COMMERCIAL LAW
COMMERCIAL LAW
COMMERCIAL LAW
COMMERCIAL LAW
3.
TABLE OF CONTENTS
LETTERS OF CREDIT .......................... 1
I.
LETTERS OF CREDIT AND TRUST
RECEIPTS .......................................................... 2
A. Definition and Nature of Letter of Credit . 2
B. Parties to a Letter of Credit ......................... 4
C. Basic Principles of Letter of Credit............. 5
1. Doctrine of Independence ................... 5
2. Fraud Exception Principle ................... 5
3. Doctrine of Strict Compliance............. 5
D. Definition and Concept of a Trust Receipt
Transaction [Sec. 4, PD 115] ....................... 8
1. Loan/Security Feature .......................... 9
2. Ownership of the Goods, Documents
and Instruments Under a Trust Receipt
9
E. Rights of the Entruster .............................. 10
F. Obligation and Liability of the Entrustee. 11
1. Payment/Delivery of Proceeds of Sale
or Disposition of Goods, Documents or
Instruments ......................................... 11
2. Return of Goods, Documents or
Instruments in Case of Non-Sale ...... 11
3. Risk of Loss of Goods, Documents or
Instruments ......................................... 11
G. Remedies Available .................................... 12
H. Warehouseman’s Lien ................................ 13
G.
H.
I.
J.
K.
NEGOTIABLE INSTRUMENTS LAW15
II. NEGOTIABLE INSTRUMENTS LAW .... 16
A. Definition and Purpose.............................. 16
B. Forms and Interpretation .......................... 16
1. Requisites of Negotiability ................. 16
2. Kinds of Negotiable Instruments ...... 21
C. Completion and Delivery........................... 22
1. Insertion of Date................................. 22
2. Incomplete but Delivered Instruments
22
3. Incomplete
and
Undelivered
Instruments ......................................... 22
4. Complete but Undelivered Instruments
23
D. Signature ...................................................... 24
1. Signing in Trade Name ....................... 24
2. Signature of Agent .............................. 24
3. Indorsement by Minor or Corporation
24
4. Forgery ................................................. 24
E. Consideration.............................................. 27
1. Who is a Holder for Value (HFV)? ... 27
2. Burden of Proof – Presumption of
Consideration ...................................... 27
3. Effect of Want of Consideration ....... 27
F. Accommodation Party ............................... 28
1. Liability of an Accommodation Party 28
2. Accommodation Party as Surety ....... 28
L.
M.
N.
O.
P.
Q.
Corporation as Accommodation Party
28
Negotiation ................................................. 29
1. Distinguished from Assignment ........ 29
2. Modes of Negotiation......................... 29
3. Kinds of Indorsement ........................ 31
Rights of the Holder .................................. 34
1. Holder in Due Course (HDC) ........... 34
2. Holder Not in Due Course ................ 37
3. Defenses against the Holder .............. 37
Liabilities of Parties .................................... 38
1. Maker ................................................... 38
2. Drawer ................................................. 38
3. Acceptor .............................................. 38
4. Indorser................................................ 39
5. Warranties ............................................ 40
Presentment for Payment .......................... 41
1. Necessity of Presentment for Payment
41
2. Parties to Whom Presentment for
Payment Should Be Made .................. 41
3. When the Requirement of Presentment
May Be Dispensed With ..................... 42
4. Dishonor by Non-Payment ............... 42
Notice of Dishonor .................................... 43
1. Parties to be Notified ......................... 43
2. Parties Who May Give Notice of
Dishonor.............................................. 44
3. Effect of Notice .................................. 44
4. Form of Notice ................................... 44
5. Waiver .................................................. 44
6. Dispensation with Notice................... 44
7. Effect of Failure to Give Notice ....... 45
Discharge of Negotiable Instrument ........ 46
1. Discharge of Negotiable Instrument. 46
2. Discharge of Parties Secondarily Liable
48
3. Right of Party Who Discharged
Instrument ........................................... 49
4. Renunciation by Holder ..................... 49
Material Alteration...................................... 50
1. Concept................................................ 50
2. Effect of Material Alteration.............. 50
Acceptance .................................................. 51
1. Definition ............................................ 51
2. Manner ................................................. 51
3. Time for Acceptance .......................... 51
4. Rules Governing Acceptance............. 51
Presentment for Acceptance ..................... 52
1. Time/Place/Manner of Presentment 53
2. Effect of Failure to Make Presentment
53
3. Dishonor by Non-Acceptance........... 53
Promissory Notes ....................................... 54
Checks ......................................................... 55
1. Definition ............................................ 55
2. Kinds .................................................... 55
3. Presentment for Payment................... 55
COMMERCIAL LAW
INSURANCE CODE ............................ 57
TRANSPORTATION LAWS ................ 99
III. INSURANCE ................................................... 58
A. Concept of Insurance................................. 58
1. Contract of Insurance......................... 58
2. Doing or Transacting Insurance
Business ............................................... 59
3. Governing Law ................................... 59
4. Parties to an Insurance Contract ....... 60
5. Bancassurance ..................................... 60
6. Pre-Need Plans.................................... 60
7. Health Care Agreements .................... 61
B. Elements of an Insurance Contract .......... 61
1. Insurable Interest ................................ 61
2. Cause and Risk of Loss or Damage .. 61
3. Consideration ...................................... 62
4. Risk-Distributing Scheme .................. 62
5. Meeting of the Minds ......................... 62
C. Characteristics of an Insurance Contract . 62
1. In General............................................ 62
2. For Specific Kinds of Insurance
Contracts.............................................. 63
D. Classes ......................................................... 64
1. Marine Insurance ................................ 64
2. Fire ....................................................... 69
3. Casualty ................................................ 70
4. Suretyship ............................................ 71
5. Life ....................................................... 72
6. Compulsory Motor Vehicle Liability
Insurance ............................................. 75
E. Insurable Interest........................................ 76
1. In Life/Health ..................................... 77
2. In Property .......................................... 78
3. Double Insurance and Over Insurance;
Reinsurance ......................................... 80
4. Multiple or Several Interests on Same
Property ............................................... 81
F. Perfection of the Contract of Insurance .. 83
1. Offer and Acceptance/ Consensual .. 83
2. Premium Payment............................... 83
3. Cover Notes ........................................ 84
4. Non-Default Options in Life Insurance
85
5. Reinstatement of a Lapsed Policy of Life
Insurance ............................................. 86
6. Refund of Premiums .......................... 86
G. Rescission of Insurance Contracts ............ 87
1. Concealment........................................ 87
2. Misrepresentation/ Omissions .......... 90
3. Breach of Warranties .......................... 91
H. Claims Settlement and Subrogation .......... 93
1. Concept of Loss .................................. 93
2. Notice and Proof of Loss................... 94
3. Guidelines on Claims Settlement....... 95
I. Insurance Commissioner ........................... 97
1. Jurisdiction and Adjudicatory Powers97
2. Revocation of Certificate of Authority
98
3. Liquidation of Insurance Company... 98
IV. TRANSPORTATION LAWS ....................... 99
A. Common Carriers ....................................... 99
1. Concept................................................ 99
2. Diligence Required of Common
Carriers............................................... 102
3. Liabilities of Common Carriers ....... 102
B. Vigilance over Goods............................... 103
1. Liability, in General........................... 103
2. Exempting Causes ............................ 103
3. Contributory Negligence .................. 105
4. Duration
of
Extraordinary
Responsibility for Goods ................. 105
5. Stipulation for Limitation of Liability
106
6. Liability for Baggage of Passengers . 108
C. Safety of Passengers ................................. 109
1. Liability, in general ............................ 109
2. Void Stipulations............................... 109
3. Duration of Liability ......................... 109
4. Liability for Acts of Others .............. 111
5. Contributory Negligence .................. 112
6. Extent of Liability for Damages ...... 112
D. Bill of Lading ............................................ 114
1. Three-Fold Character ....................... 114
2. Delivery of Goods ............................ 114
3. Period for Filing Claims ................... 115
4. Period for Filing Actions.................. 116
E. Admiralty and Maritime Commerce ....... 117
1. Charter Parties ................................... 117
2. Liability of Ship Owners and Shipping
Agents ................................................ 119
3. Accidents and Damages in Maritime
Commerce ......................................... 121
4. Carriage of Goods by Sea Act ......... 125
5. Special
Contracts
of
Maritime
Commerce ......................................... 126
6. Passengers on Sea Voyage................ 127
F. The Warsaw Convention ......................... 127
1. Applicability....................................... 127
2. Limitation of Liability ....................... 128
3. Willful Misconduct............................ 129
4. Jurisdiction......................................... 129
CORPORATION CODE..................... 130
V. CORPORATION LAW ............................... 131
A. Corporation............................................... 131
1. Definition .......................................... 131
B. Classes of Corporations ........................... 132
1. Stock Corporation............................. 132
2. Non-Stock Corporation ................... 132
3. Other Corporations .......................... 133
C. Nationality of Corporations .................... 136
1. Place of Incorporation Test ............. 136
2. Control Test ...................................... 136
3. Grandfather Rule .............................. 137
D. Corporate Juridical Personality................ 139
COMMERCIAL LAW
1.
E.
F.
G.
H.
I.
Doctrine
of
Separate
Juridical
Personality ......................................... 139
2. Doctrine of Piercing the Corporate Veil
140
Incorporation and Organization ............. 143
1. Promoter............................................ 143
2. Steps in Incorporation ...................... 143
3. Number and Qualifications of
Incorporators .................................... 145
4. Corporate Name — Limitations on Use
of Corporate Name........................... 145
5. Corporate Term ................................ 145
6. Minimum
Capital
Stock
and
Subscription Requirements .............. 146
7. Articles of Incorporation.................. 146
8. Registration and Issuance of Certificate
of Incorporation................................ 150
9. Adoption of By-Laws ....................... 150
Corporate Powers..................................... 152
1. General Powers; Theory of General
Capacity [Sec. 36] .............................. 152
2. Specific Powers; Theory of Specific
Capacity [Secs. 37-44] ....................... 152
3. How Corporate Powers are Exercised
156
4. Trust Fund Doctrine ........................ 157
Board of Directors and Trustees............. 159
1. Doctrine of Centralized Management
159
2. Business Judgment Rule ................... 160
3. Tenure,
Qualifications,
and
Disqualifications of Directors or
Trustees.............................................. 160
4. Elections [Sec. 24] ............................. 161
5. Removal ............................................. 162
6. Filling of Vacancies [Sec. 29] ........... 162
7. Compensation [Sec. 30] .................... 162
8. Fiduciary Duties and Liability Rules 162
9. Responsibility for Crimes ................. 164
10. Inside Information ............................ 165
11. Contracts............................................ 165
12. Executive Committee [Sec. 35] ........ 166
13. Meetings............................................. 166
Stockholders and Members ..................... 168
1. Rights of Stockholders and Members
168
2. Participation in Management ........... 169
3. Proprietary Rights ............................. 175
4. Remedial Rights ................................ 179
5. Obligations of a Stockholder ........... 180
6. Meetings............................................. 182
Capital Structure ....................................... 184
1. Subscription Agreements ................. 184
2. Consideration for Stocks .................. 185
3. Shares of Stock .................................. 186
4. Payment of Balance of Subscription
[Secs. 66 and 67]................................ 191
5. Certificate of Stock ........................... 192
6. Stock and Transfer Book ................. 195
7.
