computer program, a
compilation of data and other
materials or a musical work in
graphic form, irrespective of the
ownership of the original or the
copy which is the subject of the
rental;
(5) Public display of the original or a
copy of the work;
(6) Public performance of the work; and
(7) Other communication to the public
of the work. [Sec 177, RA 8293]
B. BASIC PRINCIPLES
B.1. WORKS ARE PROTECTED BY THE
SOLE FACT OF THEIR CREATION
Principle of Automatic Protection :
Copyright is vested from the very moment of
creation. [Sec. 172.2, RA 8293]
UP LAW BOC INTELLECTUAL PROPERTY LAW
The enjoyment and exercise of copyright,
including moral rights, shall not be the
subject of any formality; such enjoyment
and such exercise shall be independent of
the existence of protection in the country of
origin of the work. [Article 5(2), Berne
Convention for the Protection of Literary and
Artistic Works]
The Denicola Test in intellectual property
law states that if design elements of an
article reflect a merger of aesthetic and
functional considerations, the artistic
aspects of the work cannot be conceptually
separable from the utilitarian aspects; thus,
the article cannot be copyrighted.
B.2. PROTECTION EXTENDS ONLY TO
THE EXPRESSION OF AN IDEA, NOT
THE IDEA ITSELF.
No protection shall extend, under this law,
to any idea, procedure, system method or
operation, concept, principle, discovery or
mere data as such, even if they are
expressed, explained, illustrated or
embodied in a work. [Sec 175, RA 8293]
B.3. THE COPYRIGHT IS DISTINCT
FROM THE PROPERTY IN THE
MATERIAL OBJECT SUBJECT TO IT.
The copyright is distinct from the 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 object. Nor shall a
transfer or assignment of the sole copy or of
one or several copies of the work imply
transfer or assignment of the copyright.
[Sec 181, RA 8293]
B.4. COPYRIGHT IS A STATUTORY
RIGHT.
Copyright, in the strict sense of the term is
purely a statutory right. Being a mere
statutory grant, the rights are limited to
what the statute confers. It may be obtained
and enjoyed only with respect to the
subjects and by the persons, and on terms
and conditions specified in the statute.
Accordingly, it can cover only the works
PAGE 286 OF 320
MERCANTILE LAW
falling within the statutory enumeration or
description. [Pearl and Dean vs. Shoemart,
G.R. No. 148222 (2003)]
C. COPYRIGHTABLE WORKS
C.1. ORIGINAL LITERARY AND
ARTISTIC WORKS
Literary and artistic works, hereinafter
referred to as "works", are original
intellectual creations in the literary and
artistic domain protected from the moment
of their creation and shall include in
particular:
(a) Books, pamphlets, articles and
other writings;
(b) Periodicals and newspapers;
(c) Lectures, sermons, addresses,
dissertations prepared for oral
delivery, whether or not reduced in
writing or other material form;
(d) Letters;
(e) Dramatic or dramatico-musical
compositions; choreographic works
or entertainment in dumb shows;
(f) Musical compositions, with or
without words;
(g) Works of drawing, painting,
architecture, sculpture, engraving,
lithography or other works of art;
models or designs for works of art;
(h) Original ornamental designs or
models for articles of manufacture,
whether or not registrable as an
industrial design, and other works
of applied art;
(i) Illustrations, maps, plans, sketches,
charts and three-dimensional works
relative to geography, topography,
architecture or science;
(j) Drawings or plastic works of a
scientific or technical character;
(k) Photographic works including works
produced by a process analogous to
photography; lantern slides;
UP LAW BOC INTELLECTUAL PROPERTY LAW
(l) Audiovisual works and
cinematographic works and works
produced by a process analogous to
cinematography or any process for
making audio-visual recordings;
(m) Pictorial illustrations and
advertisements;
(n) Computer programs; and
(o) Other literary, scholarly, scientific
and artistic works
W hen a work is considered original:
(1) The work is an independent creation of
the author; and
(2) It must not be copied from the work of
another.
A person to be entitled to a copyright must
be the original creator of the work. He must
have created it by his own skill, labor and
judgment without directly copying or
evasively imitating the work of another.
[Ching Kian Chuan vs. CA, G.R. No. 130360
(2001)]
By originality is meant that the material was
not copied, and evidences at least minimal
creativity; that it was independently created
by the author and that it possesses at least
some minimal degree of creativity. Copying
is shown by proof of access to copyrighted
material and substantial similarity between
the two works. The applicant must thus
demonstrate the existence and validity of
copyright because in the absence of
copyright protection, even the original
creation may be freely copied. [Ching v.
Salinas, G.R. No. 161295 (2005)]
Originality is not determined by novelty,
aesthetic merit or ingenuity but that it is an
independent creation.
The requirement in US Law that the
expression should be fixed in a tangible
medium is not applicable here since our law
expressly provides that works are protected
irrespective of their mode or form of
expression. [Sec. 172.2, RA 8293]
PAGE 287 OF 320
MERCANTILE LAW
C.2. DERIVATIVE WORKS
The following derivative works shall also be
protected by copyright:
(1) Dramatizations, translations,
adaptations, abridgments,
arrangements, and other alterations of
literary or artistic works; and
(2) Collections of literary, scholarly or
artistic works, and compilations of data
and other materials which are original
by reason of the selection or
coordination or arrangement of their
contents. [Sec. 173.1, RA 8293]
Derivative works are protected as
new works provided they shall not:
(a) Affect the force of any subsisting
copyright upon the original works
employed or any part thereof; or
(b) Be construed to imply any right to such
use of the original works, or to secure or
extend copyright in such original works.
[Sec. 173.2, RA 8293]
The provisions of the intellectual property
code shall apply to works in which copyright
protection obtained prior to the effectivity of
the law is subsisting. Provided that the
application of the code shall not result in
the diminution of such protection. [Sec.
239.3 IPC]
A person entitled to copyright must be the
original creator of the work. He must have
created it by his own skill, labor, and
judgment without directly copying or
evasively imitating the work of another.
[Ching Kian Chuan vs CA, G.R. No. 130360
(2001) (Vermicelli Case)]
To be entitled to copyright, the thing being
copyrighted must be original, created by the
author through his own judgment without
directly copying or evasively imitating the
work of another. [Sambar vs Levi Strauss,
G.R. No. 132604 (2002]:
UP LAW BOC INTELLECTUAL PROPERTY LAW
D. NON-COPYRIGHTABLE WORKS
D.1. UNPROTECTED SUBJECT MATTER
(1) Any idea, procedure, system method or
operation, concept, principle, discovery
or mere data as such, even if they are
expressed, explained, illustrated or
embodied in a work;
(2) News of the day and other
miscellaneous facts having the
character of mere items of press
information;
(3) Any official text of a legislative,
administrative or legal nature, as well
as any official translation thereof;
(4) Pleadings;
(5) Original decisions of courts and
tribunals (This pertains to the original
decisions not the SCRA published
volumes since these are protected under
derivative works under Sec 173.1) [Sec. 175,
RA 8293]
The format or mechanics of a TV show is not
copyrightable as copyright does not extend
to ideas, procedures, processes, systems,
methods of operation, concepts, principles
or discoveries regardless of the form in
which they are described, explained,
illustrated or embodied. [Joaquin Jr. et al vs.
Drilon, et al, G.R. No. 108946 (1999)]
No one may claim originality as to facts as
these do not owe their origin to an act of
authorship. The first person to find and
report a particular fact has not created the
same; he has merely discovered its
existence. [Feist Publication v Rural
Telephone Services, 499 U.S. 340 (1991)]
D.2. WORKS OF THE GOVERNMENT
OF THE PHILIPPINES
W ork of the Government of the
Philippines: Is a work created by an
officer or employee of the Philippine
Government or any of its subdivisions and
instrumentalities, including government-
owned or controlled corporations as a part
of his regularly prescribed official duties.
[Sec. 171.11, RA 8293]
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MERCANTILE LAW
General Rule: Government cannot own
copyright
Exceptions:
(1) When copyright is assigned or
bequested in favor of the government
[Sec 176.3];
(2) Author of speeches, lectures, sermons,
addresses and dissertations shall have
exclusive right of making a collection of
his work.
However, prior approval of the government
agency or the office wherein the work is
created shall be necessary for the
exploitation of such work for profit. [Sec.
176.1]
Notwithstanding the foregoing provisions,
the Government is not precluded from
receiving and holding copyrights transferred
to it by assignment, bequest or otherwise;
nor shall publication or republication by the
Government in a public document of any
work in which copyright is subsisting be
taken to cause any abridgment or
annulment of the copyright or to authorize
any use or appropriation of such work
without the consent of the copyright owner.
[Sec. 176.3, RA 8293]
D.3. WORKS OF THE PUBLIC DOMAIN
These include works whose term of
copyright has expired.
D.4. USEFUL ARTICLES
Useful Article Doctrine: Works whose
sole purpose is utilitarian have no separate
artistic value. This can be distinguished
from a work of applied art, which has
utilitarian functions but there is an
identifiable artistic work or creation
incorporated thereto.
UP LAW BOC INTELLECTUAL PROPERTY LAW
E. RIGHTS OF COPYRIGHT OWNER
E.1. COPYRIGHT OR ECONOMIC
RIGHTS
Copyright or economic rights shall consist
of the exclusive right to carry out, authorize
or prevent the following acts:
(1) Reproduction of the work or substantial
portion of the work; [Sec. 177.1, RA
8293]
(2) Dramatization, translation, adaptation,
abridgment, arrangement or other
transformation of the work; [Sec. 177.2,
RA 8293]
(3) The first public distribution of the
original and each copy of the work by
sale or other forms of transfer of
ownership; [Sec. 177.3, RA 8293]
(4) Rental of the original or a copy of an
audiovisual or cinematographic work, a
work embodied in a sound recording, a
computer program, a compilation of
data and other materials or a musical
work in graphic form, irrespective of the
ownership of the original or the copy
which is the subject of the rental; [Sec.
177.4, RA 8293]
(5) Public display of the original or a copy
of the work; [Sec. 177.5, RA 8293]
(6) Public performance of the work; [Sec.
177.6, RA 8293]
(7) Other communication to the public of
the work [Sec. 177.7, RA 8293]
Economic rights also give the author the
right to assign or license the copyright
and/or the material object in whole or in
part, and they allow the owner to derive
financial reward from the use of his works
by others. [Sec. 180.1, RA 8293 as amended
by RA 10372]
Copyright in a work of architecture:
shall include the right to control the
erection of any building which reproduces
the whole or a substantial part of the work
either in its original form or in any form
recognizably derived from the original:
Provided, That the copyright in any such
work shall not include the right to control
PAGE 289 OF 320
MERCANTILE LAW
the reconstruction or rehabilitation in the
same style as the original of a building to
which that copyright relates. [Sec. 186, RA
8293]
Communication to the Public of
Copyrighted W orks: Includes point-to-
point transmission of a work, including
video on demand, and providing access to
an electronic retrieval system, such as
computer databases, servers, or similar
electronic storage devices. Broadcasting,
rebroadcasting, retransmission by cable,
and broadcast and retransmission by
satellite are all acts of communication to
the public within the meaning of the IPC.
[Rule 11, Copyright Safeguards and
Regulations]
First Public Distribution of W ork: An
exclusive right of first distribution of work
includes all acts involving distribution,
specifically including the first importation of
an original and each copy of the work into
the jurisdiction of the Republic of the
Philippines. [Rule 12, Copyright Safeguards
and Regulations]
Civil Code Provisions on Ownership
of Intellectual Creation:
By intellectual creation, the following
persons acquire ownership:
(1) The author with regard to his literary,
dramatic, historical, legal, philosophical,
scientific or other work;
(2) The composer; as to his musical
composition;
(3) The painter, sculptor, or other artist, with
respect to the product of his art;
(4) The scientist or technologist or any other
person with regard to his discovery or
invention. [Art. 721, NCC]
The author and the composer, mentioned in
Nos. 1 and 2 of the preceding article, shall
have the ownership of their creations even
before the publication of the same. Once
their works are published, their rights are
governed by the Copyright laws.
UP LAW BOC INTELLECTUAL PROPERTY LAW
The painter, sculptor or other artist shall
have dominion over the product of his art
even before it is copyrighted. The scientist
or technologist has the ownership of his
discovery or invention even before it is
patented. . [Art. 722, NCC]
Letters and other private communications
in writing are owned by the person to whom
they are addressed and delivered, but they
cannot be published or disseminated
without the consent of the writer or his heirs.
However, the court may authorize their
publication or dissemination if the public
good or the interest of justice so requires.
[Art. 723, NCC]
E.2. WHEN COPYRIGHT VESTS
Works are protected by the sole fact of their
creation, irrespective of their mode or form
of expression, as well as of their content,
quality and purpose. [Sec. 172.2, RA 8293]
The issuance of the certificates of
registration and deposit as provided by Sec.
2, Rule 7 of the Copyright Safeguards and
Regulations, are purely for recording the
date of registration and deposit of the work,
and are not conclusive as to copyright
ownership (nor does it determine the time
when copyright vests). [Manly Sportwear v.
Dadodette Enterprises, G.R. No. 165306
(2005)]
E.3. MORAL RIGHTS
The author of a work shall, independently of
the economic rights in Section 177 or the
grant of an assignment or license with
respect to such right, have the right:
(1) To require that the authorship of the
works be attributed to him, in particular,
the right that his name, as far as
practicable, be indicated in a prominent
way on the copies, and in connection
with the public use of his work; [Sec.
193.1, RA 8293]
(2) To make any alterations of his work
prior to, or to withhold it from
publication; [Sec. 193.2, RA 8293]
(3) To object to any distortion, mutilation or
other modification of, or other
PAGE 290 OF 320
MERCANTILE LAW
derogatory action in relation to, his
work which would be prejudicial to his
honor or reputation; [Sec. 193.3, RA
8293]
(4) To restrain the use of his name with
respect to any work not of his own
creation or in a distorted version of his
work. [Sec. 193.4, RA 8293]
In addition to the right to publish granted
by the author, his heirs, or assigns, the
publisher shall have a copyright consisting
merely of the right of reproduction of the
typographical arrangement of the
published edition of the work. [Sec.174, RA
8293]
The author of speeches, lectures, sermons,
addresses, and dissertations mentioned in
the preceding paragraphs shall have the
exclusive right of making a collection of his
works. [Sec. 176.2, Ra 8293]
W aiver of Moral Rights
General Rule: Moral rights can be waived
in writing, expressly stating such waiver
[Sec. 195, RA 8293] or by contribution to a
collective work unless such is expressly
reserved [Sec. 196, RA 8293].
Exceptions:
Even if made in writing, waiver is still not
valid if:
(1) Use of the name of the author, title of
his work, or his reputation with respect
to any version or adaptation of his work,
which because of alterations
substantially tends to injure the literary
or artistic reputation of another author;
[Sec. 195.1, RA 8293]
(2) It uses the name of the author in a work
that he did not create. [Sec. 195.1, RA
8293]
Moral rights are not assignable or subject to
license. [Sec. 198, RA 8293]
The right of an author under Section 193.1.
shall last during the lifetime of the author
and in perpetuity after his death while the
rights under Sections 193.2. 193.3. and 193.4.
shall be coterminous with the economic
UP LAW BOC INTELLECTUAL PROPERTY LAW
rights [Sec. 198, RA 8293 as amended by RA
10372]
E.4. RIGHTS TO PROCEEDS IN
SUBSEQUENT TRANSFERS (DROIT DE
SUITE OR FOLLOW UP RIGHTS)
In every sale or lease of an original work of
painting or sculpture or of the original
manuscript of a writer or composer,
subsequent to the first disposition thereof
by the author, the author or his heirs shall
have an inalienable right to participate in
the gross proceeds of the sale or lease to
the extent of five percent (5%). This right
shall exist during the lifetime of the author
and for fifty (50) years after his death. [Sec.
200, RA 8293]
W orks not covered
Prints, etchings, engravings, works of
applied art, or works of similar kind wherein
the author primarily derives gain from the
proceeds of reproductions. (Sec. 201, RA
8293)
First Sale Doctrine
After the first sale of the lawfully made copy
of the copyrighted work, anyone who is the
owner of that copy can sell or dispose of
that copy in any way without any liability for
copyright infringement. The first sale of an
authorized copy of the work exhausts the
authors right to control distribution of
copies.
E.5. NEIGHBORING RIGHTS
Performers Rights
(1) As regards their performances, the right
of authorizing:
(a) The broadcasting and other
communication to the public of
their performance; and
(b) The fixation of their unfixed
performance. [Sec. 203.1, RA
8293]
PAGE 291 OF 320
MERCANTILE LAW
Such right shall be maintained and
exercised fifty (50) years after his death,
by his heirs, and in default of heirs, the
government, where protection is
claimed. [Sec. 204.2, RA 8293]
(2) The right of authorizing the direct or
indirect reproduction of their
performances fixed in sound recordings,
or audiovisual works or fixations in any
manner or form; [Sec. 203.2, RA 8293,
as amended by 10372]
(3) Subject to the provisions of Section 206,
the right of authorizing the first public
distribution of the original and copies of
their performance fixed in the sound
recording or audiovisual works or
fixations through sale or rental or other
forms of transfer of ownership; [Sec.
203.3, RA 8293, as amended by RA
10372]
(4) The right of authorizing the commercial
rental to the public of the original and
copies of their performances fixed in
sound recordings or audiovisual works
or fixations, even after distribution of
them by, or pursuant to the
authorization by the performer; [Sec.
203.4, RA 8293, as amended by RA
10372]
(5) The right of authorizing the making
available to the public of their
performances fixed in sound recordings
or audiovisual works or fixations, by wire
or wireless means, in such a way that
members of the public may access them
from a place and time individually
chosen by them. [Sec. 203.5, RA 8293,
as amended by RA 10372]
(6) Independently of a performer's
economic rights, the performer, shall, as
regards his live aural performances or
performances fixed in sound recordings
or audiovisual works or fixations, have
the right to claim to be identified as the
performer of his performances, except
where the omission is dictated by the
manner of the use of the performance,
and to object to any distortion,
mutilation or other modification of his
performances that would be prejudicial
UP LAW BOC INTELLECTUAL PROPERTY LAW
to his reputation. [Sec. 204.1, RA 8293,
as amended by RA 10372]
(7) Unless otherwise provided in the
contract, in every communication to the
public or broadcast of a performance
subsequent to the first communication
or broadcast thereof by the
broadcasting organization, the
performer shall be entitled to an
additional remuneration equivalent to
at least five percent (5%) of the original
compensation he or she received for the
first communication or broadcast. [Sec.
206, RA 8293]
Rights of Producers of Sound
Recordings
(1) The right to authorize the direct or
indirect reproduction of their sound
recordings, in any manner or form; the
placing of these reproductions in the
market and the right of rental or
lending; [Sec. 208.1, RA 8293]
(2) The right to authorize the first public
distribution of the original and copies of
their sound recordings through sale or
rental or other forms of transferring
ownership; [Sec. 208.2, RA 8293]
(3) The right to authorize the commercial
rental to the public of the original and
copies of their sound recordings, even
after distribution by them by or
pursuant to authorization by the
producer. [Sec. 208.3, RA 8293]
(4) If a sound recording published for
commercial purposes, or a reproduction
of such sound recording, is used directly
for broadcasting or for other
communication to the public, or is
publicly performed with the intention of
making and enhancing profit, a single
equitable remuneration for the
performer or performers, and the
producer of the sound recording shall
be paid by the user to both the
performers and the producer, who, in
the absence of any agreement shall
share equally. [Sec. 209, RA 8293]
PAGE 292 OF 320
MERCANTILE LAW
Rights of Broadcasting
Organizations
(1) The rebroadcasting of their broadcasts;
[Sec. 211.1, RA 8293]
(2) The recording in any manner, including
the making of films or the use of video
tape, of their broadcasts for the purpose
of communication to the public of
television broadcasts of the same; [Sec.
211.2, RA 8293]
(3) The use of such records for fresh
transmissions or for fresh recording.
[Sec. 211.3, RA 8293]
Must-Carry Rule: Prevents cable
television companies from excluding
broadcasting organization especially in
those places not reached by signal. Also,
the rule prevents cable television
companies from depriving viewers in far-
flung areas the enjoyment of programs
available to city viewers. [ABS-CBN
Broadcasting vs. Philippine Multi-Media
System, G.R. Nos. 175769-70 (2009)]
Lim itations on Protection
Sections 203, 208 and 209 shall not apply
where the acts referred to in those Sections
are related to:
(1) The use by a natural person exclusively
for his own personal purposes;
(2) Using short excerpts for reporting
current events;
(3) Use solely for the purpose of teaching or
for scientific research; and
(4) Fair use of the broadcast subject to
certain conditions. (Sec. 212, RA 8293)
The issue in this case as WON the playing
and signing of musical compositions which
have been copyrighted under the provisions
of the copyright law inside the restaurant
constitute a performance for profit? The
court ruled that the word perform as used
in the ACT has been applied to one who
plays a musical composition on a piano,
thereby producing in the air sound waves
UP LAW BOC INTELLECTUAL PROPERTY LAW MERCANTILE LAW

which are heard as a music and if the Term of Protection

instrument he plays on is a piano plus a
broadcasting apparatus, so that the waves Works Term
are thrown out, not only upon the air but
For performances not Fifty (50) years
upon others, then he also performing a
incorporated in from the end of the
musical composition. In relation thereto it
recordings year in which the
has been held that the playing of music in
performance took
dine and dance establishments which was
place [Sec. 215.1(a),
paid for by the public in purchases of food
RA 8293]
and drink constitute performance for public.
The music provided for is for the purpose of For sound or image Fifty (50) years
entertaining and amusing customers in and sound recordings from the end of the
order to make the establishment more and for performances year in which the
attractive and desirable. The expenses incorporated therein recording took
entailed thereby are added to the overhead place. [Sec. 215.1(b),
of the restaurant which are either eventually RA 8293]
charged to the price of the food and drink or
the overall total of additional income
produced by the bigger volume of business
which the entertainment was programmed Broadcasts Twenty (20) years
to attract. Nevertheless, the there is no from the date the
infringem ent of copyright law as the broadcast took
composers in this case waived their right place [Sec. 215.2,
in favour of the public when they allowed RA 8293]
their intellectual creations to become
property of public domain. [Filipino Society
of Composers vs Benjamin Tan, Search
Results G.R. NO. L-36402 (1987)]