Disposition and Encumbrance of
Shares ................................................. 195
J. Dissolution and Liquidation .................... 196
1. Modes of Dissolution ....................... 196
2. Methods of Liquidation.................... 198
K. Other Corporations.................................. 200
1. Close Corporations ........................... 200
2. Non-Stock Corporations .................. 205
3. Religious Corporations ..................... 206
4. Foreign Corporations ....................... 207
L. Mergers and Consolidations .................... 211
1. Definition and Concept.................... 211
2. Constituent
vs.
Consolidated
Corporation ....................................... 211
3. Plan of Merger or Consolidation [Sec.
76] ....................................................... 211
4. Articles of Merger or Consolidation 211
5. Procedure........................................... 211
6. Limitations ......................................... 212
7. Effects [Sec. 80] ................................ 212
SECURITIES REGULATION CODE 214
VI. SECURITIES REGULATION CODE .... 215
A. State Policy ................................................ 215
B. Definition of Securities ............................ 215
C. Kinds of Securities ................................... 216
1. Exempt Securities [Sec. 9] ................ 216
2. Exempt Transactions [Sec. 10] ........ 217
D. Procedure for Registration of Securities. 220
1. Registration of Securities [Secs. 12 and
13] ....................................................... 220
2. Powers of the SEC During Registration
222
E. Prohibitions on Fraud, Manipulation and
Insider Trading ......................................... 222
1. Manipulation of Security Prices [Sec. 24]
222
2. Fraudulent Transactions [Sec. 26] ... 224
3. Insider Trading [Sec. 27] .................. 225
F. Protection of Investors ............................ 226
1. Tender Offer Rule [Sec. 19] ............. 226
2. Rules on Proxy Solicitation [Sec. 20]228
3. Disclosure Rule ................................. 229
G. Civil Liability ............................................. 231
1. Civil Liabilities on Account of False
Registration Statement [Sec. 56] ...... 231
2. Civil Liabilities Arising in Connection
With Prospectus, Communications and
Reports [Sec. 57] ............................... 232
3. Civil Liability of Fraud in Connection
with Securities Transactions [Sec. 58]
232
4. Civil Liability for Manipulation of
Security Prices [Sec. 59] .................... 232
5. Civil Liability With Respect to
Commodity Futures Contracts and PreNeed Plans [Sec. 60] ......................... 233
COMMERCIAL LAW
6.
Civil Liability on Account of Insider
Trading [Sec. 61] ............................... 233
7. Liabilities of Controlling Persons, Aider
and Abettor and Other Secondary
Liability [Sec. 51] ............................... 233
H. Settlements, Prescriptive Period, and
Damages .................................................... 237
1. Settlement of Cases [Sec. 55] ........... 237
2. Prescription of Actions [Sec. 62] ..... 237
3. Damages [Sec. 63] ............................. 238
BANKING LAWS ................................ 239
VII.BANKING LAWS ........................................ 240
A. The New Central Bank Act (NCBA) [R.A.
7653, as amended by R.A. 11211] ........... 240
1. State Policies ...................................... 240
2. Responsibility and Primary Objective of
the Bangko Sentral ng Pilipinas (BSP)
240
3. Monetary Board (MB) ...................... 241
4. The BSP and Banks in Distress ....... 242
5. Legal Tender Power .......................... 245
6. Foreign Exchange Operations ......... 246
B. Law on Secrecy of Bank Deposits [RA 1405,
as Amended] ................................................ 247
1. Policy.................................................. 247
2. Prohibited Acts ................................. 247
3. Deposits Covered ............................. 247
4. Exceptions ......................................... 248
5. Power of the Ombudsman to Examine
Accounts ............................................ 248
6. Garnishment of Deposits ................. 249
7. Confidentiality of Foreign Currency
Deposits ............................................. 249
C. General Banking Law of 2000 (GBL) .... 250
1. Introduction ...................................... 250
2. Quasi-Banks and Trust Entities ....... 250
3. Core Banking Functions................... 251
4. Bank Powers and Liabilities ............. 251
5. Nature of Bank Funds and Bank
Deposits ............................................. 252
6. Stipulation on Interests .................... 253
7. Grant of Loans and Security
Requirements..................................... 253
8. Diligence Require of Banks.............. 256
INTELLECTUAL PROPERTY CODE
............................................................. 257
VIII.
INTELLEC-TUAL PROPERTY CODE
258
A. Intellectual Property Rights in General .. 258
1. Intellectual Property Rights.............. 258
2. The Difference Between Copyright,
Trademarks, and Patent Lie in The
Scope of Protection .......................... 258
3. Other Forms of Intellectual Property
258
B. Patents ....................................................... 259
1.
2.
3.
4.
5.
6.
7.
Purpose of the Patent Law............... 259
What are Patentable .......................... 259
Non-Patentable Inventions .............. 260
Ownership of a Patent...................... 261
Term of a Patent ............................... 261
Cancellation of Patent ...................... 262
Remedy of the True and Actual
Inventor ............................................. 262
8. Rights Conferred by a Patent ........... 262
9. Limitations of Patent Rights ............ 262
10. Patent Infringement .......................... 263
11. Tests in Patent Infringement ........... 264
12. Criminal
Liability
for
Patent
Infringement arises only after a Final
Judgment Against the Infringer ....... 264
13. Licensing ............................................ 265
14. Assignment and Transmission of Rights
267
C. Trademarks ............................................... 268
1. Definition of Marks, Collective Marks,
Trade Names ..................................... 268
2. Acquisition of Ownership of Mark . 269
3. Acquisition of Ownership of Trade
Name.................................................. 270
4. Non-Registrable Marks..................... 270
5. Use of Mark as a Requirement ........ 271
6. Tests To Determine Confusing
Similarity between Marks ................. 272
7. Well-Known Marks........................... 273
8. Rights Conferred by Registration .... 273
9. Infringement and Remedies ............. 274
10. Unfair Competition........................... 277
11. Trade Names or Business Names ... 278
12. Collective Marks................................ 278
D. Copyright................................................... 279
1. Definition .......................................... 279
2. Basic Principles ................................. 279
3. Copyrightable Works ........................ 279
4. Non-Copyrightable Works............... 280
5. Rights of Copyright Owner ............. 281
6. Rules on Ownership of Copyright .. 285
7. Limitations on Copyright ................. 286
8. Copyright infringement .................... 287
SPECIAL LAWS .................................. 290
IX. SPECIAL LAWS ............................................ 291
A. Anti-Money Laundering Act ................... 291
1. Policy of the Law .............................. 291
2. Covered Institutions and Their
Obligations [RA 9160, as amended by
RA 10365 and RA 10927] ................ 291
3. Covered Transactions ....................... 292
4. Suspicious Transactions ................... 292
5. Obligations of Covered Institutions 292
6. When is Money Laundering Committed
293
7. Unlawful Activities or Predicate Crimes
293
COMMERCIAL LAW
8.
B.
C.
D.
E.
F.
Anti-Money
Laundering
Council
(AMLC).............................................. 294
9. Freezing of Monetary Instrument or
Property ............................................. 295
10. Forfeiture ........................................... 296
11. Authority to Inquire into Bank Deposits
297
Electronic Commerce Act of 2000 (RA
8792) .......................................................... 298
1. Policy.................................................. 298
2. Application ........................................ 298
3. Legal Recognition of Electronic Data
Messages, Documents and Signatures
298
4. Presumption Relating to Electronic
Signatures........................................... 300
5. Admissibility and Evidential Weight of
Electronic Data Message or Electronic
Document.......................................... 300
6. Obligation of Confidentiality ........... 300
7. Formation of Contracts in Electronic
Form................................................... 300
Data Privacy Act (RA 10173) .................. 301
1. Scope .................................................. 301
2. Personal vs. Sensitive Personal
Information ....................................... 302
3. Processing of Personal Information 303
4. Rights of Data Subject...................... 304
Financial Rehabilitation and Insolvency Act
of 2010 (RA 10142) .................................. 306
1. Key Concepts and Definitions......... 306
2. Nature of Rehabilitation Proceedings
306
3. Court–Supervised Proceedings ........ 306
4. Pre-Negotiated Rehabilitation.......... 315
5. Out-of-Court Rehabilitation ............ 316
6. Conversion
into
Liquidation
Proceedings ....................................... 316
7. Liquidation......................................... 316
Philippine Competition Act (RA 10667) 322
1. Overview............................................ 322
2. Policy [Sec. 2] .................................... 323
3. Application [Sec. 3] ........................... 323
4. Philippine Competition Commission
324
5. Mergers and Acquisitions ................. 325
6. Anti-Competitive Agreements [Sec. 14]
327
7. Abuse of Dominant Position [Sec. 15]
328
8. Disposition of Cases ......................... 329
Foreign Investments Act [R.A. 7042 as
amended by RA 8179].............................. 331
1. Policy of the Law .............................. 331
2. Definition of Terms.......................... 332
3. Registration of Investments on NonPhilippine Nationals ......................... 333
4. Foreign Investments in Export
Enterprise .......................................... 334
5.
6.
Foreign Investment in Domestic Market
Enterprise .......................................... 334
Foreign Investment Negative List ... 334
U.P. LAW BOC
LETTERS OF CREDIT
COMMERCIAL LAW
LETTERS OF CREDIT
Commercial Law
Page 1 of 330
U.P. LAW BOC
LETTERS OF CREDIT
1.
I. LETTERS OF
CREDIT AND
TRUST RECEIPTS
A. Definition and Nature of
Letter of Credit
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].
It is a written instrument whereby the writer requests
or authorizes the addressee to pay money or deliver
goods to a third person and assumes responsibility for
payment of debt therefor to the addressee [Transfield
Philippines v. Luzon Hydro, G.R. No. 146717 ( 2004)].
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.
Those which do not have one of these conditions
shall be mere letters of recommendation [Art. 568,
Code of Commerce].
NATURE
1. Financial device – L/Cs are developed by
merchants as a convenient and relatively safe
mode of dealing with sales of goods to satisfy the
seemingly irreconcilable interests of a seller, who
refuses to part with his goods before he is paid,
and a buyer, who wants to have control of the
goods before paying [Bank of America v. CA, G.R.
No. 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.
The primary purpose of the letter of credit is to
substitute for and therefore support, the
agreement of the buyer/importer to pay money
under a contract or other arrangement. It creates
in the seller/exporter a secure expectation of
payment [Reliance Commodities, Inc. v. Daewoo
Industrial Co., Ltd., G.R. No. L-100831 (1993)].
A L/C is a financial device developed by merchants
as a convenient and relatively safe mode of dealing
with sales of goods. The buyer is required to contract
a bank to issue a L/C in favor of the seller so that, by
virtue of the L/C, the issuing bank can authorize the
seller to draw drafts and engage to pay them upon
their presentment simultaneously with the tender of
documents required by the L/C [Bank of America v.
CA, G.R. No. 105395 (1993)].