PAGE 293 OF 320

 UP LAW BOC INTELLECTUAL PROPERTY LAW MERCANTILE LAW

F. RULES ON OWNERSHIP OF COPYRIGHT

F.1. OWNERSHIP OF COPYRIGHT

W ork Ownership

Single Creator of an Original Work Belongs to the author of the work [Sec. 178.1, RA 8293]

Belongs of the co-authors; in the absence of agreement, their

rights shall be governed by the rules on co-ownership. However, if
Works of Joint Authorship the work consists of parts that can be used separately and
identified, the author of each part owns the copyright of the part
he has created. [Sec. 178.2, RA 8293; Asked in 95, 04]

Belongs to the employee if the creation is not a part of his regular

duties, even if he used the time, facilities and materials of the
Work created during the course of
employer. However, belongs to the employer if the work is in the
employment
performance of the employees regular duties unless there is an
agreement to the contrary. [Sec. 178.3, RA 8293; Asked in 08]

The person who commissioned the work holds ownership of the

Work commissioned by a person other work per se, but copyright remains with the creator unless there
than the employer was a stipulation to the contrary. [Sec. 178.4, RA 8293; Asked in
95, 04]

Belongs to the producer, author of the scenario, composer of the

music, film director, and author of the adapted work. However,
subject to stipulations, the producers shall exercise the copyright
Audio visual works
as may be required for the exhibition of the work, except for the
right to collect license fees for the performance of musical
compositions in the work. [Sec. 178.5, RA 8293]

Belongs to the writer, but the court may authorize their

publication or dissemination of the public good or interest of
Letters
justice requires, pursuant to Art. 723, New Civil Code. [Sec. 178.6,
RA 8293]

Publishers are deemed to represent the authors, unless the

contrary appears, the pseudonyms or adopted names leave no
Anonymous and pseudonymous works
doubt as to the authors identity or if the author discloses his
identity. [Sec. 179, RA 8293]

A contributor is deemed to have waived his right unless he

Collective works
expressly reserves it. [Sec. 196, RA 8293]

PAGE 294 OF 320

UP LAW BOC INTELLECTUAL PROPERTY LAW MERCANTILE LAW

F.2. DURATION OF COPYRIGHT

W orks Term

Original Literary and Artistic Works including Lifetime of author and for fifty (50) years after his
Posthumous Works death [Sec 213.1, RA 8293]

Derivative Works including Posthumous Works Lifetime of author and for fifty (50) years after his
death [Sec 213.1, RA 8293]

Joint Authorship Lifetime of the last surviving author and for fifty
(50) years after his death [Sec 213.2, RA 8293]

Anonymous or Pseudonymous Works Fifty (50) years from date of first lawful
publication [Sec. 213.3, RA 8293]

Applied Art Twenty-five (25) years from date of making [Sec.

213.4, RA 8293]

Published Photographic Works Fifty (50) years from publication [Sec. 213.5, RA
8293]

Unpublished Photographic Works Fifty (50) years from the making [Sec. 213.5, RA
8293]

Published Audio-visual Works Fifty (50) years from publication [Sec. 213.6, RA
8293]

Unpublished Audio-visual Works Fifty (50) years from the making [Sec. 213.6, RA
8293]

PAGE 295 OF 320

UP LAW BOC INTELLECTUAL PROPERTY LAW
F.3. PRESUMPTION OF AUTHORSHIP
The natural person whose name is indicated
on a work in the usual manner as the author
shall, in the absence of proof to the contrary,
be presumed to be the author of the work.
This provision shall be applicable even if the
name is a pseudonym, where the
pseudonym leaves no doubt as to the
identity of the author. The person or body,
corporate whose name appears on an
audio-visual work in the usual manner shall,
in the absence of proof to the contrary, be
presumed to be the maker of said work. [Sec.
219, RA 8293]
The term of protection subsequent to the
death of the author shall run from the date
of his death or of publication, but such
terms shall always be deemed to begin on
the first day of January of the year following
the event which gave rise to them. [Sec. 214,
RA 8293]
F.4. TRANSFER OR ASSIGNMENT OF
COPYRIGHT
The copyright may be assigned or licensed
in whole or in part. Within the scope of the
assignment or license, the assignee or
licensee is entitled to all the rights and
remedies which the assignor or licensor had
with respect to the copyright. [Sec. 180.1, RA
8293 as amended by RA 10372]
The copyright is not deemed assigned or
licensed inter vivos in whole or in part unless
there is a written indication of such
intention. [Sec. 180.2, RA 8293 as amended
by RA 10372]
The submission of a literary, photographic
or artistic work to a newspaper, magazine
or periodical for publication shall constitute
only a license to make a single publication
unless a greater right is expressly granted.
If two (2) or more persons jointly own a
copyright or any part thereof, neither of the
owners shall be entitled to grant licenses
without the prior written consent of the
other owner or owners. [Sec. 180.3, RA
8293]
PAGE 296 OF 320
MERCANTILE LAW
The copyright is distinct from the property
in the material object subject to it.
Consequently, the transfer, assignment or
licensing of the copyright shall not itself
constitute a transfer of the material object.
Nor shall a transfer or assignment of the
sole copy or of one or several copies of the
work imply transfer, assignment or licensing
of the copyright. [Sec. 181, RA 8293 as
amended by RA 10372]
The owners of copyright and related rights
or their heirs may designate a society of
artists, writers, composers and other right-
holders to collectively manage their
economic or moral rights on their behalf.
For the said societies to enforce the rights of
their members, they shall first secure the
necessary accreditation from the
Intellectual Property Office. [Sec. 183, RA
8293 as amended by RA 10372]
G. LIMITATIONS ON COPYRIGHT
G.1. DOCTRINE OF FAIR USE
The fair use of copyrighted work for criticism,
news reporting, teaching (including multiple
copies for classroom use), research and
similar purposes is not an infringement of
copyright.
A privilege, in persons other than the owner
of the copyright, to use the copyrighted
material in a reasonable manner without his
consent, notwithstanding the monopoly
granted to the owner by the copyright. It is
meant to balance the monopolies enjoyed
by the copyright owner with the interests of
the public and of society.
Decom pilation
Refers to the reproduction of the code and
translation of the forms of the computer
program to achieve the inter-operability of
an independently created computer
program with other programs. This may
also constitute fair use [Sec. 185.1, RA 8293].
UP LAW BOC INTELLECTUAL PROPERTY LAW
The fact that a work is unpublished shall
not by itself bar a finding of fair use if such
finding is made upon consideration of all
the above factors. [Sec 185.2, RA 8293]
Factors to consider in determ ining
Fair Use
(1) The purpose and character of the use,
including whether such use is of a
commercial nature or is for non-profit
educational purposes;
(2) The nature of the copyrighted work;
(3) The amount and substantiality of the
portion used in relation to the
copyrighted work as a whole; and
(4) The effect of the use upon the potential
market for or value of the copyrighted
work [Sec. 185.1, RA 8293; (Harper &
Row v. Nation Enterprise, 471 US 539,
(1985)]
The format of a show is not copyrightable.
[Joaquin vs Drilon, G.R. No. 108946 (1999)]
A compilation is not copyrightable per se,
but it is copyrightable only if its facts have
been selected, coordinated, or arranged in
such a way that the resulting work as a
while constitutes an original work of
authorship. Otherwise known as the Sweat
of the Brow or Industrious Collection
Test. [Feist Publications Inc vs. Rural Tel
Service 499 US 340 (1991)]
An exception is carved out for lawyers and
officers of the court against plagiarism
when writing judicial documents that will be
part of court record. [In the Matter of the
Charges of Plagiarism etc Against Associate
Justice Mariano C. Del Castillo AM No 10-7-
17-SC (2011)]
H. COPYRIGHT INFRINGEMENT
Infringement of Copyright and
Related Rights: means any violation of
the rights under the Intellectual Property
PAGE 297 OF 320
MERCANTILE LAW
Code and/or the applicable Intellectual
Property Law, including the act of any
person who at the time when copyright
subsists in a work has in his possession an
article which he known, or ought to know, to
be an infringing copy of the work f or the
purpose of:
(1) Selling, letting for hire, or by way of
trade offering or exposing for sale, or
hire, the article
(2) Distributing the article for purpose of
trade, or for any other purpose to an
extent that will prejudice the rights of
the copyright owner in the work; or
(3) Trade exhibit of the article in public.
[Sec. 1(l), Rule 1, Rules and Regulations
on Administrative Complaints for
Violation of Laws involving Intellectual
Property Rights]
Infringement consists in the doing by any
person, without the consent of the owner of
the copyright, of anything the sole right to
do which is conferred by statute on the
owner of the copyright. For there to be
substantial reproduction of a book, it does
not necessarily require that the entire
copyrighted work, or even a large portion of
it, be copied. If so much is taken that the
value of the original work is substantially
diminished, there is an infringement of
copyright and to an injurious extent, the
work appropriated. It is no defense that the
pirate did not know whether or not he was
infringing any copyright; he at least knew
that what he was copying was not his, and
he copied at his peril. In cases of
infringement, copying alone is not what is
prohibited. The copying must produce an
injurious effect. [Habana et al vs. Robles et
al., G.R. No. 131522 (1999)]
Copyright infringement and unfair
competition are not limited to the act of
selling counterfeit goods. They cover a
whole range of acts from copying,
assembling, packaging to marketing,
including the mere offering for sale of
counterfeit goods. [Microsoft Corp vs.
Maxicorp Inc., G.R. No. 140946 (2004)]
UP LAW BOC INTELLECTUAL PROPERTY LAW
A copy of a piracy is an infringement of the
original, and it is no defense that the pirate,
in such cases, did not know what works he
was indirectly copying, or did not know
whether or not he was infringing any
copyright; he at least knew that what he
was copying was not his, and he copied at
his peril. In determining the question of
infringement, the amount of matter copied
from the copyrighted work is an important
consideration. To constitute infringement, it
is not necessary that the whole or even a
large portion of the work shall have been
copied. If so much is taken that the value of
the original is sensibly diminished, or the
labors of the original author are
substantially and to an injurious extent
appropriated by another, that is sufficient in
point of law to constitute a such recording may not be made from
piracy. [Columbia Pictures v. CA, G.R. No.
110318 (1996)]
The following shall NOT constitute
infringem ent of copyright:
(1) Recitation or performance of a work
once it has been made accessible to the
public if (1) privately done AND free of
charge OR (2) strictly for a charitable or
religious institution; [Sec. 184.1(a), RA
8293]
(2) Making of quotations from a published
work: (i) compatible with fair use, (ii)
extent is justified by the purpose, (iii)
source and name of the author,
appearing on work, must be mentioned;
[Sec. 184.1(b), RA 8293]
(3) Reproduction or communication to the
public by mass media of articles on
current political, social, economic,
scientific or religious topic, lectures,
addresses and other works, delivered in
public: (i) for information purposes, (ii)
not expressly reserved, and (iii) source is
already indicated; [Sec. 184.1(c), RA
8293]
(4) Reproduction and communication to
the public of literary, scientific or artistic
works as part of reports of current
events by means of photography,
PAGE 298 OF 320
MERCANTILE LAW
cinematography or broadcasting to the
extent necessary for the purpose; [Sec.
184.1(d), RA 8293]
(5) Inclusion of a work in a publication,
broadcast or other communication to
the public, sound recording or film if
made by way of illustration for teaching
purposes compatible with fair use and
the source and the name of the author
appearing on work, must be mentioned;
[Sec. 184.1(e), RA 8293]
(6) Recording made in schools, universities,
or educational institutions of a work
included in a broadcast for the use of
schools, universities or educational
institutions. Such recording must be
deleted within a reasonable period;
audio-visual works which are part of the
general cinema, repertoire of feature
films except of brief excerpts of the
work; [Sec. 184.1(f), RA 8293]
(7) Making of ephemeral recordings; (i) by a
broadcasting organization, (ii) by means
of its work or facilities, (iii) for use in its
own broadcast; [Sec. 184.1(g), RA 8293]
(8) Use made of a work by or under the
direction or control of the government
for public interest compatible with fair
use; [Sec. 184.1(h), RA 8293]
(9) Public performance or the
communication to the public of a work
in a place where no admission fee is
charged by a club on institution for
charitable or educational purpose only
and the aim is not profit-making; [Sec.
184.1(i), RA 8293]
(10) Public display of the original or a copy
of the work not made by means of a film,
slide, television, image or otherwise on
screen or by means of any other device
or process either the work has been
published, sold, given away, or
transferred to another person by the
author or his successor in title; [Sec.
184.1(j), RA 8293]
(11) Use made of a work for the purpose of
any judicial proceedings or for the
UP LAW BOC INTELLECTUAL PROPERTY LAW
giving of professional advice by a legal
practitioner. [Sec. 184.1(k), RA 8293]
(12) The reproduction or distribution of
published articles or materials in a
specialized format exclusively for the
use of the blind, visually- and reading-
impaired persons: Provided, That such
copies and distribution shall be made
on a nonprofit basis and shall indicate
the copyright owner and the date of the
original publication. [Sec. 184.1(l), RA
8293 as amended by RA 10372]
Reproduction of Published W ork
General Rule: The private reproduction of
a published work in a single copy, where the
reproduction is made by a natural person
exclusively for research and private study,
shall be permitted, without the
authorization of the owner of copyright in
the work. [Sec. 187.1, RA 8293]
Exceptions: Such permission shall not
extend to:
(1) A work of architecture in the form of
building or other construction;
(2) An entire book, or a substantial part
thereof, or of a musical work in graphic
form by reprographic means;
(3) A compilation of data and other
materials;
(4) A computer program except as provided
in Section 189; and
(5) Any work in cases where reproduction
would unreasonably conflict with a
normal exploitation of the work or
would otherwise unreasonably
prejudice the legitimate interests of the
author. [187.2, RA 8293]
Reprographic Reproduction by
Libraries
Any library or archive whose activities are
not for profit may, without the authorization
of the author of copyright owner, make a
PAGE 299 OF 320
MERCANTILE LAW
single copy of the work by reprographic
reproduction:
(1) Where the work by reason of its fragile
character or rarity cannot be lent to user
in its original form;
(2) Where the works are isolated articles
contained in composite works or brief
portions of other published works and
the reproduction is necessary to supply
them, when this is considered expedient,
to persons requesting their loan for
purposes of research or study instead of
lending the volumes or booklets which
contain them; and
(3) Where the making of such a copy is in
order to preserve and, if necessary in the
event that it is lost, destroyed or
rendered unusable, replace a copy, or to
replace, in the permanent collection of
another similar library or archive, a copy
which has been lost, destroyed or
rendered unusable and copies are not
available with the publisher. [Sec. 188.1,
RA 8293]
It shall not be permissible to produce a
volume of a work published in several
volumes or to produce missing tomes or
pages of magazines or similar works, unless
the volume, tome or part is out of stock:
Provided, That every library which, by law, is
entitled to receive copies of a printed work,
shall be entitled, when special reasons so
require, to reproduce a copy of a published
work which is considered necessary for the
collection of the library but which is out of
stock. [Sec. 188.2, RA 8293)]
Reproduction of Computer Program
The reproduction in one (1) back-up copy or
adaptation of a computer program shall be
permitted, without the authorization of the
author of, or other owner of copyright in, a
computer program, by the lawful owner of
that computer program: Provided, That the
copy or adaptation is necessary for:
(a) The use of the computer program in
conjunction with a computer for the
UP LAW BOC INTELLECTUAL PROPERTY LAW MERCANTILE LAW