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)].
GOVERNING LAW
Whether those who execute them be merchants or
not, and whether specified in this Code or not, the
instrument should be governed by:
a. The provisions contained it
b. In their absence, by the usages of commerce
generally observed in each place, and
c. In the absence of both rules, by those of the Civil
Law.
Those acts contained in this Code and all others of
analogical character shall be deemed as acts of
commerce [Art. 2, Code of Commerce].
Essential Conditions of Letters of Credit:
COMMERCIAL LAW
2.
Composite of three distinct contracts – An
L/C transaction involves three distinct but
intertwined relationships:
a. The contract between the buyer and the
seller.
b. The contract of the buyer with the issuing
bank, often called the “Application and
Agreement”
or
“Reimbursement
Agreement” and,
c. The letter of credit proper in which the bank
promises to pay the seller pursuant to the
terms and conditions stated therein [Keng
Hua Paper Products Co. v. CA, G.R. No.
116863 (1998)].
A LETTER OF CREDIT IS NOT:
1. A third-party beneficiary contract – because
the issuer must honor drafts drawn against a
letter regardless of problems subsequently arising
in the underlying contract.
2. An assignment by the customer to the
beneficiary – since the bank’s customer cannot
draw on the letter.
Page 2 of 330
U.P. LAW BOC
3.
4.
LETTERS OF CREDIT
A contract of suretyship or guarantee –
because it entails a primary liability following
default.
A negotiable instrument – because it is not
payable to order or bearer and is generally
conditional, yet the draft presented under it is
often negotiable. [Transfield Philippines, Inc. v.
Luzon Hydro Corporation Australia, et al., G.R. No.
146717 (2004)]
Duration of Letters of Credit
1. Period stipulated by the parties; or
2. If no period is fixed:
a. 6 months from date if used in the Philippines
b. 12 months if abroad
Types of letters of credit
1. As to the type of the main contract
a. Commercial Letter of Credit
b. Standby Letter of Credit
Commercial
Standby
Letter of Credit
Letter of Credit
Use
Method of payment in a
contract of sale
Used to guarantee or
secure an obligation in a
non-sale transaction
Purpose
Reduces the risk of
non-payment
of
purchase price under a
contract of sale
Reduces the risk of
non-performance of a
contractual obligation
The credit is payable
upon the presentation
by the seller-beneficiary
that he has taken
affirmative steps to
comply with the sale
agreement.
The credit is payable
upon certification of a
party’s
nonperformance of the
agreement.
Beneficiary must certify
by document that he
has performed the
contract.
Beneficiary must certify
that his obligor has not
performed the contract.
When Payable
Beneficiary
2. As to revocability
a. Revocable L/C - One which can be
revoked by the issuing bank without the
consent of the buyer and seller
b. Irrevocable L/C - One which the issuing
bank cannot revoke without the consent of
the buyer and seller [FEATI Bank and Trust
Co. v. CA, G.R. No. 94209 (1991)]
3. As to the obligation
correspondent bank
assumed
by
Page 3 of 330
a.
COMMERCIAL LAW
Unconfirmed L/C - One which continues
to be the obligation of the issuing bank
b. Confirmed L/C - One which is supported
by the absolute assurance to the beneficiary
that the confirming bank will undertake the
issuing bank's obligation as its own
according to the terms and conditions of the
credit [FEATI Bank and Trust Co. v. CA, G.R.
No. 94209 (1991)]
U.P. LAW BOC
LETTERS OF CREDIT
COMMERCIAL LAW
B. Parties to a Letter of
Credit
letter of credit. It is not a privy to the contract of
sale between the buyer and the seller. Its
relationship is only with that of the issuing bank.
RIGHTS AND OBLIGATIONS OF THE
PARTIES
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)].
There would be at least three parties to a letter of
credit [Lee v. CA, G.R. No. 117913 (2002)]:
1.
Buyer/Importer/Account Party – one who
procures the letter of credit and obliges himself
to reimburse the issuing bank upon receipt of
documents of title.
2.
Issuing/Opening Bank – the bank which is
usually the buyer’s bank and actually issues the
letter of credit [Lee v. CA, G.R. No. 117913
(2002)].
The services of the notifying bank must always
be utilized if the letter of credit is to be advised
to the beneficiary through cable [Lee v. CA, G.R.
No. 117913 (2002)].
2.
The bank which confirms the letter of credit
issued by the opening bank [Lee v. CA, G.R. No.
117913 (2002)].
It undertakes:
a. To pay the seller upon receipt of the draft
and proper documents of title; and
b. To surrender the documents to the buyer
upon reimbursement [Bank of America v. CA,
G.R. No. 105395 (1993)].
The obligation of the issuing bank to pay the
seller is direct, primary, absolute, definite and
solidary with the buyer, in the absence of
stipulation in the letter of credit [Metropolitan
Waterworks and Sewerage System v. Daway, G.R. No.
160732 (2004)].
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.
Seller/Exporter/Beneficiary – one who ships
the goods to the buyer in compliance with a
contract of sale and delivers the documents of
title and draft to the issuing bank to recover
payment.
4.
Depending on the transaction, the number of parties
to the letter of credit may be increased. Thus, the
different types of correspondent banks:
1.
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)].
An issuing bank that paid the beneficiary of an
expired letter of credit can recover from the
applicant-buyer, who obtained goods from the
beneficiary to prevent unjust enrichment
[Rodzssen Supply Co. v. Far East Bank & Trust Co.,
G.R. No. 109087 (2001)].
3.
Confirming Bank – lends credence to the letter
of credit issued by a lesser known issuing bank
[Bank of America v. CA, G.R. No. 105395 (1993)].
Advising/Notifying Bank – the bank which
conveys to the seller the existence of the credit.
The bank assumes no liability except to notify
and/or transmit to the seller the existence of the
Page 4 of 330
Paying Bank – the bank which buys or
discounts the drafts contemplated by the letter of
credit, if such draft is to be drawn on the opening
bank or on another designated bank not in the
city of the beneficiary [Lee v. CA, G.R. No.
117913 (2002)].
It undertakes to encash the drafts drawn by the
exporter [Bank of America v. CA, G.R. No. 105395
(1993)].
U.P. LAW BOC
LETTERS OF CREDIT
call on the letter of credit as a security in case the
commercial transaction does not push through,
or the applicant fails to perform his part of the
transaction [Transfield Philippines v. Luzon Hydro,
G.R. No. 146717 (2004)].
C. Basic Principles of Letter
of Credit
1. Doctrine of Independence
The principle of independence assures the sellerbeneficiary of prompt payment regardless or independent
of any breach of the main contract. By this principle, the
issuing bank determines compliance with the letter of
credit only by examining the shipping documents
presented; it is precluded from determining whether
the main contract is accomplished or not. [Bank of
America v. CA, G.R. No. 105395 (1993)].
Under this principle, banks assume no liability or
responsibility for the form, sufficiency, accuracy,
genuineness, falsification or legal effect of any
documents, or for the general and/or particular
conditions stipulated in the documents or
superimposed thereon, nor do they assume any
liability or responsibility for the description, quantity,
weight, quality, condition, packing, delivery, value or
existence of the goods represented by any documents,
or for the good faith or acts and/or omissions,
solvency, performance or standing of the consignor,
the carriers, or the insurers of the goods, or any other
person whomsoever [PNB v. San Miguel
Corporation, G.R. No. 186063 (2014), citing 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.
In both cases the payment may be enjoined if in the
light of the purpose of the credit the payment of the
credit would constitute fraudulent abuse of the credit
[Transfield Philippines v. Luzon Hydro, G.R. No. 146717
(2004].
The independence doctrine works to the benefit of
both the issuing bank and the beneficiary:
a. With the letter of credit from the issuing bank,
the party who applied for and obtained it may
confidently present the letter of credit to the
beneficiary as a security to convince the
beneficiary to enter into the business transaction.
b. On the other hand, the beneficiary of the letter of
credit, can be rest assured of being empowered to
COMMERCIAL LAW
Justification Aspect – A demand for payment under
the credit prima facie means that the beneficiary has
performed his part of the underlying transaction and
is prima facie entitled to payment. The justification is
only prima facie, because the documents tendered may
be proper while there is a defect in the underlying
transaction.
2. Fraud Exception Principle
The independence principle admits of an exception,
referred to as the Fraud Exception Rule. This
principle 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.
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:
a. Clear proof of fraud,
b. The fraud constitutes fraudulent abuse of the
independent purpose of the letter of credit and
only fraud under the main agreement, and
c. Irreparable injury might follow if injunction is
not granted or the recovery of damages would be
seriously damaged.
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 may
not thereafter be able to recover from the buyer or
the issuing bank, as the case may be, the money thus
Page 5 of 330
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LETTERS OF CREDIT
paid to the beneficiary. An honoring entity deals only
with documents and is not in a position to determine
whether or not the documents required by the letter
of credit are material or superfluous [SOMERA citing
FEATI Bank and Trust Co. v. CA, G.R. No. 94209
(1991)].
Page 6 of 330
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COMMERCIAL LAW
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Commercial Law
Page 7 of 330
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D. Definition and Concept
of a Trust Receipt
Transaction [Sec. 4, PD
115]
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
interest 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” [Colinares v. Court of Appeals, G.R. No. 90828
(2000)].
A trust receipt agreement 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. 158649 (2013)].
TRUST RECEIPT
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 (entregarla) or to
return the goods, documents or instruments
themselves if they are unsold or not otherwise
disposed of (devolvera), in accordance with the
terms and conditions specified in the trust
receipt, or for or for other purposes substantially
equivalent to any of the following:
In case of goods or
documents:
a. To sell the goods or a.
procure their sale;
or
b. To manufacture or b.
process the goods
with the purpose of c.
ultimate sale;
In case of
instruments:
To sell or procure
their
sale
or
exchange; or
To deliver them to a
principal; or
To
effect
the
consummation of
In case of goods or
documents:
Provided, that, 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; or
c. To load, unload,
ship or transship or
otherwise deal with
them in a manner
preliminary
or
necessary to their
sale
COMMERCIAL LAW
In case of
instruments:
some transactions
involving delivery
to a depository or
register; or
d. To effect their
presentation,
collection,
or
renewal
FORM OF A TRUST RECEIPT
No further formality of execution or authentication
shall be necessary to the validity of a trust receipt [Sec.
3, PD 115].
It need not be in any particular form, but every such
receipt must substantially contain:
1. A description of the goods, documents, or
instruments subject of the trust receipt;
2. The total invoice value of the goods and the
amount of the draft to be paid by the entrustee;
3. An undertaking or a commitment of the
entrustee: (a) to hold in trust for the entruster the
goods, documents or instruments therein
described, (b) to dispose of them in the manner
provided for in the trust receipt, and (c) to turn
over the proceeds of the sale of the goods,
documents, or instruments to the entruster to the
extent of the amount owing to the entruster or as
appears in the trust receipt, or to return the goods,
documents, or instruments in the event of their
non-sale within the period specified therein.