purpose, and to the extent, for which (2) When such copies form parts of libraries
the computer program has been and personal baggage belonging to
obtained; and persons or families arriving from foreign
countries and are not intended for sale:
(b) Archival purposes, and, for the
Provided, that such copies do not
replacement of the lawfully owned copy
exceed three (3). [Sec. 190.1, RA 8293 is
of the computer program in the event
repealed by RA 10372]
that the lawfully obtained copy of the
computer program is lost, destroyed or
rendered unusable. [Sec. 189.1, RA Copies imported as allowed by this Section
8293] may not lawfully be used in any way to
violate the rights of owner the copyright or
annul or limit the protection secured by this
No copy or adaptation mentioned in this
Act, and such unlawful use shall be deemed
Section shall be used for any purpose other
an infringement and shall be punishable as
than the ones determined in this Section,
such without prejudice to the proprietor's
and any such copy or adaptation shall be
right of action. [Sec. 190.2, RA 8293 is
destroyed in the event that continued
repealed by RA 10372]
possession of the copy of the computer
program ceases to be lawful. [Sec. 189.2, RA
8293]
Importation and Exportation of
Infringing Materials. Subject to the
Importation for Personal Purposes approval of the Secretary of Finance, the
Commissioner of Customs is hereby
The importation of a copy of a work by an empowered to make rules and regulations
individual for his personal purposes shall be for preventing the importation or
permitted without the authorization of the exportation of infringing articles prohibited
author of, or other owner of copyright in, the under Part IV of this Act and under relevant
work under the following circumstances: treaties and conventions to which the
(1) When copies of the work are not Philippines may be a party and for seizing
available in the Philippines and: and condemning and disposing of the same
in case they are discovered after they have
(a) Not more than one (1) copy at been imported or before they are exported
one time is imported for strictly [Sec. 190, RA 8293 as amended by RA
individual use only; or 10372]
(b) The importation is by authority
of and for the use of the
Philippine Government; or
(c) The importation, consisting of
not more than three (3) such
copies or likenesses in any one
invoice, is not for sale but for
the use only of any religious,
charitable, or educational
society or institution duly
incorporated or registered, or is
for the encouragement of the
fine arts, or for any state school,
college, university, or free public
library in the Philippines.

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UP LAW BOC INTELLECTUAL PROPERTY LAW
IV. Rules of Procedure
for Intellectual
Property Rights Cases
(A.M. No. 10-3-10 SC)
A. IN WHAT COURTS APPLICABLE
These Rules shall be observed by Regional
Trial Courts designated by the Supreme
Court as Special Commercial Courts.
B. APPLICABILITY OF REGULAR
RULES
General Rule: The Rules of Court (RoC)
shall apply suppletorily to these Rules.
Exception: When the civil or criminal
action involves complex issues, the Court
shall issue a special order that the regular
procedure prescribed in the RoC.
The following are specific rules applicable
in IPR Cases:
(a) Rules 2-9 of the RoC shall apply to all
civil actions for violation of intellectual
property rights under RA 8293 and
other violations of intellectual property
rights as may be defined by law.
(b) Special Commercial Courts in Quezon
City, Makati, Manila, and Pasig shall
have authority to act on applications for
the issuance of writs of search and
seizure in civil actions for violations of
the Code, enforceable nationwide.
Special Commercial Courts have
concurrent jurisdiction over applications
enforceable within their own jurisdiction
for violations within the judicial region.
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MERCANTILE LAW
(c) It shall be the duty of the Clerk of Court
to notify the Director-General of the
Intellectual Property Office of any action
involving a copyright, trademark,
service mark, patent, industrial design,
utility model, undisclosed information,
and technology transfer agreement.
C. COMMENCEMENT OF CIVIL
ACTION
C.1. PLEADINGS
The only pleadings allowed to be filed are
the complaints, compulsory counterclaims,
and cross-claims pleaded in the answer,
and the answers thereto. All of them shall
be verified.
C.2. WHO MAY FILE
(a) Any IPR owner, or anyone possessing
any right, title, or interest under claim of
ownership in any IPR, whose right may
have been violated;
(b) Any person who is a 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 IPR or
the repression of unfair competition, to
which the Philippines is also a party, or
extends reciprocal rights to Filipinos by
law;
(c) Any foreign national or juridical person
who meets the requirements of the
preceding paragraph, and does not
engage business in the Philippines.
C.3. FORM AND CONTENTS OF THE
PETITION
(1) Full names of parties to the case;
(2) Facts showing capacity of parties to sue
or be sued, or the authority of a party to
sue or be sued in a representative
capacity, or the legal existence of an
UP LAW BOC INTELLECTUAL PROPERTY LAW
organized association of persons that is
made a party;
(3) ultimate facts showing the cause of
action
(4) reliefs sought;
(5) an affidavit in question-and-answer
format must be attached to the
complaint. Such affidavit shall state
only the facts of direct personal
knowledge to the affiants which are
admissible in evidence, and shows the
competence of the affiants to testify.
(6) Certificate of non-forum shopping.
C.4. PROHIBITED PLEADINGS
(a) Motion to dismiss
(b) Motion for bill of particulars
(c) Motion for reconsideration of a final
order judgment, except with regard to
an order of destruction
(d) Reply
(e) Petition for relief from judgment
(f) Motion for extention of time to submit
pleadings, except for meritorious
reasons
(g) Motion for postponement intended for
delay
(h) Third-party complaint
(i) Intervention
(j) Motion to hear affirmative defenses
(k) Any petition or motion with similar
effect to the foregoing.
C.5. FAILURE TO FILE COMPLAINT
WHERE A WRIT OF SEARCH AND
SEIZURE IS ISSUED
Applicant has 31 days from issuance of writ
to file a case before the appropriate court or
quasi-judicial agency.
For failure to file a case, the Court may,
upon motion of the owner of the seized
PAGE 302 OF 320
MERCANTILE LAW
goods, order the return of such goods. Such
motion must be filed within 60 days from
the expiration of the period to file cases.
If the owner fails to file the motion, the
Court may dispose of the goods after notice
and hearing.
C.6. SUMMONS
Summons shall be served no later than 5
days from receipt of the complaint.
C.7. ANSWER
Must be filed 15 days after service of
summons; 10 days if answer to compulsory
counterclaim or cross-claim.
Should the defendant fail to answer, the
Court may, motu proprio or upon motion of
the plaintiff, render judgment based on the
affidavits and the evidence on record unless
it requires the submission of additional
evidence.
D. MODES OF DISCOVERY
A party may avail of the different modes of
discovery not later than 30 days from the
joinder of issues.
Any objection must be made within 10 days
from receipt of the request for discovery and
only on the ground that the matter
requested is manifestly incompetent,
irrelevant, immaterial, privileged in nature
or for harassment.
A comment on the objection may be made
in writing within 3 days from receipt of the
same. The Court then has 10 days to decide
on the objection.
Compliance with any mode of discovery
shall be made within 10 days from receipt of
the request for discovery, or from notice of
the ruling of the court.
Sanctions provided in the RoC in relation to
the modes of discovery shall apply.
UP LAW BOC INTELLECTUAL PROPERTY LAW
E. PRE-TRIAL
The Court shall set the case for pre-trial 5
days after the after the period for availing
modes of discovery or compliance
whichever comes later.
The Court shall then direct the parties to
appear before the Philippine Mediation
Center in accordance with mediation rules.
Should parties fail to settle the case at
mediation, the Court shall conduct JDR
conferences.
If either fails, the case shall be sent back to
the court for pre-trial.
F. CLARIFICATORY HEARINGS
AND TRIAL
Clarificatory hearings must be conducted
within 30 days from pre-trial, to be
completed not later than 15 days thereafter.
Immediately after the termination of the
clarificatory hearings the parties must
submit their position papers within 10 days.
The judicial affidavits attached to the
position papers shall serve as the direct
testimony of the witnesses, subject to cross-
examination.
The period of trial shall be 30 days allotted
to the plaintiff and defendant.
After an oral ruling on the last offer of
evidence, the Court shall direct the parties
to submit their respective draft decisions
within a non-extendible period of 30 days
from receipt of order.
G. COMMENCEMENT OF CRIMINAL
ACTION
A criminal action is commenced by the filing
of an information after a prior verified
complaint is filed under Rule 112 of the RoC.
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MERCANTILE LAW
H. COMMON RULES ON
ADMISSIBILITY OF EVIDENCE
Good faith NOT a defense, unless the
defendant or accused claims to be a prior
user.
All official records kept in a foreign country,
including certificates of registration, are
admissible in the Philippines if
authenticated by the consular office of the
Philippines having jurisdiction over the
country where such records are kept.
Authentication of documents may be
subject of agreement of the parties.
The deposition of foreign witnesses must be
made 6 months following the order of
deposition, unless failure to take the
deposition is caused by fortuitous event,
fraud, accident, mistake, or excusable
negligence.
Presumptions in the Intellectual Property
Code shall apply to these Rules.
I. EVIDENCE IN PATENT CASES
Subject matter is a patent for process for
obtaining a product:
Any identical product is presumed to have
been obtained through the use of the
patented process if:
(1) The product is new;
(2) There is substantial likelihood that the
product was made by the process and
that the owner of the patent has been
unable, despite reasonable efforts, to
determine the process actually used.
In such cases the Court shall order the
defendant/accused to show that the
process he used to obtain the identical
product is different from the patented
process.
UP LAW BOC INTELLECTUAL PROPERTY LAW
Presumptions concerning patents:
(1) A letters patent issued by the IPO is
prima facie evidence of its existence and
validity during the term specified,
unless cancelled or voided by final
judgment.
(2) Letters patent issued by the IPO are
presumed to have been validly issued
unless overcome by evidence of
irregularity.
(3) It is presumed that the
defendant/accused is aware of the
existence of the patent if the words
"Philippine patent" with the patent
number are written on:
(a) the patented invention or the
product manufactured using the
patented process
(b) on the container or the package in
which said article is supplied to the
public
(c) on the advertising material related
to the patented invention or process.
J. EVIDENCE IN TRADEMARK
INFRINGEMENT AND UNFAIR
COMPETITION CASES
A certificate of registration shall be prima
facie evidence of:
(1) The validity of the registration
(2) The registrant's ownership of the
mark
(3) The registrant's right to exclusively
use the same
Determination of a well-known m ark
Knowledge of the relevant sector of the
public, rather than the knowledge of the
general public, shall be taken into account.
(for the criteria in determining a well-known
mark, see Determinants, supra.)
PAGE 304 OF 320
MERCANTILE LAW
Likelihood of confusion
In determining likelihood of confusion, the
Court must consider the general impression
of the ordinary purchaser, buying under the
normally prevalent conditions of trade, and
giving such attention buyers normally give
in buying that class of goods.
The following factors are taken into
account:
(1) Strength of the plaintiff's mark
(2) Degree of similarity between the
plaintiff's and the defendant's
marks
(3) Proximity of the products or services.
(4) Likelihood that the plaintiff will
bridge the gap
(5) Evidence of actual confusion
(6) Defendant's good faith in adopting
the mark
(7) Quality of the defendant's service
(8) Sophistication of the buyers
Colorable imitation
Denotes a close or ingenious imitation as
calculated to deceive ordinary persons, or
such a resemblance to the original as to
deceive an ordinary purchaser giving such
attention as a purchaser usually gives, as to
cause him to purchase the one supposing it
to be the other.
Intent to Defraud
There is a presumption of an intent to
defraud:
(1) When the defendant passes of a
product as his by using imitative
devices, signs, or marks on the
general appearance of the goods,
misleading purchasers into buying
his merchandise under the
impression that they are buying that
of his competitors.
UP LAW BOC INTELLECTUAL PROPERTY LAW MERCANTILE LAW