The trust receipts may contain other terms and
conditions agreed upon by the parties in addition to
those enumerated provided that they shall not be
contrary to the provisions of this decree, any existing
laws, public policy or morals, public order or goods
customs. [Sec. 5, PD 115]
A trust receipt may be denominated in the Philippine
currency or any foreign currency acceptable and
eligible as part of international reserves of the
Philippines. However, payment shall be made in its
equivalent Philippine currency. [Sec. 6, PD 115]
Page 8 of 330
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PARTIES
TO
A
TRUST
RECEIPT
AGREEMENT [Sec. 3, PD 115]
Entruster
Entrustee
Person having or taking
possession of goods,
Person holding title documents
or
over
the
goods, instruments under a
documents,
or trust
receipt
instruments subject of a transaction,
trust
receipt and any successor in
transaction, and any interest of such person
successor in interest of for the purpose or
such person
purposes specified in
the
trust
receipt
agreement
OBJECTS
OF
A
TRUST
AGREEMENT [Sec. 3, PD 115]
Goods
Instruments
Chattels and
personal
property
other than:
1. Money,
2. Things in
action, or
3. Things so
affixed to
land as to
become a
part
thereof
Any
negotiable
instrument;
any certificate of
stock,
bond,
debenture
for
payment of money
issued
by
a
corporation, or any
certificate
of
deposit,
participation
certificate
or
receipt, any credit
or
investment
instrument of a sort
marketed in the
ordinary course of
business whereby
the entrustee after
issuance of a trust
receipt appears to
be the owner.
Does not include a
document
as
defined under PD
115
RECEIPT
Documents
of title
Written or
printed
evidence of
title
to
goods
COMMERCIAL LAW
secures an indebtedness. [Lee v. CA, G.R. No. 117913
(2002)]
A trust receipt is a security agreement pursuant to
which a bank acquires a “security interest” in the
goods. It secures an indebtedness and there can be no
such thing as security interest that secures no
obligation [Sps. Vintola v. Insular Bank, GR No. 73271
(1987)]
2. Ownership of the Goods,
Documents and Instruments
Under a Trust Receipt
To secure that the banker (entruster) 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 ownership of the merchandise continues to be
vested in the owner thereof or in the person who has
advanced payment (entruster), until he has been paid
in full, or if the merchandise has already been sold,
until 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)]
On the other hand, the importer (entrustee) becomes
absolute owner of the imported merchandise as soon
as he has paid its price.
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 fully complied with his
obligation under the trust receipt. [Sec. 4(1), PD 115]
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 that
Page 9 of 330
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E. Rights of the Entruster
PURCHASERS
FOR VALUE
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 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 [Sec. 7, PD
115]
Note: The entrustee shall receive any surplus but shall
be liable to the entruster for any deficiency.
The entruster holding a security interest shall not,
merely by virtue of such interest or having given the
entrustee liberty of sale or other disposition of the
goods, documents or instruments under the terms of
the trust receipt transaction be responsible as
principal or as vendor under any sale or contract
to sell made by the entrustee [Sec. 8, PD 115].
VALIDITY OF ENTRUSTER’S SECURITY
INTEREST:
AGAINST THE The
entruster's
security
CREDITORS
interest in goods, documents,
OF
THE or instruments pursuant to the
ENTRUSTEE
terms of a trust receipt shall be
valid as against all creditors of
the entrustee for the duration
of the trust receipt agreement
[Sec. 12, PD 115].
AGAINST
INNOCENT
A purchaser of goods from an
entrustee with right to sell, or
of documents or instruments
Page 10 of 330
COMMERCIAL LAW
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 [Sec. 11, PD
115].
U.P. LAW BOC
TRUST RECEIPTS LAW
F. 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. [Sec. 9, PD 115]
Note: When both parties enter into an agreement
knowing that the return of the goods is not possible
then it is not a true trust receipt transaction. If the
only obligation is the return of the proceeds then it
becomes a mere loan [Land Bank of the Philippines v.
Perez, G.R. No. 166884 (2012)].
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) [Sec. 13, PD
115].
Art 315, Revised Penal Code. Swindling
(Estafa).
With unfaithfulness or abuse of confidence,
namely:
COMMERCIAL LAW
delivery of or to return the same, even though such
obligation be totally or partially guaranteed by a
bond; or by denying having received such money,
goods, or other property.
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). [Sec. 13, PD 115]
Intent to defraud is presumed when:
a. The entrustee fails to turn over the proceeds of
the sale of goods covered by the trust receipt to
the entruster; or
b. When the entrustee fails to return the goods
under trust, if they are not disposed of in
accordance with the terms of the trust receipts.
[Land Bank of the Philippines v. Perez, G.R. No.
166884 (2012)]
PENAL SANCTION IF OFFENDER IS A
CORPORATION
If the violation or offense is committed by a
corporation, partnership, association or other juridical
entities, the penalty shall be imposed upon the
directors, officers, employees or other officials or
persons therein responsible for the offense,
without prejudice to the civil liabilities arising
from the criminal offense. [Sec. 13, PD 115]
3. Risk of 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. [Sec. 10, PD 115]
By misappropriating or converting, to the
prejudice of another, money, goods, or any other
personal property received by the offender in trust
or on commission, or for administration, or under
any other obligation involving the duty to make
Page 11 of 330
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TRUST RECEIPTS LAW
1.
G. Remedies Available
Upon default or failure of the entrustee to comply
with the terms and conditions
1. The entruster may file a criminal action for
estafa in case of failure of the entrustee to deliver
the proceeds of the sale of the goods under trust
receipt up to the extent of his obligation to the
entruster.
2. 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.
3. The entruster in possession of the goods may
give notice in writing to the entrustee of the
intention to sell, and may, not less than five days
after such notice, sell the goods, documents or
instruments at a public or private sale. The
entruster may become a purchaser at a public
sale.
a. The proceeds of the sale shall be applied:
i.
to the payment of the expenses
thereof;
ii.
to the payment of the expenses of
re-taking, keeping and storing the
goods, documents or instruments;
iii.
to the satisfaction of the entrustee's
indebtedness to the entruster.
b. The entrustee shall receive any surplus
but shall be liable to the entruster for any
deficiency. [Sec. 7, PD 115]
4. If a surety secures the obligation of the entrustee
in addition to the trust receipt, the entruster may
proceed directly against the surety instead of
cancelling the trust and taking possession of the
goods. The option belongs to the entruster.
2.
3.
4.
5.
COMMERCIAL LAW
The transaction is not a trust receipt agreement
within the contemplation of the Trust Receipts
Law.
a. When the entrustee acquired possession and
ownership of the goods before the trust
receipt transaction was entered into [Colinares
v. Court of Appeals, G.R. No. 90828 (2000)]
b. When the parties knew before the execution
of the alleged trust receipt agreement that the
goods were never intended for sale or resale
[Hur Tin Yang v. People, G.R. No. 195117
(2013)]
Compromise entered into by the parties prior to
the filing of the information [Ong v. CA, G.R. No.
L-58476 (1983)]
Non-receipt of the goods by the entrustee or
where the proof of delivery of the goods to the
entrustee is insufficient [Ramos v. CA, G.R. No.
L-39922-25 (1987)]
Cancellation of the trust receipts agreement and
taking possession of the goods by the entruster.
Loss of the goods without the fault of the
entrustee or due to force majuere.
Note: The Court has held that practice of banks of
making borrowers sign trust receipts to facilitate
collection of loans and place them under the threats
of criminal prosecution should they be unable to pay
it may be unjust and inequitable, if not reprehensible.
The delivery to respondent Corporation of the goods
subject of the trust receipt occurred long before the
trust receipt itself was executed. Hence, the
transaction was in the nature of a simple loan and not
a trust receipts transaction. [Consolidated Bank and Trust
Corporation, G.R. No. 114286 (2001), citing Colinares v.
Court of Appeals, G.R. No. 90828 (2000)]
In case of failure to turn over the proceeds of the
sale, or failure to return in case of non-sale
The entruster may file a criminal case for estafa under
RPC Art. 315, par. 1 (b). [PD 115, Sec. 13]
The civil action may be instituted in the criminal
action or separately filed independently of the
criminal action. The criminal action is based on exdelictu for violation of the law while the civil action is
based on ex-contractu for violation of the trust receipt
agreement.
Note: Punishable as estafa without need of proving
intent to defraud [Osental v. People, GR No. 225697
(2018) citing Colinares v. Court of Appeals, G.R. No.
90828 (2000)].
Defenses available to the entrustee against
criminal liability
Page 12 of 330
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H. Warehouseman’s Lien
The warehouseman’s lien under the Warehouse
Receipts Law (Act. No. 2137) is the warehouseman’s
legal right or interest in the depositor’s property. It is
similar to the depositary’s 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, Credit Transactions:
Notes and Cases, Volume II (2015)].
The warehouseman having a lien valid against the
person demanding the goods may refuse to deliver the
goods until the lien is satisfied [Sec. 31, Act No. 2137].
Claims included in the warehouseman’s lien
A warehouseman shall have a lien on the goods
deposited or the proceeds thereof in his hands for:
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 warehouseman’s lien [Sec. 27,
Act No. 2137]
IF A NEGOTIABLE RECEIPT IS ISSUED
FOR THE GOODS
General rule: The warehouseman shall have no lien
thereon except for charges for storage of goods
subsequent to the date of the receipt.
Exception: When the receipt expressly enumerate other
charges for which a lien is claimed. In such case, there
shall be a lien for the charges enumerated so far as
they are within the above Sec. 27, although the
amount of the charges is not stated in the receipt. [Sec.
30, Act No. 2137]
Against what property the lien may be enforced
1. Against all goods, whenever deposited, belonging
to the person who is liable as debtor for the
claims to which the lien is asserted, and
2. 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 [Sec. 28, Act No.
2137].
COMMERCIAL LAW
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
This day shall not be less than ten days from:
a. the delivery of the notice if it is personally
delivered, or
b. 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 [Sec. 33, Act No. 2137].
In accordance with the terms of a notice so given, a
sale of the goods by auction may be had to satisfy any
valid claim of the warehouseman for which he has a
lien on the goods [Sec. 33, Act No. 2137].
From the proceeds of such sale:
1. The warehouseman shall satisfy his lien including
the reasonable charges of notice, advertisement
and sale.
2. The balance, if any, shall be held by the
warehouseman and delivered on demand to the
person to whom he would have been bound to
deliver or justified in delivering goods [Sec. 33,
Act No. 2137].
At any time before the goods are so sold
General rule: The warehouseman shall retain the
possession of the goods according to the terms of the
original contract of deposit
Exception: Any person claiming a right of property or
possession may pay the warehouseman the amount
necessary to satisfy his lien and to pay the reasonable
expenses and liabilities incurred. The warehouseman
shall deliver the goods to the person making payment.
[Sec. 33, Act No. 2137]
Effect of sale TO SATISFY LIEN
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. [Sec. 36, Act No. 2137]
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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 [Sec. 35, Act No. 2137].
How lien may be lost
1. By surrendering possession of the goods
2. By refusing to deliver the goods when a demand
is made with which he is bound to comply [Sec.
29, Act No. 2137].
The lien may be lost where the warehouseman
surrenders possession of the goods without requiring
payment of the lien, because a warehouseman’s lien is
possessory in nature. [Philippine National Bank v. Se,
G.R. 119231 (1996)]
Lien does not preclude other remedies
Whether or not a warehouseman has a lien upon the
goods, he is entitled to all remedies allowed by law to
a creditor against a debtor for the collection of all
charges and advances which the depositor has
contracted to pay [Sec. 32, Act No. 213].
Perishable and hazardous goods
If the goods are perishable, or by keeping will
deteriorate greatly in value, or by its nature will be
liable to injure other property:
1. The warehouseman may give notice to the
owner or the person in whose name the goods
are stored, as is reasonable and possible under the
circumstances, to satisfy the lien and remove the
goods from the warehouse.
2. In case of failure to satisfy the lien and receive the
goods, the warehouseman may sell the goods
without advertising.
3. If the warehouseman is unable to sell the goods,
he may dispose of them in any lawful manner
and shall incur no liability [Sec. 34, Act No. 2137].
Note: The proceeds of this sale shall be disposed of in
the same way as in satisfaction of lien by sale under
Sec. 33, Act No. 2137. It also produces the same
effect as when the goods have been lawfully sold to
satisfy a warehouseman’s lien [Sec. 36, Act No. 2137].
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COMMERCIAL LAW
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COMMERCIAL LAW
NEGOTIABLE
INSTRUMENTS LAW
Commercial Law
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II. NEGOTIABLE
INSTRUMENTS
LAW
COMMERCIAL LAW
B. Forms and Interpretation
1. Requisites of Negotiability
[Note: Most frequently asked bar question since 1992;
Last appeared in 2013]
A. Definition and Purpose
A negotiable instrument is a written contract for the
payment of money, by its form and on its face,
intended as a substitute for money, and intended to
pass from hand to hand.
An instrument to be negotiable must conform to all
the requirements prescribed by the Negotiable
Instruments Law [Sec. 1, Negotiable Instruments
Law, hereinafter referred to as “NIL”].
However, the fact that an instrument does not meet
the foregoing requisites will not affect its validity, the
only consequence being that it will be governed not
by the NIL but by the general law on contracts
[CAMPOS, Negotiable Instruments Law (1994),
hereinafter “CAMPOS”].
NEGOTIABLE
INSTRUMENTS
NOT
LEGAL TENDER
Although considered as medium for payment of
obligations, negotiable instruments are not legal
tender.
Art. 1249, New Civil Code [hereinafter “NCC”].
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.
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.
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. It must contain an unconditional promise or
order to pay a sum certain in money;
c. It must be payable on demand, or at a fixed or
determinable future time;
d. It 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 [Sec. 1,
NIL].
a. In Writing and Signed by the
Maker or Drawer
What is considered "In writing": This includes
print; written or typed. The word “’written’ includes
printed, and ‘writing’ includes print” [Sec. 191, NIL].
Electronic messages cannot be negotiable
instruments [HSBC v. CIR, G.R. No. 166018 (2014)].
Rationale for requirement: Since an instrument is a
document, there must be something in written form
that can be transferred from person to person
[ABAD].
Rule: No person is liable on the instrument whose
signature does not appear thereon [Sec. 18, NIL].
Notes:
● One who signs in a trade or assumed name will
be liable to the same extent as if he had signed in
his own name [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 one’s
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. Where a signature is so placed upon
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the instrument that it is not clear in what capacity
the person making the same intended to sign, he
is to be deemed an indorser [Sec. 17(f), NIL].
b. 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.
UNCONDITIONAL
The promise or order to pay, to be unconditional,
must be unqualified [CAMPOS].
Must not be dependent upon an event that is not
certain to happen [ABAD].
The fact that the condition appearing on the
instrument has been fulfilled will not convert it into a
negotiable one.
● An instrument payable upon a contingency is not
negotiable, and the happening of the event does
not cure the defect [Sec. 4, NIL].
An instrument where the maker or the person
primarily liable has the option to require something to
be done in lieu of payment of money is not negotiable.
But it is negotiable if the option to require
something to be done in lieu of payment of
money is with the holder [CAMPOS].
Fund for
Reimbursement
(Unconditional)
The drawee pays the
payee from his own
funds. Afterwards, the
drawee pays himself
from the indicated fund.
Indicated fund is not the
direct
source
of
payment.
Particular Fund
(Conditional)
The drawee pays directly
from the particular fund
indicated.
Particular fund indicated
is the direct source of
payment [SUNDIANG
and AQUINO].
COMMERCIAL LAW
When conditional: An instrument is conditional
when reference to the fund clearly indicates an
intention that such fund alone should be the source
of payment.
Thus, “The indication of Fund 501 as the source of
the payment to be made on the treasury warrants
makes the order or promise to pay "not
unconditional" and the warrants themselves nonnegotiable. There should be no question that the
exception on Section 3 of the Negotiable Instruments
Law is applicable in the case at bar” [Metropolitan Bank
vs. CA, G.R. No. 88866 (1991)].
ORDER OR PROMISE TO PAY
● As to promissory note: The promise to pay
should be expressed on the face of the
instrument [CAMPOS].
o The word "promise" is not absolutely
necessary. Any expression equivalent to a
promise is sufficient [CAMPOS].
o Mere acknowledgment of a debt is
insufficient [CAMPOS].
● As to bill of exchange: Order – command made
by the drawer addressed to the drawee ordering
the latter to pay the payee or the holder a sum
certain in money; the instrument is, by its nature,
demanding a right.
o Words which are equivalent to an order are
sufficient.
o A mere request or authority to pay does not
constitute an order. Although the mere use
of polite words like "please" does not of
itself deprive the instrument of its
characteristics as an order, its language must
clearly indicate a demand upon the drawee to
pay.
SUM PAYABLE MUST BE CERTAIN
Sec. 2, NIL. What constitutes certainty as to
sum. – The sum payable is a sum certain within the
meaning of this Act, although it is to be paid:
(a) With interest; or
(b) By stated installments; or
(c) By stated installments, with a provision that,
upon default in payment of any installment or of
interest, the whole shall become due; or
(d) With exchange, whether at a fixed rate or at the
current rate; or
(e) With costs of collection or an attorney's fee, in
case payment shall not be made at maturity.
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].
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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 (3), NIL. The validity and negotiable
character of an instrument are not affected by the
fact that it designates a particular kind of current
money in which payment is to be made.
An agreement to pay in foreign currency is valid.
Sec. 1, RA 8183. All monetary obligations shall be
settled in Philippine currency which is legal tender in
the Philippines. However, the parties may agree that
the obligation or transaction shall be settled in any
other currency at the time of payment.
An instrument payable in personal property like
merchandise, shares of stock or gold is nonnegotiable.
An instrument which contains an order or promise to
do an act in addition to the payment of money is not
negotiable.
However, a provision giving the holder an election to
require something in lieu of money does not affect
negotiability [Sec. 5, NIL].
c. 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.
When 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
COMMERCIAL LAW
the running of interest, if any, but the obligation to
pay the note remains.
AT A FIXED TIME
Only on the stipulated date, and not before, may the
holder demand its payment.
Should he fail to demand payment, the instrument
becomes overdue, but remains valid and negotiable.
It is merely converted to a demand instrument with
respect to the person who issued, accepted, or
indorsed it when overdue [Sec. 7, NIL].
AT A DETERMINABLE FUTURE TIME
Note: It is required that the maturity of the instrument
can be absolutely determined with certainty [ABAD].
Payable at a determinable future time if:
1. At a fixed period after date or sight, e.g., “30 days
after date.”
2. On or before a fixed or determinable future time
specified therein, e.g., “payable on or before
December 1, 2000”
3. On or at a fixed period after the occurrence of a
specified event which is certain to happen,
though the time of happening be uncertain, e.g.,
“payable within 60 days after the death of Jose”
Effect of acceleration provisions:
Option to accelerate
Option to accelerate is
maturity is on the
on the holder
maker
If option is absolute,
If option is absolute, instrument’s
instrument is negotiable negotiability
is
destroyed.
If option is conditional
(can be exercised only
If option is conditional, after the happening of a
instrument
is
still specified event/act over
negotiable.
which he has no
control), instrument is
still negotiable.
Acceleration of Maturity by operation of law
Instrument is still negotiable (e.g. insolvency or
death of maker)
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].
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Provisions extending time of payment
General rule: Negotiability not affected. Effect is
similar with that of an acceleration clause at the
option of the maker [CAMPOS].
Exception: Where a note with a fixed maturity provides
that the maker has the option to extend time of
payment until the happening of contingency, the
instrument is NOT negotiable. The time for payment
may never come at all.
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, or 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].
COMMERCIAL LAW
PAYABLE TO ORDER
Sec. 8, NIL. When payable to order. – The
instrument is payable to order where it is draw
payable to the order of a specified person or to him
or to 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.
Payment on Installments
If the instrument states that the amount shall be paid
in two equal installments, the second being payable
on a fixed date, the instrument can be considered
negotiable since the first installment would then be
payable on demand [VITUG].
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.
The subsequent purchaser of the instrument will
merely step into the shoes of the person designated
and be open to all defenses available against the latter
[Consolidated Plywood Industries vs. IFC Leasing, G.R. No.
72593 (1987)].
d. Payable to Order or to Bearer
PAYABLE 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)].
Payable to bearer if:
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 nonexisting 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. Note: a blank indorsement cannot convert
a non-negotiable instrument to a negotiable one.
Therefore, the instrument must contain words of
negotiability. The words of negotiability serve as an
expression of consent that the instrument may be
transferred. [Note: 2012 Bar Question]
For example:
● “Pay to the order of Juan Cruz”, or “I promise to
pay to the order of Juan Cruz”
● “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.
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
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the person presenting it for payment without the
drawer's indorsement [Ang Tek Lian vs. CA, G.R. No.
L-2516 (1950)].
Where the maker is the payee
● Making himself liable to himself. Thus, the
instrument produces no legal effect.
● It will produce legal effect only once the payeemaker indorses the instrument to another person
because such indorsement will then give rise to
rights and obligations [ABAD].
e. Parties Must be Named or
Designated With Reasonable
Certainty
Omissions and
Provisions That Do
Not Affect
Negotiability
If the payee’s name is misspelled or wrongly
designated, the instrument does not lose its
negotiability [Sec. 43, NIL].
1.
3.
4.
5.
DRAWEE
Applies only to a bill of exchange.
DETERMINATION OF NEGOTIABILITY
In determining the negotiability of an instrument, the
instrument in its entirety and what appears on its face
must be considered [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 involved [PBCOM
vs. Aruego, G.R. Nos. L-25836-37 (1981)].
Non-dating of the
instrument
Non-specification
of value given, or
that any value had
been given
Non-specification
of place where it is
drawn or place
where it is payable
Bears a seal
Designation
of
particular kind of
currency in which
payment is to be
made. [Sec. 6, NIL].
Authorizes the sale
of
collateral
securities
on
default.
Note:
Authorization
allowing the holder to
sell BEFORE maturity
renders the instrument
non-negotiable;
2. Authorizes
confession
of
judgment
on
default;
3. Waives the benefit
of law intended to
protect the debtor;
or
4. Allows the creditor
the
option
to
require something
in lieu of money
[Sec. 5, NIL].