(2) When the defendant makes a false
statement in the course of trade to
discredit the goods and business of
another.
(3) Where the similarity of the goods as
packed and offered for sale is so
striking.
K. EVIDENCE IN COPYRIGHT
CASES
Presumption of Copyright
Copyright is presumed to subsist and
ownership thereof shall be presumed to
belong to the complainant if he so claims
through affidavit evidence, unless
defendant attaches proof to the contrary in
his answer to the complaint.
Mere denial of the subsistence of the
copyright based on lack of knowledge shall
not be sufficient to rebut the presumption.
(b) Where the statement is
contradicted by another
statement in the register.
L. ORDER OF DESTRUCTION
At any time after the filing of the complaint
or information, the Court, upon motion and
after due notice and hearing where the
violation of the intellectual property rights
of the owner is established, may order the
destruction of the seized infringing goods,
objects and devices, including but not
limited to, sales invoices, other documents
evidencing sales, labels, signs, prints,
packages, wrappers, receptacles, and
advertisements and the like used in the
infringing act.
The hearing shall be summary in nature
with notice of hearing addressed to
defendant to afford him opportunity to
oppose the motion.

Effect of registration and deposit Conditions for the Order of

Destruction
Registration and deposit of copyrighted
work is not a condition sine qua non to a
claim of copyright infringement.
International registration of works
A statement concerning a work, recorded in
an international register in accordance with
an international treaty to which the
Philippines is or may become a party, shall
be construed as true until the contrary is
proved, except:
(a) Where the statement cannot be
valid under the Intellectual
Property Code or any other law
concerning intellectual
property;
(a) Inventory and photographs of the
seized infringing goods taken before
destruction
(b) Taking and inventory must be
witnessed by the (i) accused,
counsel or agent; (ii) the
complainant, his representative, or
counsel,
(c) A representative sample of the
seized goods must be retained for
evidentiary purposes
(d) An inventory of the samples must
have been made
(e) The officer authorized to supervise
the destruction has submitted a
report thereon within 5 days from
the date of the destruction
(f) Posting of a bond by the applicant

PAGE 305 OF 320

UP LAW BOC SPECIAL LAWS MERCANTILE LAW

MERCANTILE LAW
SPECIAL LAWS
\

PAGE 306 OF 320

UP LAW BOC SPECIAL LAWS MERCANTILE LAW

I. The Chattel Mortgage RA 9160 RA 10365

Commission (IC)
Law and Real Estate (3) (i) securities
dealers, brokers,
(3) (i) securities
dealers, brokers,
Mortgage Law salesmen, salesmen, investment
(Now part of Civil Law) investment houses houses and other
and other similar similar persons
entities managing managing securities
securities or or rendering services
II. Anti-Money rendering services as as investment agent,
investment agent, advisor, or
Laundering Act advisor, or consultant,
(R.A. 9160, as amended by R.A. 9194 and consultant, (ii) mutual funds,
R.A. 10365) (ii) mutual funds, close-end investment
close-end investment companies, common
A. POLICY OF THE LAW companies, common trust funds, and other
It is the policy of the State to protect and trust funds, pre-need similar persons, and
preserve the integrity and confidentiality of companies and other (iii) other entities
bank accounts and to ensure that the similar entities, administering or
Philippines shall not be used as a money (iii) foreign exchange otherwise dealing in
laundering site for the proceeds of any corporations, money currency,
unlawful activity. Consistent with its foreign changers, money commodities or
policy, the State shall extend cooperation in payment, remittance, financial derivatives
transnational investigations and prosecutions and transfer based thereon,
of persons involved in money laundering companies and other valuable objects,
activities wherever committed. (Sec. 2) similar entities, and cash substitutes and
(iv) other entities other similar
B. COVERED INSTITUTIONS administering or monetary
otherwise dealing in instruments or
RA 9160 RA 10365 currency, property supervised
commodities or or regulated by the
(1) banks, non-banks, (1) banks, non-banks,
financial derivatives Securities and
quasi-banks, trust quasi-banks, trust
based thereon, Exchange
entities, and all other entities, foreign
valuable objects, Commission (SEC)
institutions and their exchange dealers,
cash substitutes and
subsidiaries and pawnshops,
other similar
affiliates supervised m oney changers,
monetary
or regulated by the rem ittance and
instruments or
Bangko Sentral ng transfer
property supervised
Pilipinas (BSP) com panies and
or regulated by
other sim ilar
Securities and
entities and all
Exchange
other persons and
Commission
their subsidiaries and
affiliates supervised (4) jewelry dealers in
or regulated by the precious metals, who,
Bangko Sentral ng as a business, trade
in precious metals,
Pilipinas (BSP)
for transactions in
(2) insurance (2) insurance
excess of One million
companies and all companies, pre-
pesos
other institutions need com panies
(P1,000,000.00)
supervised or and all other persons
regulated by the supervised or (5) jewelry dealers in
Insurance regulated by the precious stones, who,
as a business, trade
Commission Insurance
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UP LAW BOC SPECIAL LAWS MERCANTILE LAW

RA 9160 RA 10365 RA 9160 RA 10365

in precious stones, for companies; and
transactions in excess (iv) creation,
of One million pesos operation or
(P1,000,000.00) management of
(6) company service juridical persons or
providers which, as a arrangements, and
business, provide any buying and selling
of the following business entities.
services to third Notwithstanding the
parties: foregoing, the term
(i) acting as a covered persons
formation agent of shall exclude lawyers
juridical persons; and accountants
(ii) acting as (or acting as
arranging for another independent legal
person to act as) a professionals in
director or corporate relation to
secretary of a information
company, a partner concerning their
of a partnership, or a clients or where
similar position in disclosure of
relation to other information would
juridical persons; compromise client
(iii) providing a confidences or the
registered office, attorney-client
business address or relationship:
accommodation, Provided, That these
correspondence or lawyers and
administrative accountants are
address for a authorized to
company, a practice in the
partnership or any Philippines and shall
other legal person or continue to be
arrangement; and (iv) subject to the
acting as (or provisions of their
arranging for another respective codes of
person to act as) a conduct and/or
nominee shareholder professional
for another person; responsibility or any
and of its amendments.
(7) persons who
provide any of the C. OBLIGATIONS OF COVERED
following services: INSTITUTIONS
(i) managing of client
money, securities or (1) Customer Identification
other assets; (2) Record Keeping
(ii) management of (3) Reporting of Covered and Suspicious
bank, savings or Transactions (Sec. 9)
securities accounts;
(iii) organization of Customer Identification
contributions for the Covered institutions shall establish and
creation, operation or record the true identity of its clients based on
management of official documents. They shall maintain a
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UP LAW BOC SPECIAL LAWS MERCANTILE LAW