Note: Negotiability is
affected
when
instrument contains a
promise or order to do
any act in addition to the
payment of money.
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:
● “To Juan Cruz and Jose Reyes” – negotiable
● “To Juan Cruz or Jose Reyes” – not negotiable;
no certainty as to drawee
Additional Provisions
That Do Not Affect
Negotiability
1.
2.
PAYEE
Where the instrument is payable to order, the payee
must be named or otherwise indicated therein with
reasonable certainty [Sec. 8, NIL].
COMMERCIAL LAW
Notes:
● 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.
o A confession of judgment is not
recognized in our country, as it is
unconstitutional and against public
policy. It denies due process, and
deprives the right of appeal. However,
such provision does not affect the
instrument’s negotiability [PNB v.
Manila Oil Refining, G.R. No. L-18103
(1922)].
● The electronic messages received by HSBC were
not considered as negotiable instruments as they
lack the feature of negotiability, which is the
ability to be transferred [HSBC v CIR, G.R. No.
166018 (2014)].
Page 20 of 330
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2. Kinds of Negotiable
5.
a. Promissory Note
6.
Instruments
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.
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].
7.
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).
Banker’s acceptance – a time draft across the
face which the drawee has written the word
accepted [SUNDIANG and AQUINO].
Check - A bill of exchange drawn on a bank
payable on demand [Sec. 185, NIL]. It is the most
common form of bill of exchange.
INSTANCES WHEN A BILL OF EXCHANGE
MAY BE TREATED AS A PROMISSORY
NOTE [Note: 2011 and 2015 Bar Question]
The holder may treat an instrument at his option
either as a bill of exchange or as a promissory note
when:
1. The drawer and the drawee are the same person;
2. Drawee is a fictitious person;
3. Drawee does NOT have the capacity to contract
[Sec. 130, NIL]
4. Where the bill is drawn on a person who is legally
absent;
5. 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 [Sec. 17[e] NIL].
Promissory Note
Unconditional promise
Involves two parties
Maker is primarily liable
b. Bill of Exchange
Sec. 126. NIL. Bill of exchange, defined. A bill of
exchange is an uncond-itional 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.
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 – a draft that is payable at a fixed
date.
4. Sight or demand draft – payable when the
holder presents it for payment.
COMMERCIAL LAW
Only one presentment:
for payment
Bill of Exchange
Not necessarily drawn
on a deposit.
The drawee need not be
a bank
Death of a drawer of a
BOE,
with
the
knowledge of the bank,
does not revoke the
authority of the drawee
to pay.
Must be presented for
payment
within
reasonable time after its
last negotiation.
May be payable on
demand or at a fixed or
determinable
future
time.
Page 21 of 330
Bill of Exchange
Unconditional order
Involves three parties
Drawer
is
only
secondarily liable
Two presentments: for
acceptance and for
payment
Check
It is necessary that a
check be drawn on a
bank deposit. Otherwise,
there would be fraud.
Death of the drawer of a
check, with knowledge
of the bank, revokes the
authority of the banker
to pay.
Must be presented for
payment
within
a
reasonable time after its
issue.
Always payable
demand.
on
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NEGOTIABLE INSTRUMENTS LAW
C. Completion and Delivery
STEPS
IN
THE
EXECUTION
OF
NEGOTIABLE INSTRUMENTS:
1. Writing of the instrument completely in
accordance with the requisites of negotiability
under Sec. 1.
2. Delivery of the instrument by the maker or the
drawer to the payee in order to give legal effect
thereto [ABAD].
Note: It may sometimes be difficult to locate the
boundary line between a complete and an incomplete
instrument. It would seem that if an instrument
contains all the requisites for making it a negotiable
one, it should be considered as complete though it in
fact may have blanks as to non-essentials [CAMPOS].
1. Insertion of Date
[Note: 2012 Bar Question]
Any holder may insert the true date of issue or
acceptance of an instrument where:
a. The instrument is expressed to be payable at a
fixed period after date is issued undated; or
b. The acceptance of an instrument payable at a
fixed period after sight is undated.
Effect: The instrument shall be payable accordingly.
The insertion of a wrong date does not avoid the
instrument in the hands of a subsequent holder in due
course; but as to him, the date so inserted is to be
regarded as the true date.
EFFECT OF ANTE-DATING AND POSTDATING
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 [Sec. 12, NIL].
2. Incomplete but Delivered
Instruments
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
COMMERCIAL LAW
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.
Incomplete instrument which is delivered raises a
personal defense [CAMPOS at 485].
The authority to fill in the blanks or to complete the
instrument is limited as to time such that it must be
filled up within a reasonable time [Sec. 14, NIL].
• Such reasonable time must be reckoned from the
time of issuance of the instrument and not from
the time of each successive negotiation, because
the interest involved is that of the issuer
[CAMPOS at 488].
• No rigid rule on what is reasonable time but Sec.
193 of NIL provides that “regard must be had to
the nature of the instrument, the usage of
trade/business with respect to such instrument,
and the facts of the particular case” [CAMPOS].
3. Incomplete and Undelivered
Instruments
[Note: 2018 Bar Question]
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.
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: As against the drawee bank, the drawer is
estopped from raising the defense under Sec. 15 of
NIL if his negligent custody of the checks, after partial
execution, contributed to its escape [CAMPOS at
475].
Page 22 of 330
U.P. LAW BOC
NEGOTIABLE INSTRUMENTS LAW
4. Complete but 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.
Section 14
complete it by
filling up the
blanks;
(2) Signature
operates as a
prima
facie
authority to fill
it up for any
amount
Filled
up
strictly
in
accordance
with
the
authority given
and within a
reasonable
time
COMMERCIAL LAW
Section 15
and/or
negotiate
When Enforceable
Not
enforceable
Kind of Defense
Personal
Real
Rights of Holder
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 this fact is conclusively
presumed [CAMPOS].
Until the same is delivered, the instrument remains
revocable.
SUMMARY OF SECTIONS 14, 15 AND 16
Section 14
Section 15
Section 16
Delivery
Delivered
Undelivered
Undelivered
(1) Wanting in
any
material
particular;
(2) Blank paper
with signature
Mechanically
incomplete
Mechanically
complete
(1) Prima facie
authority
to
No authority to
complete
Completeness
(1) If HDC, he
can enforce the
instrument as
completed as
against parties
prior
or
subsequent to
the
completion;
None in the
(2) If not a
hands of any
HDC, he can
holder.
enforce
the
instrument as
completed only
against parties
subsequent to
the completion
but not against
those
prior
thereto.
Authority of Person in Possession
May negotiate
if delivered to
Page 23 of 330
Section 16
him by or
under
the
authority of the
party making,
indorsing,
drawing,
or
accepting
Delivery
is
made by or
under authority
of the party
making,
indorsing,
drawing,
or
accepting, as
the case may be
Personal
Can enforce
the instrument.
Here,
the
instrument is in
the hands of a
HDC, a valid
delivery
thereof by all
parties prior to
him so as to
make
them
liable to him is
conclusively
presumed.
Where
the
instrument is
no longer in
the possession
of a party
whose
signature
appears
thereon, a valid
and intentional
delivery to him
is
presumed
until
the
contrary
is
proved.
U.P. LAW BOC
NEGOTIABLE INSTRUMENTS LAW
COMMERCIAL LAW
c.
D. Signature
General rule: One whose signature does not appear
on the instrument shall not be liable thereon [Sec. 18,
NIL].
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.
Note: 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, and not a maker or
drawer [Sec. 17(f), NIL].
1. 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].
2. Signature of Agent
He must indicate in the instrument that he is
signing merely as agent; and
d. He must disclose his principal.
3. 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
entered 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).
4. Forgery
Signature of any party may be made by duly
authorized agent, established as in ordinary agency.
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. 19, NIL].
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 [Sec. 20,
NIL].
Exceptions:
a. Mere addition of words describing him as an
agent WITHOUT disclosing his principal [Sec.
20, NIL].
b. Where a broker or agent negotiates an instrument
without indorsement, he incurs all liabilities in
Sec. 65 of the NIL, unless he discloses the name of
principal and the fact that he is only acting as an
agent [Sec. 69, NIL].
[Note: 3rd Most Frequently Asked since 1992; 2006,
2008, 2010, 2011, and 2015 Bar Question]
Counterfeit making or fraudulent alteration of any
writing, which may consist of:
a. Signing of another’s name with intent to defraud;
or
b. 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:
a. No right to retain the instrument
b. No right to give a discharge therefor
c. No right to enforce payment thereof against any
party thereto can be acquired through or under
such signature
Requisites to negative personal liability of agent:
a. He must be duly authorized;
b. He must act within the scope of his authority
Page 24 of 330
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NEGOTIABLE INSTRUMENTS LAW
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].
a. Persons Precluded from Setting
Up Defense of Forgery
1.
2.
3.
Those who warrant or admit the genuineness of
the signature in question (This includes indorsers,
persons negotiating by delivery and acceptors).
Those who, by their acts, silence, or negligence,
are estopped from setting up the defense of
forgery.
Those who are negligent.
b. Rules on Forgery
1. Promissory Note
Maker’s signature forged
a. Maker is not liable because he never became a
party to the instrument.
b. Indorsers subsequent to forgery are liable
because of their warranties.
c. Party who made the forgery is liable.
Payee’s signature forged
a. Payee is not liable.
b. Maker is still liable. (Reason: Indorsement is not
necessary to title and the maker engages to pay
holder)
c. Indorsers subsequent to forgery are liable.
d. Party who made the forgery is liable.
Indorser’s signature forged
a. Maker, payee, indorser whose signature/s
was/were forged, and all indorsers preceding the
forgery are not liable.
b. Indorsers subsequent to forgery are liable.
c. Party who made the forgery is liable.
2. Bill of Exchange
Drawer’s signature forged
a. Drawer is not liable because he was never a party
to the instrument.
b. Drawee is liable if it paid or accepted the
instrument (no recourse to drawer) because he
admitted the genuineness of the drawer’s
signature [Sec. 62, NIL].
c. Indorsers subsequent to forgery are liable (such
as collecting bank or last endorser).
d. Party who made the forgery is liable.
COMMERCIAL LAW
Payee’s signature forged
a. Payee is not liable.
b. Drawer is still secondarily liable.
c. Drawee is liable if it paid or accepted the
instrument [Sec. 62, NIL], but it may pass liability
back through the collection chain.
d. Indorsers subsequent to forgery are liable (such
as collecting bank).
e. Party who made the forgery is liable.
Indorser’s signature forged
a. Drawer, payee, indorser whose signature/s
was/were forged and all indorsers preceding the
forgery are not liable.
b. Drawee is liable if it paid or accepted the
instrument [Sec. 62, NIL].
c. Indorsers subsequent to forgery are liable. (such
as collecting bank).
d. Party who made the forgery is liable.
SUMMARY OF RULES ON FORGERY AS TO
PROMISSORY NOTES
Order Instrument
Bearer Instrument
Maker’s Signature Forged
Maker is not liable
because
he
never
became a party to the
instrument.
Indorsers subsequent to
forgery
are
liable
because
of
their
warranties.