system of verifying the true identity of their RA 9160 RA 10365

clients and, in case of corporate clients, consultants or suspicious
require a system of verifying their legal associates shall not transactions if the
existence and organizational structure, as be deemed to have relevant information
well as the authority and identification of all violated Republic Act was obtained in
persons purporting to act on their behalf. No. 1405, as circumstances where
amended; Republic they are subject to
The provisions of existing laws to the contrary Act No. 6426, as professional secrecy
notwithstanding, anonymous accounts, amended; Republic or legal professional
accounts under fictitious names, and all other Act No. 8791 and privilege.
similar accounts shall be absolutely other similar laws,
prohibited. Peso and foreign currency non- but are prohibited x x x
checking numbered accounts shall be from communicating,
allowed. The BSP may conduct annual directly or indirectly, x x x
testing solely limited to the determination of in any manner or by
the existence and true identity of the owners any means, to any When reporting
of such accounts. person the fact that a covered or suspicious
covered transaction transactions to the
Record Keeping report was made, the AMLC, covered
All records of all transactions of covered contents thereof, or persons and their
institutions shall be maintained and safely any other information officers and
stored for five (5) years from the dates of in relation thereto. In employees are
transactions. case of violation prohibited from
thereof, the communicating,
With respect to closed accounts, the records concerned officer, directly or indirectly,
on customer identification, account files and employee, in any manner or by
business correspondence, shall be preserved representative, any means, to any
and safely stored for at least five (5) years agent, advisor, person or entity, the
from the dates when they were closed. consultant or media, the fact that a
associate of the covered or suspicious
Reporting of Covered and Suspicious covered institution, transaction has been
Transactions shall be criminally reported or is about
liable. However, no to be reported, the
RA 9160 RA 10365 administrative, contents of the
Covered institutions Covered persons criminal or civil report, or any other
shall report to the shall report to the proceedings, shall lie information in
AMLC all covered AMLC all covered against any person relation thereto.
transactions within transactions and for having made a Neither may such
five (5) working days suspicious covered transaction reporting be
from occurrence transactions within report in the regular published or aired in
thereof, unless the five (5) working days performance of his any manner or form
Supervising Authority from occurrence duties and in good by the mass media,
concerned prescribes thereof, unless the faith, whether or not electronic mail, or
a longer period not AMLC prescribes a such reporting other similar devices.
exceeding ten (10) different period not results in any In case of violation
working days. exceeding fifteen (15) criminal prosecution thereof, the
working days. under this Act or any concerned officer and
When reporting other employee of the
covered transactions Lawyers and Philippine law. covered person and
to the AMLC, covered accountants acting media shall be held
institutions and their as independent legal When reporting criminally liable.
officers, employees, professionals are not covered transactions
representatives, required to report to the AMLC, covered
agents, advisors, covered and institutions and their

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RA 9160 RA 10365 RA 9160 RA 9194

officers, employees, banking days except
representatives, those between a
agents, advisors, covered institution and
consultants or a person who, at the
associates are time of the transaction
prohibited from was a properly
communicating, identified client and the
directly or indirectly, amount is
in any manner or by commensurate with the
any means, to any business or financial
person, entity, the capacity of the client;
media, the fact that a or those with an
covered transaction underlying legal or
report was made, the trade obligation,
contents thereof, or purpose, origin or
any other information economic justification.
in relation thereto. It likewise refers to a
Neither may such single, series or
reporting be combination or pattern
published or aired in of unusually large and
any manner or form complex transactions in
by the mass media, excess of Four million
electronic mail, or Philippine pesos
other similar devices. (Php4,000,000.00)
In case of violation especially cash
thereof, the deposits and
concerned officer, investments having no
employee, credible purpose or
representative, origin, underlying trade
agent, advisor, obligation or contract.
consultant or
associate of the
covered institution, E. SUSPICIOUS TRANSACTIONS
or media shall be
held criminally liable. Transactions with covered institutions,
regardless of the amounts involved, where
D. COVERED TRANSACTIONS any of the following circumstances exist:
(1) There is no underlying legal or trade
RA 9160 RA 9194 obligation, purpose or economic
(b) "Covered (b) 'Covered justification;
transaction" is a single, transaction' is a (2) The client is not properly identified;
series, or combination transaction in cash (3) The amount involved is not
of transactions or other equivalent commensurate with the business or
involving a total monetary financial capacity of the client;
amount in excess of instrument (4) Taking into account all known
Four million Philippine involving a total circumstances, it may be perceived that
pesos amount in excess the clients transaction is structured in
(Php4,000,000.00) or of Five hundred order to avoid being the subject of
an equivalent amount thousand pesos reporting requirements under the Act;
in foreign currency (P500,000.00) (5) Any circumstance relating to the
based on the prevailing within one (1) transaction which is observed to deviate
exchange rate within banking day. from the profile of the client and/or the
five (5) consecutive
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clients past transactions with the RA 9160 RA 10365

covered institution; knowing that any disguises the true
(6) The transaction is in anyway related to an monetary instrument nature, source,
unlawful activity or offense under this Act or property is location, disposition,
that is about to be, is being or has been required under this movement or
committed; or Act to be disclosed ownership of or rights
(7) Any transaction that is similar or and filed with the with respect to said
analogous to any of the foregoing (Sec. 3 Anti-Money monetary instrument
[b-1], added by Sec. 2 of RA 9194) Laundering Council or property;
(AMLC), fails to do
F. WHEN IS MONEY LAUNDERING so.
COMMITTED (d) attempts or
conspires to commit
RA 9160 RA 10365 money laundering
SEC. 4. Money SEC. 4. Money offenses referred to in
Laundering Offense. Laundering Offense. paragraphs (a), (b) or
Money laundering Money laundering is (c);
is a crime whereby committed by any (e) aids, abets, assists
the proceeds of an person who, knowing in or counsels the
unlawful activity are that any monetary commission of the
transacted, thereby instrument or money laundering
making them appear property represents, offenses referred to in
to have originated involves, or relates to paragraphs (a), (b) or
from legitimate the proceeds of any (c) above
sources. unlawful activity (f) performs or fails to
(a) Any person (a) transacts said perform any act as a
knowing that any monetary instrument result of which he
monetary instrument or property; facilitates the offense
or property of money laundering
represents, involves, referred to in
or relates to, the paragraphs (a), (b) or
proceeds of any (c) above.
unlawful activity, Money laundering is
transacts or attempts also committed by
to transact said any covered person
monetary instrument who, knowing that a
or property. covered or suspicious
(b) Any person (b) converts, transaction is
knowing that any transfers, disposes of, required under this
monetary instrument moves, acquires, Act to be reported to
or property involves possesses or uses the Anti-Money
the proceeds of any said monetary Laundering Council
unlawful activity, instrument or (AMLC), fails to do
performs or fails to property so.
perform any act as a
result of which he
facilitates the offense
of money laundering
referred to in
paragraph (a) above.
(c) Any person (c) conceals or

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G. UNLAWFUL ACTIVITIES OR PREDICATE CRIMES
RA 9160
(1) Kidnapping for ransom under
Article 267 of Act No. 3815,
otherwise known as the Revised
Penal Code, as amended;
(2) Sections 3, 4, 5, 7, 8 and 9 of
Article Two of Republic Act No.
6425, as amended, otherwise
known as the Dangerous Drugs
Act of 1972;
(3) Section 3 paragraphs B, C, E,
G, H and I of Republic Act No.
3019, as amended; otherwise
known as the Anti-Graft and
Corrupt Practices Act;
(4) Plunder under Republic Act
No. 7080, as amended;
(5) Robbery and extortion under
Articles 294, 295, 296, 299,
300, 301 and 302 of the Revised
Penal Code, as amended;
(6) Jueteng and Masiao
punished as illegal gambling
under Presidential Decree No.
1602;
(7) Piracy on the high seas under
the Revised Penal Code, as
amended and Presidential
Decree No. 532;
(8) Qualified theft under Article
310 of the Revised Penal Code,
as amended;
(9) Swindling under Article 315
of the Revised Penal Code, as
amended;
(10) Smuggling under Republic
Act Nos. 455 and 1937;
(11) Violations under Republic
Act No. 8792, otherwise known
as the Electronic Commerce Act
of 2000;
(12) Hijacking and other
violations under Republic Act
SPECIAL LAWS
RA 9194
(1) Kidnapping for ransom under
Article 267 of Act No. 3815,
otherwise known as the Revised
Penal Code, as amended;
(2) Sections 4, 5, 6, 8, 9, 10, 12,
13, 14, 15, and 16 of Republic Act
No. 9165, otherwise known as
the Comprehensive Dangerous
Drugs Act of 2002;
(3) Section 3 paragraphs B, C, E,
G, H and I of Republic Act No.
3019, as amended, otherwise
known as the Anti-Graft and
Corrupt Practices Act;
(4) Plunder under Republic Act
No. 7080, as amended;
(5) Robbery and extortion under
Articles 294, 295, 296, 299,
300, 301 and 302 of the Revised
Penal Code, as amended;
(6) Jueteng and Masiao
punished as illegal gambling
under Presidential Decree No.
1602;
(7) Piracy on the high seas
under the Revised Penal Code,
as amended and Presidential
Decree No. 532;
(8) Qualified theft under Article
310 of the Revised Penal Code,
as amended;
"(9) Swindling under Article 315
of the Revised Penal Code, as
amended
(10) Smuggling under Republic
Act Nos. 455 and 1937;
"(11) Violations under Republic
Act No. 8792, otherwise known
as the Electronic Commerce Act
of 2000;
(12) Hijacking and other
violations under Republic Act
PAGE 312 OF 320
MERCANTILE LAW
RA 10365
(1) Kidnapping for ransom under
Article 267 of Act No. 3815,
otherwise known as the Revised
Penal Code, as amended;
(2) Sections 4, 5, 6, 8, 9, 10, 11,
12, 13, 14, 15 and 16 of Republic
Act No. 9165, otherwise known
as the Comprehensive
Dangerous Drugs Act of 2002;
(3) Section 3 paragraphs B, C, E,
G, H and I of Republic Act No.
3019, as amended, otherwise
known as the Anti-Graft and
Corrupt Practices Act;
(4) Plunder under Republic Act
No. 7080, as amended;
(5) Robbery and extortion under
Articles 294, 295, 296, 299,
300, 301 and 302 of the Revised
Penal Code, as amended;
(6) Jueteng and Masiao
punished as illegal gambling
under Presidential Decree No.
1602;
(7) Piracy on the high seas
under the Revised Penal Code,
as amended and Presidential
Decree No. 532;
(8) Qualified theft under Article
310 of the Revised Penal Code,
as amended
(9) Swindling under Article 315
and Other Forms of Swindling
under Article 316 of the Revised
Penal Code, as amended
(10) Smuggling under Republic
Act Nos. 455 and 1937
(11) Violations of Republic Act
No. 8792, otherwise known as
the Electronic Commerce Act of
2000;
(12) Hijacking and other
violations under Republic Act
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RA 9160 RA 9194 RA 10365

No. 6235; destructive arson and
murder, as defined under the
Revised Penal Code, as
amended, including those
perpetrated by terrorists against
non-combatant persons and
similar targets;
(13) Fraudulent practices and
other violations under Republic
Act No. 8799, otherwise known
as the Securities Regulation
Code of 2000;
(14) Felonies or offenses of a
similar nature that are
punishable under the penal laws
of other countries.
No. 6235; destructive arson and
murder, as defined under the
Revised Penal Code, as
amended, including those
perpetrated by terrorists against
non-combatant persons and
similar targets;
(13) Fraudulent practices and
other violations under Republic
Act No. 8799, otherwise known
as the Securities Regulation
Code of 2000;
(14) Felonies or offenses of a
similar nature that are
punishable under the penal
laws of other countries.
No. 6235; destructive arson and
murder, as defined under the
Revised Penal Code, as
amended
(33) Fraudulent practices and
other violations under Republic
Act No. 8799, otherwise known
as the Securities Regulation
Code of 2000
(34) Felonies or offenses of a
similar nature that are
punishable under the penal
laws of other countries.

In addition to the amendments to the

aforesaid provisions, RA 10365
added the following as unlawful activities:
(13) Terrorism and conspiracy to commit
terrorism as defined and penalized under
Sections 3 and 4 of Republic Act No. 9372;
(14) Financing of terrorism under Section 4
and offenses punishable under Sections 5, 6,
7 and 8 of Republic Act No. 10168, otherwise
known as the Terrorism Financing Prevention
and Suppression Act of 2012:
(15) Bribery under Articles 210, 211 and 211-A
of the Revised Penal Code, as amended, and
Corruption of Public Officers under Article 212
of the Revised Penal Code, as amended;
(16) Frauds and Illegal Exactions and
Transactions under Articles 213, 214, 215 and
216 of the Revised Penal Code, as amended;
(17) Malversation of Public Funds and
Property under Articles 217 and 222 of the
Revised Penal Code, as amended;
(18) Forgeries and Counterfeiting under
Articles 163, 166, 167, 168, 169 and 176 of the
Revised Penal Code, as amended;
(19) Violations of Sections 4 to 6 of Republic
Act No. 9208, otherwise known as the Anti-
Trafficking in Persons Act of 2003;
(20) Violations of Sections 78 to 79 of
Chapter IV, of Presidential Decree No. 705,
otherwise known as the Revised Forestry
Code of the Philippines, as amended;
(21) Violations of Sections 86 to 106 of
Chapter VI, of Republic Act No. 8550,
otherwise known as the Philippine Fisheries
Code of 1998;
(22) Violations of Sections 101 to 107, and 110
of Republic Act No. 7942, otherwise known as
the Philippine Mining Act of 1995;
(23) Violations of Section 27(c), (e), (f), (g) and
(i), of Republic Act No. 9147, otherwise known
as the Wildlife Resources Conservation and
Protection Act;
(24) Violation of Section 7(b) of Republic Act
No. 9072, otherwise known as the National
Caves and Cave Resources Management
Protection Act;
(25) Violation of Republic Act No. 6539,
otherwise known as the Anti-Carnapping Act
of 2002, as amended;

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(26) Violations of Sections 1, 3 and 5 of
Presidential Decree No. 1866, as amended,
otherwise known as the decree Codifying the
Laws on Illegal/Unlawful Possession,
Manufacture, Dealing In, Acquisition or
Disposition of Firearms, Ammunition or
Explosives;
(27) Violation of Presidential Decree No. 1612,
otherwise known as the Anti-Fencing Law;
(28) Violation of Section 6 of Republic Act No.
8042, otherwise known as the Migrant
Workers and Overseas Filipinos Act of 1995,
as amended by Republic Act No. 10022;
H. ANTI-MONEY LAUNDERING
COUNCIL (AMLC)
The Anti-Money Laundering Council shall be
composed of the Governor of the Bangko
Sentral ng Pilipinas as chairman, the
Commissioner of the Insurance Commission
and the Chairman of the Securities and
Exchange Commission as members. (Sec. 7)
H.1. FUNCTIONS
The AMLC shall act unanimously in the
discharge of its functions as defined
hereunder:
(1) to require and receive covered or
suspicious transaction reports from
covered institutions;
(2) to issue orders addressed to the
appropriate Supervising Authority or
the covered institution to determine
the true identity of the owner of any
monetary instrument or property
subject of a covered transaction or
suspicious transaction report or request
for assistance from a foreign State, or
believed by the Council, on the basis of
substantial evidence, to be, in whole or
in part, wherever located, representing,
involving, or related to, directly or
indirectly, in any manner or by any
means, the proceeds of an unlawful
activity.
(3) to institute civil forfeiture proceedings
and all other remedial proceedings
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SPECIAL LAWS MERCANTILE LAW
(29) Violation of Republic Act No. 8293,
otherwise known as the Intellectual Property
Code of the Philippines;
(30) Violation of Section 4 of Republic Act No.
9995, otherwise known as the Anti-Photo
and Video Voyeurism Act of 2009;
(31) Violation of Section 4 of Republic Act No.
9775, otherwise known as the Anti-Child
Pornography Act of 2009;
(32) Violations of Sections 5, 7, 8, 9, 10(c), (d)
and (e), 11, 12 and 14 of Republic Act No. 7610,
otherwise known as the Special Protection of
Children Against Abuse, Exploitation and
Discrimination
through the Office of the Solicitor
General;
(4) to cause the filing of complaints with
the Department of Justice or the
Ombudsman for the prosecution of
money laundering offenses;
(5) to investigate suspicious transactions
and covered transactions deemed
suspicious after an investigation by
AMLC, money laundering activities, and
other violations of this Act;
(6) to apply before the Court of Appeals,
ex parte, for the freezing of any
monetary instrument or property
alleged to be the proceeds of any
unlawful activity as defined in Section
3(i) hereof;
(7) to implement such measures as may be
necessary and justified under this Act to
counteract money laundering;
(8) to receive and take action in respect of,
any request from foreign states for
assistance in their own anti-money
laundering operations provided in this
Act;
(9) to develop educational programs on
the pernicious effects of money
laundering, the methods and
techniques used in money laundering,
the viable means of preventing money
laundering and the effective ways of
prosecuting and punishing offenders;
(10) to enlist the assistance of any branch,
department, bureau, office, agency or
instrumentality of the government,
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including government-owned and - RA 9160 RA 10365

controlled corporations, in undertaking the issuance of the months depending
any and all anti-money laundering freeze order. The upon the
operations, which may include the use depositor shall have circumstances of the
of its personnel, facilities and resources seventy-two (72) case: Provided, That
for the more resolute prevention, hours upon receipt of if there is no case
detection and investigation of money the notice to explain filed against a
laundering offenses and prosecution of why the freeze order person whose
offenders; and should be lifted. The account has been
(11) to impose administrative sanctions for AMLC has seventy- frozen within the
the violation of laws, rules, regulations two (72) hours to period determined
and orders and resolutions issued dispose of the by the court, the
pursuant thereto. (Sec. 7) depositors freeze order shall be
explanation. If it fails deemed ipso facto
Sec. 6 of RA 10365 added the following to act within seventy- lifted: Provided,
power to the AMLC: two (72) hours from further, That this
(12) to require the Land Registration receipt of the new rule shall not
Authority and all its Registries of depositors apply to pending
Deeds to submit to the AMLC, reports explanation, the cases in the courts.
on all real estate transactions freeze order shall In any case, the court
involving an amount in excess of Five automatically be should act on the
hundred thousand pesos dissolved. The fifteen petition to freeze
(P500,000.00) within fifteen (15) days (15)-day freeze order within twenty-four
from the date of registration of the of the AMLC may be (24) hours from filing
transaction, in a form to be prescribed extended upon order of the petition. If the
by the AMLC. The AMLC may also of the court, provided application is filed a
require the Land Registration that the fifteen (15)- day before a
Authority and all its Registries of day period shall be nonworking day, the
Deeds to submit copies of relevant tolled pending the computation of the
documents of all real estate courts decision to twenty-four (24)-
transactions. extend the period. hour period shall
exclude the
I. FREEZING OF MONETARY No court shall issue a nonworking days.
INSTRUMENT OR PROPERTY temporary restraining
order or writ of A person whose
RA 9160 RA 10365 injunction against any account has been
Upon determination Upon a verified ex freeze order issued by frozen may file a
that probable cause parte petition by the the AMLC except the motion to lift the
exists that any AMLC and after Court of Appeals or freeze order and the
deposit or similar determination that the Supreme Court. court must resolve
account is in any way probable cause this motion before
related to an exists that any the expiration of the
unlawful activity, the monetary instrument freeze order.
AMLC may issue a or property is in any
freeze order, which way related to an No court shall issue
shall be effective unlawful activity as a temporary
immediately, on the defined in Section restraining order or a
account for a period 3(i) hereof, the Court writ of injunction
not exceeding fifteen of Appeals may issue against any freeze
(15) days. Notice to a freeze order which order, except the
the depositor that his shall be effective Supreme Court.
account has been immediately, and
frozen shall be issued which shall not
simultaneously with exceed six (6)
PAGE 315 OF 320
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J. AUTHORITY TO INQUIRE INTO BANK
DEPOSITS
Notwithstanding the provisions of Republic
Act No. 1405, as amended, Republic Act No.
6426, as amended, Republic Act No. 8791,
and other laws, the AMLC may inquire into or
examine any particular deposit or investment
with any banking institution or non-bank
financial institution upon order of any
competent court in cases of violation of this
Act when it has been established that
(1) there is probable cause that the deposits
OR
(2) investments involved are related to an
unlawful activity as defined in Section 3(i)
hereof or a money laundering offense
under Section 4 hereof;
except that no court order shall be required in
cases involving unlawful activities defined in
Sections 3(i)(1), (2) and (12).
To ensure compliance with this Act, the
Bangko Sentral ng Pilipinas (BSP) may
inquire into or examine any deposit or
investment with any banking institution or
non-bank financial institution when the
examination is made in the course of a
periodic or special examination, in
accordance with the rules of examination of
the BSP. (Sec.11)
Sec. 2 of RA 10167 amended Sec. 11 to
read as follows:
Notwithstanding the provisions of Republic
Act No. 1405, as amended; Republic Act No.
6426, as amended; Republic Act No. 8791;
and other laws, the AMLC may inquire into or
examine any particular deposit or investment,
including related accounts, with any banking
institution or non-bank financial institution
upon order of any competent court based on
an ex parte application in cases of violations
of this Act, when it has been established that
there is probable cause that the deposits or
investments, including related accounts
involved, are related to an unlawful activity as
defined in Section 3(i) hereof or a money
laundering offense under Section 4 hereof;
except that no court order shall be required in
cases involving activities defined in Section
3(i)(1), (2), and (12) hereof, and felonies or
PAGE 316 OF 320
SPECIAL LAWS MERCANTILE LAW
offenses of a nature similar to those
mentioned in Section 3(i)(1), (2), and (12),
which are Punishable under the penal laws of
other countries, and terrorism and conspiracy
to commit terrorism as defined and penalized
under Republic Act No. 9372."
"The Court of Appeals shall act on the
application to inquire into or examine any
deposit or investment with any banking
institution or non-bank financial institution
within twenty-four (24) hours from filing of
the application."
"To ensure compliance with this Act, the
Bangko Sentral ng Pilipinas may, in the
course of a periodic or special examination,
check the compliance of a Covered institution
with the requirements of the AMLA and its
implementing rules and regulations."
"For purposes of this section, related
accounts shall refer to accounts, the funds
and sources of which originated from and/or
are materially linked to the monetary
instrument(s) or property(ies) subject of the
freeze order(s)."
"A court order ex parte must first be obtained
before the AMLC can inquire into these
related Accounts: Provided, That the
procedure for the ex parte application of the
ex parte court order for the principal account
shall be the same with that of the related
accounts."
"The authority to inquire into or examine the
main account and the related accounts shall
comply with the requirements of Article III,
Sections 2 and 3 of the 1987 Constitution,
which are hereby incorporated by reference."
Amendments under RA 9194
(a) Expands the reporting requirements to
include the reporting of suspicious
transactions regardless of the amount
involved
(b) Authorizes AMLC to inquire into or
examine any particular deposit or
investment, with any banking institution
or non-bank financial institution and their
subsidiaries and affiliates upon order of
any competent court in cases of violation
UP LAW BOC SPECIAL LAWS MERCANTILE LAW