Same
Indorsers may be made
liable to those persons
who obtain title through
their indorsements.
Payee’s Signature Forged
Maker and payee not
liable.
Indorsers subsequent to
forgery
are
liable
because
of
their
warranties.
Maker is liable.
Indorsers may be made
liable to those persons
who obtain title through
their indorsements.
Indorser’s Signature Forged
Maker,
payee
and
indorser
whose
signature was forged are
not liable.
Indorsers subsequent to
forgery
are
liable
because
of
their
warranties.
Page 25 of 330
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.
U.P. LAW BOC
NEGOTIABLE INSTRUMENTS LAW
SUMMARY OF RULES ON FORGERY AS TO
BILLS OF EXCHANGE
Order Instrument
Bearer Instrument
Drawer’s Signature Forged
Drawer is not liable
because he was never a
party to the instrument.
Drawee-acceptor
is
liable, without recourse
to drawer, if it paid
because he admitted the
genuineness of the
drawer’s signature.
Drawee also cannot
recover
from
the
collecting bank because
there is no privity of
contract between the
collecting bank and the
drawer. The collecting
bank does not give any
warranty regarding the
signature of the drawer.
Indorsers subsequent to
forgery
(such
as
collecting bank or last
endorser) are liable.
Same
Cut-off rule does not
apply.
Drawee is liable if it
paid.
Indorsers subsequent to
forgery
(such
as
collecting bank) are
liable.
Drawee-acceptor
is
liable if it paid. It cannot
recover
from
the
collecting bank because
it is bound to know the
drawer’s signature since
the latter is its depositor.
The drawee may recover
from the drawer when
the latter’s negligence is
the proximate cause of
the loss or contributed
thereto.
Indorsers may be made
liable to those persons
who obtain title through
their indorsements.
Payee’s Signature Forged
Drawer is liable (his
indorsement is not
necessary to pass title).
Drawer, drawee
payee not liable.
and
Cut-off rule applies.
Indorsers subsequent to
forgery
(such
as
collecting bank) are
liable without prejudice
to their right to proceed
against the forger.
Drawee is liable (no
privity between drawer
and payee because
indorsement of payee is
not necessary).
Payee is not liable.
Collecting bank is liable
because of warranty.
However, it may recover
from the person who
forged the indorsement
on the check and
deposited or encashed
the same.
Indorser’s Signature Forged
Drawer, payee and
indroser
whose
signatures were forged
are not liable.
Drawer is liable even if
special indorsement was
forged
because
indorsement is not
necessary to title.
Page 26 of 330
COMMERCIAL LAW
Drawee is liable.
Indorser
whose
signature was forged is
liable
because
indorsement is not
necessary to title.
U.P. LAW BOC
NEGOTIABLE INSTRUMENTS LAW
E. Consideration
COMMERCIAL LAW
2. Burden of Proof –
Presumption of
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:
xxx
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.
“Value” means valuable consideration;
Because of the presumption, it is immaterial whether
or not “for value received” appears in the instrument.
xxx
3. Effect of Want of
“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.
1. Who is a Holder for Value
(HFV)?
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 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]. [Note:
2009 Bar question]
[Note: 2011 Bar Question]
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].
A holder who has a lien on the instrument but only to
the extent of his lien [Sec. 27, NIL].
Page 27 of 330
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NEGOTIABLE INSTRUMENTS LAW
F. Accommodation Party
COMMERCIAL LAW
2. Accommodation Party as
Surety
Sec. 29, NIL. Liability of accommodation party.
– An accommodation party is one who has signed
the instrument as maker, drawer, acceptor, or
indorser, without receiving value therefor, and for
the purpose of lending his name to some other
person. Such a person is liable on the instrument to
a holder for value, notwithstanding such holder, at
the time of taking the instrument, knew him to be
only an accommodation party.
Accommodation Party
1. Must be a party to the instrument, signing as
maker, drawer, acceptor, or indorser;
2. Must not have received value therefor; and
3. Signed for the purpose of lending his name to
some other person.
Note: “Without receiving value therefor” does not
mean that a person ceases to be an accommodation
party merely because he receives some consideration
for lending his name or credit. An accommodation
party loses his status only when he receives value not
for lending his name, but for the instrument itself
[CAMPOS at 659].
1. Liability of an
Accommodation Party
[Note: 2018 Bar Question]
Whether the liability is primary or secondary will
depend on whether he signs as a maker, acceptor,
drawer or indorser.
The holder for value to whom the instrument thus
executed is subsequently negotiated has a right of
recourse against the accommodation party in spite of
the former’s knowledge that no consideration passed
between the accommodation and accommodated
parties [Sec. 28, NIL].
Note: Where a party accommodates the payee by
signing alone as a maker of a note, the note suffers
from absence of consideration. But, if the
accommodation party signs as a co-maker, there is
consideration for the note [CAMPOS at 658].
An accommodation party is generally regarded as a
surety for the party accommodated [Cañeda v. CA,
G.R. No. 81322 (1990)].
When the accommodation party makes payment to
the holder of the note, he has the right to sue the
accommodated party for reimbursement [Cañeda v.
CA, G.R. No. 81322 (1990)].
3. Corporation as
Accommodation Party
As a general rule, a corporation cannot act as an
accommodation party. The issue or endorsement of
negotiable instruments by a corporation without
consideration and for the accommodation of another
is ultra vires [Crisologo-Jose v. CA, G.R. No. 80599
(1989)].
By way of exception, an officer or agent of a
corporation shall have the power to execute or
indorse a negotiable paper in the name of the
corporation for the accommodation of a third person
only if specifically authorized to do so [Crisologo-Jose v.
CA, G.R. No. 80599 (1989)].
Corollarily, corporate officers, such as the president
and vice-president, have no power to execute for
mere accommodation a negotiable instrument of the
corporation for their individual debts or transactions
arising from or in relation to matters in which the
corporation has no legitimate concern. The
signatories thereof shall be personally liable therefor
[Crisologo-Jose v. CA, G.R. No. 80599 (1989)].
Accommodation Party v. Regular Party
Accommodation Party
Regular Party
Purpose
Signs instrument for the
purpose of lending his
name or credit to some
other person
Does not sign the
instrument for the same
purpose
Value Received
Signs the instrument
without receiving value
therefor
Page 28 of 330
Signs the instrument for
value
U.P. LAW BOC
NEGOTIABLE INSTRUMENTS LAW
Accommodation Party
COMMERCIAL LAW
G. Negotiation
Regular Party
Absence or Failure of Consideration as
Defense
Sec. 30, NIL. What constitutes negotiation. – An
Cannot avail of the
defense of absence or
failure of consideration
against a holder not in
due course
Can avail of said defense
against a person not a
holder in due course
After paying the holder,
may
sue
the
accommodated party for
reimbursement
May not sue any
subsequent party for
reimbursement
Right to Sue
instrument is negotiated when it is transferred from
one person to another in such manner as to
constitute the transferee the holder thereof. If
payable to bearer, it is negotiated by delivery; if
payable to order, it is negotiated by the indorsement
of the holder and completed by delivery.
1. Distinguished from
Assignment
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].
Negotiation
The transfer of the
instrument from one
person to another so as
to
constitute
the
transferee the holder
thereof [Sec.30, NIL].
Assignment
The transferee does not
become a holder, nor
can he become a holder
in due course; and he
merely steps into the
shoes of the transferor.
As such, any defense
available against the
transferor is available
against the transferee.
2. Modes of Negotiation
a. By Delivery – If Payable to
Bearer
Sec. 191, NIL. Definition and meaning of terms.
In this Act, unless the contract otherwise requires
xxx
“Delivery” means transfer of possession of
instrument by the maker or drawer, with intent to
transfer title to the payee and recognize him as
holder thereof;
xxx
Requisites
1. Mechanical act of writing the instrument
completely and in accordance with the
requirements of Section 1 of the NIL; and
Page 29 of 330
U.P. LAW BOC
2.
3.
NEGOTIABLE INSTRUMENTS LAW
The delivery of the complete instrument by the
maker or drawer, with
The intention of giving effect to it, to the payee
or holder.
PRESUMPTIONS OF DELIVERY
2. Signature of the indorser, without additional
words, is a sufficient indorsement [Sec. 31,
NIL].
3. Must be of the ENTIRE instrument
Prima facie - 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 [Sec. 16, NIL].
Conclusive - If it is in the hands of a holder in due
course, the presumption of a valid delivery is
conclusive [Sec. 16, NIL].
PRESUMPTION AS TO DATE
Date is not an essential element of negotiability; it is
not included in the 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. By Indorsement Completed by
Delivery – If Payable to Order
Sec. 32, NIL. Indorsement must be of the 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.
●
●
●
Sec. 191, NIL. Definition and meaning of terms.
In this Act, unless the contract otherwise requires
xxx
“Indorsement” means an indorsement completed by
delivery;
xxx
HOW INDORSEMENT IS 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.
COMMERCIAL LAW
Where 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].
Note: Although the law makes no distinction, the
prevailing view follows the common law rule that an
allonge can be validly used when there is no longer
any room on the instrument for further indorsements
[CAMPOS].
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]. [Note: 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 prima facie deemed not
valid.
Sec. 43, NIL. Indorsement where name is
misspelled, and so forth. – Where the name of the
payee or indorsee is wrongly designated or
misspelled, he may indorse the instrument as therein
described adding, if he things 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. After such indorsement, he may sign his
correct name [CAMPOS at 73].
5. Indorsement where there are joint payees
Where the instrument is payable or indorsed to “A and
B,” they are joint payees and an indorsement by either
A or B only will not constitute a valid negotiation,
UNLESS the one indorsing is authorized by the other
[CAMPOS].
Page 30 of 330
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NEGOTIABLE INSTRUMENTS LAW
But where the instrument is payable to “A or B”, the
payees are merely in the alternative, and either one
may validly negotiate the same [CAMPOS].
2. Blank
Sec. 34. Special Indorsement; Indorsement
in blank. – An instrument in blank specifies
3. Kinds of Indorsement
no indorsee, and an instrument so indorsed is
payable to bearer, and may be negotiated by
delivery.
Sec. 33, NIL. Kinds of indorsement. – An
indorsement may be either special or in blank; and it
may also be either restrictive or qualified or
conditional.
Four bases of classification of indorsements
under the NIL:
A. Special or in blank – manner of future method
of negotiation.
B. Restrictive or Non-Restrictive – kind of title
transferred.
C. Qualified or unqualified – kind of liability
assumed by the indorser.
D. Conditional or unconditional – presence or
absence of express limitations.
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].
a. As to Manner of Future Method
of Negotiation
●
●
●
Sec. 34. Special Indorsement; Indorsement
in blank. – A special indorsement specifies the
person to whom, or to whose order, the
instrument is to be payable; and the
indorsement of such indorsee is necessary to
the further negotiation of the instrument.
●
●
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].
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.
The last means of indorsement always controls
the means of further negotiation.
b. 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.
1. Special
●
COMMERCIAL LAW
But the mere absence of words implying power to
negotiate does not make an indorsement 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 an 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.