of this Act, when it has been established

that there is probable cause that the III. Foreign Investments
deposits or investments are related to an
unlawful activity. However, no court order
Act (R.A. 7042)
is required in cases involving unlawful
activities of kidnapping for ransom, A. POLICY OF THE LAW
narcotics offenses and hijacking,
destructive arson and murder, including It is the policy of the State to attract, promote
those perpetrated by terrorists against and welcome productive investments from
non-combatant persons and similar foreign individuals, partnerships,
targets. corporations, and governments, including
their political subdivisions, in activities which
(c) Authorizes the Bangko Sentral ng significantly contribute to national
Pilipinas to inquire into or examine any industrialization and socio-economic
deposit or investment with any banking development to the extent that foreign
institution or non-bank financial investment is allowed in such activity by the
institution and their subsidiaries and Constitution and relevant laws. Foreign
affiliates when the examination is made investments shall be encouraged in
in the course of a periodic or special enterprises that significantly expand
examination, in accordance with the rules livelihood and employment opportunities for
of examination of the BSP to ensure Filipinos; enhance economic value of farm
compliance with R.A. No. 9160, as products; promote the welfare of Filipino
amended. consumers; expand the scope, quality and
volume of exports and their access to foreign
(d) Transfers the authority to freeze any markets; and/or transfer relevant
money/property from the AMLC to the technologies in agriculture, industry and
Court of Appeals. support services. Foreign investments shall
be welcome as a supplement to Filipino
capital and technology in those enterprises
serving mainly the domestic market.

As a general rule, there are no restrictions on

extent of foreign ownership of export
enterprises. In domestic market enterprises,
foreigners can invest as much as one hundred
percent (100%) equity except in areas
included in the negative list. Foreign owned
firms catering mainly to the domestic market
shall be encouraged to undertake measures
that will gradually increase Filipino
participation in their businesses by taking in
Filipino partners, electing Filipinos to the
board of directors, implementing transfer of
technology to Filipinos, generating more
employment for the economy and enhancing
skills of Filipino workers. (Sec. 2)

B. DEFINITION OF TERMS

B.1. FOREIGN INVESTMENT

An equity investment made by a non
Philippine national in the form of foreign
exchange and/or other assets actually
transferred to the Philippines and duly
registered with the Central Bank which shall
PAGE 317 OF 320
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assess and appraise the value of such assets
other than foreign exchange. (Sec. 3[c])
B.2. DOING BUSINESS IN THE
PHILIPPINES
Includes:
(e) soliciting orders, service contracts,
opening offices, whether called liaison
offices or branches;
(f) appointing representatives or distributors
domiciled in the Philippines or who in any
calendar year stay in the country for a
period or periods totalling one hundred
eighty (180) days or more;
(g) participating in the management,
supervision or control of any domestic
business, firm, entity or corporation in the
Philippines; and any other act or acts that
imply a continuity of commercial dealings
or arrangements, and contemplate to
that extent the performance of acts or
works, or the exercise of some of the
functions normally incident to, and in
progressive prosecution of, commercial
gain or of the purpose and object of the
business organization
Provided, however, That the phrase doing
business shall not be deemed to include
mere investment as a shareholder by a
foreign entity in domestic corporations duly
registered to do business, and/or the exercise
of rights as such investor; nor having a
nominee director or officer to represent its
interests in such corporation; nor appointing
a representative or distributor domiciled in
the Philippines which transacts business in its
own name and for its own account (Sec. 3 [d])
B.3. EXPORT ENTERPRISE
An enterprise wherein a manufacturer,
processor or service (including tourism)
enterprise exports sixty percent (60%) or
more of its output, or wherein a trader
purchases products domestically and exports
sixty percent (60%) or more of such
purchases (Sec. 3 [e])
B.4. DOMESTIC MARKET ENTERPRISE
An enterprise which produces goods for sale,
or renders services to the domestic market
entirely or if exporting a portion of its output
fails to consistently export at least sixty
percent (60%) thereof (Sec. 3 [f])
PAGE 318 OF 320
SPECIAL LAWS MERCANTILE LAW
C. REGISTRATION OF INVESTMENTS
ON NON-PHILIPPINE NATIONALS
Philippine National
(1) Citizen of the Philippines
(2) Domestic partnership or association
wholly owned by citizens of the
Philippines
(3) Corporation organized under the laws of
the Philippines of which at least 60% of
the capital stock outstanding and entitled
to vote is owned and held by citizens of
the Philippines
(4) Corporation organized abroad and
registered as doing business in the
Philippines under the Corporation Code
of which 100% of the capital stock
outstanding and entitled to vote is wholly
owned by Filipinos
(5) A trustee of funds for pension or other
employee retirement, where the trustee is
a Philippine national and at least 60% of
the fund will accrue to the benefit of
Philippine nationals
Provided, That where a corporation and its
non-Filipino stockholders own stocks in a
Securities and Exchange Commission (SEC)
registered enterprise, at least sixty percent
(60%) of the capital stock outstanding and
entitled to vote of each of both corporations
must be owned and held by citizens of the
Philippines and at least sixty percent (60%)
of the members of the Board of Directors of
each of both corporations must be citizens of
the Philippines, in order that the corporation
shall be considered a Philippine national (Sec.
3[a])
Registration of Investments on Non-
Philippine Nationals
Without need of prior approval, a non-
Philippine national may, upon registration
with the Securities and Exchange
Commission (SEC), or with the Bureau of
Trade Regulation and Consumer Protection
(BTRCP) of the Department of Trade and
Industry in the case of single proprietorships,
do business as defined in Section 3 (d) of this
Act or invest in a domestic enterprise up to
one hundred percent (100%) of its capital,
unless participation of non-Philippine
nationals in the enterprise is prohibited or
UP LAW BOC
limited to a smaller percentage by existing
law and/or under the provisions of this Act.
The SEC or BTRCP, as the case may be, shall
not impose any limitations on the extent of
foreign ownership in an enterprise additional
to those provided in this Act: Provided,
however, That any enterprise seeking to avail
of incentives under the Omnibus Investment
Code of 1987 must apply for registration with
the Board of Investments (BOI), which shall
process such application for registration in
accordance with the criteria for evaluation
prescribed in said Code: Provided, finally,
That a non-Philippine national intending to
engage in the same line of business as an
existing joint venture, in which he or his
majority shareholder is a substantial partner,
must disclose the fact and the names and
addresses of the partners in the existing joint
venture in his application for registration with
SEC. During the transitory period as provided
in Section 15 hereof, SEC shall disallow
registration of the applying non-Philippine
national if the existing joint venture
enterprise, particularly the Filipino partners
therein, can reasonably prove they are
capable to make the investment needed for
the domestic market activities to be
undertaken by the competing applicant.
Upon effectivity of this Act, SEC shall effect
registration of any enterprise applying under
this Act within fifteen (15) days upon
submission of completed requirements. (Sec.
5)
D. FOREIGN INVESTMENTS IN EXPORT
ENTERPRISE
Foreign investment in export enterprises
whose products and services do not fall
within Lists A and B of the Foreign
Investment Negative List provided under
Section 8 hereof is allowed up to one
hundred percent (100%) ownership.
Export enterprises which are non-Philippine
nationals shall register with BOI and submit
the reports that may be required to ensure
continuing compliance of the export
enterprise with its export requirement. BOI
shall advise SEC or BTRCP, as the case may
be, of any export enterprise that fails to meet
the export ratio requirement. The SEC or
PAGE 319 OF 320
SPECIAL LAWS MERCANTILE LAW
BTRCP shall thereupon order the non-
complying export enterprise to reduce its
sales to the domestic market to not more
than forty percent (40%) of its total
production; failure to comply with such SEC
or BTRCP order, without justifiable reason,
shall subject the enterprise to cancellation of
SEC or BTRCP registration, and/or the
penalties provided in Section 14 hereof. (Sec.
6)
E. FOREIGN INVESTMENT IN
DOMESTIC MARKET ENTERPRISE
Non-Philippine nationals may own up to one
hundred percent (100%) of domestic market
enterprises unless foreign ownership therein
is prohibited or limited by the Constitution
existing law or the Foreign Investment
Negative List under Section 8 hereof. (Sec. 7)
F. FOREIGN INVESTMENT NEGATIVE
LIST
The Foreign Investment Negative List shall
have two (2) components lists; A, and B.
(1) List A shall enumerate the areas of
activities reserved to Philippine nationals
by mandate of the Constitution and
specific laws.
(2) List B shall contain the areas of activities
and enterprises regulated pursuant to
law:
a. which are defense-related activities,
requiring prior clearance and
authorization from Department of
National Defense (DND) to engage in
such activity, such as the
manufacture, repair, storage and/or
distribution of firearms, ammunition,
lethal weapons, military ordinance,
explosives, pyrotechnics and similar
materials; unless such manufacturing
or repair activity is specifically
authorized, with a substantial export
component, to a non-Philippine
national by the Secretary of National
Defense; or
b. which have implications on public
health and morals, such as the
manufacture and distribution of
dangerous drugs; all forms of
gambling; nightclubs, bars,
UP LAW BOC SPECIAL LAWS MERCANTILE LAW

beerhouses, dance halls; sauna and

steam bathhouses and massage
clinics.

Small and medium-sized domestic market

enterprises, with paid-in equity capital less
than the equivalent two hundred thousand
US dollars (US$200,000) are reserved to
Philippine nationals, Provided that if: (1) they
involve advanced technology as determined
by the Department of Science and
Technology or (2) they employ at least fifty
(50) direct employees, then a minimum paid-
in capital of one hundred thousand US
dollars (US$100,000.00) shall be allowed to
non-Philippine nationals.

Amendments to List B may be made upon

recommendation of the Secretary of National
Defense, or the Secretary of Health, or the
Secretary of Education, Culture and Sports,
endorsed by the NEDA, approved by the
President, and promulgated by a Presidential
Proclamation.

Transitory Foreign Investment Negative List

established in Sec. 15 hereof shall be
replaced at the end of the transitory period by
the first Regular Negative List to be
formulated and recommended by NEDA,
following the process and criteria provided in
Sections 8 of this Act.
The first Regular Negative List shall
be published not later than sixty (60) days
before the end of the transitory period
provided in said section, and shall become
immediately effective at the end of the
transitory period. Subsequent Foreign
Investment Negative Lists shall become
effective fifteen (15) days after publication in
a newspaper of general circulation in the
Philippines: Provided, however, That each
Foreign Investment Negative List shall be
prospective in operation and shall in no way
affect foreign investment existing on the date
of its publication.

Amendments to List B after promulgation

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

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