Page 31 of 330
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3. Restrictive
2. Non-Qualified
Such indorsement either:
a. Prohibits further negotiation of instrument
b. Constitutes indorsee as agent of indorser; or
c. Vests title in indorsee in trust for another
●
●
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.
●
●
4. Non-Restrictive
c. 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.
●
Every person who indorses without qualification
[Sec. 66, NIL].
An indorser by his indorsement impliedly enters
into two contracts: (1) a contract of sale or
assignment of the instrument; and (2) a contract
to pay the instrument if the maker is unable to
pay on maturity [CAMPOS at 84].
In the absence of clear and unmistakable
language qualifying liability, an indorser will be
liable for both contracts. His liability cannot be
limited by implication [CAMPOS at 85].
Thus, an indorsement which does not expressly
state that the indorser relieves himself from
liability is NON-QUALIFIED.
d. As to Presence/Absence of
Express Limitations
1. Conditional
1. Qualified
●
●
COMMERCIAL LAW
Constitutes indorser as mere assignor of title
Made by adding the words “without recourse”,
“sans recourse,” “indorser not holder,” “at the
indorser’s own risk,” 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:
a. Relieves the qualified indorser of his liability to
pay the instrument should the maker be unable
to pay
b. The qualified indorser does not guarantee the
solvency of the maker, but merely his legal title to
the instrument
c. A qualified indorsement does not impair the
negotiable character of the instrument
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.
●
●
●
A conditional indorsement is one where an
additional condition is annexed to indorser’s
liability; such condition must be expressed.
Where an indorsement is conditional, a party
required to pay the instrument may disregard the
condition, and make payment to the indorsee or
his transferee, whether condition has been
fulfilled or not.
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
●
Page 32 of 330
An indorser is liable to pay the instrument on two
conditions: that due demand or presentment is
made on the party primarily liable on the date of
maturity, and that should the latter fail to pay, a
notice of dishonor be promptly sent to the
inroderser. These conditions are implied in every
contract of indorsement.
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●
NEGOTIABLE INSTRUMENTS LAW
An indorsement without any other condition
upon which liability is based is referred to as
UNCONDITIONAL
or
ABSOLUTE
[CAMPOS].
e. Other Kinds of Indorsement
1. Joint
COMMERCIAL LAW
The majority view is that, the transferee has a right to
an unqualified and not merely a qualified indorsement
[CAMPOS].
Note: This section applies only to an instrument
payable to the order of the transferor. This cannot
apply to bearer instruments [CAMPOS].
4. Cancelled Indorsement
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
[CAMPOS]; and
● Where the payee or indorsee indorsing has
authority to indorse for the others.
Sec. 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.
5. Indorsement by agent
Sec. 20, NIL. Liability of person signing as
agent, and so forth. – Where the instrument
2. 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].
contains or a person adds to his signature words
indicating that he signs for or on behalf of a principal
or in a representative capacity, he is not liable on the
instrument if he was duly authorized; but the mere
addition of words describing him as an agent, or as
filling a representative character, without disclosing
his principal, does not exempt him from personal
liability.
3. Unindorsed Instrument
Sec. 49, NIL. Transfer without indorsement;
effect of. Where the holder of an instrument payable
to his order transfer its 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.
The transferee cannot be considered a holder, and
thus when he sues on the instrument, he cannot avail
of the presumption of ownership. He has to prove
that he is the owner of the instrument [CAMPOS].
Page 33 of 330
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HDC has all the rights of the latter even though
he himself satisfies none of the requirements of
due course holding
H. Rights of the Holder
IN GENERAL
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]:
a. To sue on the instrument in his own name
b. To receive payment. Payment in due course to
the holder discharges instrument.
1. Holder in Due Course
(HDC)
Note: 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.
Sec. 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 is defective, the burden is on the holder
to prove that he or some person under whom he
claims acquired the title as holder in due course. But
the last-mentioned rule does not apply in favor of a
party who became bound on the instrument prior to
the acquisition of such defective title.
a. Who are Holders in Due Course
1.
2.
Holder in due course [HDC] under Sec. 52, NIL
HDC under Sec. 58, NIL: A holder who
DERIVES title to the instrument through a
COMMERCIAL LAW
HDC under Sec. 59, NIL [presumption]: Every
holder is deemed prima facie to be a holder in due
course.
Sec. 191 of the NIL defines holder as the payee or
indorsee of a bill or note, who is in possession of it,
or the bearer thereof. The word “holder” in the first
clause of Sec. 52 and in the second subsection thereof
may be replaced by the definition in Sec. 191 so as to
read “a holder in due course is a payee or an indorsee
in possession, etc.” [De Ocampo vs. Gatchalian, G.R.
No. L-15126 (1961)].
b. 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].
The negotiability of the instrument is not affected if
the holder is not a holder in due course as subsequent
holders may still become holders in due course. What
is only affected is the current holder’s rights
[CAMPOS at 122].
c. Rights of a Holder in Due
Course
1.
2.
3.
4.
Page 34 of 330
To sue on the instrument in his own name [Sec.
51, NIL]
To receive payment on the instrument [Sec. 51,
NIL]
Holds instrument free of any defect of title of
prior parties [Sec. 57, NIL]
Free from defenses available to prior parties
among themselves [Sec. 57, NIL]
U.P. LAW BOC
5.
NEGOTIABLE INSTRUMENTS LAW
May enforce payment of instrument for full
amount, against all parties liable [Sec. 57, NIL]
●
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 [Sec. 58, NIL].
●
d. Requisites of a Holder in Due
Course
●
●
See Sec. 52, NIL, quoted above.
These four requisites must concur. If any one of them
is absent, the holder cannot be considered a holder in
due course [CAMPOS].
●
1. Complete 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].
2. Became the holder before overdue and
without 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 such as when the
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].
An instrument may be dishonored either by nonacceptance or by non-payment.
a. Dishonor by non-acceptance – takes place
when the drawee refuses to accept the order of
the drawer as stated in the bill. Can refer only to
a bill of exchange.
b. Dishonor by non-payment – takes place when
the party primarily liable fails to pay the
instrument at the date of maturity [CAMPOS].
Notes:
COMMERCIAL LAW
An overdue instrument is still negotiable, but it is
subject to the defenses (real and personal)
existing at the time of the transfer.
As to what constitutes a reasonable time, regard
is to be had to the nature of the instrument, the
usage of trade or business with respect to such
instrument, and the facts of the particular case
[Sec. 193, NIL].
An instrument is not invalid for the reason only
that it is ante-dated or postdated provided it is
not done for an illegal or fraudulent purpose. The
person to whom an instrument so dated is
delivered acquires the title thereto as of the date
of delivery [Sec. 12, NIL].
Instruments with fixed maturity but subject
to acceleration: ultimate date of maturity is the
date of maturity for the purpose of determining
whether a purchaser is a HDC
Undated instruments: Prima facie presumption
that it was negotiated before it was overdue [Sec.
45, NIL].
3. That he took it in good faith and for
value
“Good Faith”
Holder must have taken the instrument in good faith
and that at the time it was negotiated to him he had
no notice of any infirmity in the instrument or defect
in the title of the person negotiating it [CAMPOS].
“Value”
a. Any consideration sufficient to support a simple
contract [Sec. 25, NIL]
b. An antecedent or pre-existing debt constitutes
value, whether the instrument is payable on
demand or at a future time [Sec. 25, NIL]
“Holder For Value” (HCV)
a. Where value has at any time been given for the
instrument, the holder is deemed a holder for
value in respect to all parties who become such
prior to that time [Sec. 26, NIL]; and
b. Where the holder has a lien on the instrument, he
is deemed a HFV to the extent of his lien [Sec.
.27, NIL].
The holder is a holder for value only to the extent that
the consideration agreed upon has been paid,
delivered, or performed [SUNDIANG and
AQUINO].
A negotiable instrument may be given as a gift to the
indorsee or transferee. In such cases, whatever
defenses can be set up against the transferor can also
be set up against the transferee, but where the holder
Page 35 of 330
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COMMERCIAL LAW
gave valuable consideration for the note and the other
requisites of Sec. 52 are present, he will be free from
such defenses.
Gross negligence in itself would not constitute notice
since it is not the equivalent of actual knowledge nor
of bad faith.
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 that intention of the transferor
is to transfer the full amount represented by the
instrument [CAMPOS].
“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].
Presumption: Every negotiable instrument is
deemed prima facie issued for valuable consideration;
and every person whose signature appears thereon is
deemed to have become a party thereto for value [Sec.
24, NIL].
Such presumption cannot be overcome by the
petitioner’s bare denial of receipt of the consideration
[Bayani v. People, G.R. No. 154947 (2004)].
4. No notice of infirmity in the
instrument or defect in the title of the
person negotiating it
“Defective title”
Title is defective when: [Sec. 55, NIL]
a. instrument/signature obtained by fraud, duress,
force or fear or other unlawful means OR for an
illegal consideration; or
b. 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:
a. any infirmity in instrument
b. any defect in title of person negotiating
Note: Due course holding is not affected by the
holder’s 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].
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)].
e. Presumption in Favor of Due
Course Holding
Every holder is deemed prima facie to be a holder in
due course [Sec. 59, NIL].
1.
2.
Page 36 of 330
Burden shifts when it is shown that the title of
any person who has negotiated the instrument
was defective. Holder must then prove that he or
some person under whom he claims acquired the
title as a holder in due course.
But the last mentioned rule does not apply in
favor of a party who became bound on the
U.P. LAW BOC
NEGOTIABLE INSTRUMENTS LAW
instrument prior to the acquisition of such
defective title.
2. Holder Not in Due Course
One who became a holder of an instrument
without any, some or all of the requisites under
Sec. 52 of the NIL
b. With respect to demand instruments, if it is
negotiated an unreasonable length of time after
its issue, the holder is deemed not a holder in due
course [Sec. 53, NIL].
Available against all
holders,
including
holders in due course
a.
Forgery,
incapacity,
fraud in the execution,
some types of duress,
and lack of delivery of an
incomplete instrument
Rights of a holder not in due course [Sec. 51, NIL.
See “IN GENERAL” ]
a. To sue on the instrument in his own name
b. To receive payment and enforce the instrument.
Payment in due course to the holder discharges
instrument.
The only disadvantage of a holder who is not a holder
in due course is that the negotiable instrument is
subject to defenses as if it were non-negotiable [Chan
Wan vs. Tan Kim, G.R. No. L-15380 (1960)].
Holder in Due Course
Not Holder in Due
Course
Compliance with Requisites
All the requisites under
Sec. 52, NIL are
complied with
Not all of the requisites
under Sec. 52 are
complied with
Defenses
His rights can be
His rights can only be
defeated by real and
defeated by real defenses
personal defenses
Rights
Has the right to enforce
payment, sue in his own
name, and negotiate the
instrument
Has the right to enforce
payment, sue in his own
name, and negotiate the
instrument
3. Defenses against the Holder
Real Defenses
Those which attach to
the instrument itself and
generally disclose an
absence of one of the
essential elements of a
contract or where the
admitted contract is void
for all purposes for
reasons of public policy
Personal Defenses
Those wherein a true
contract appears, but
where for some reason,
such as fraud, the
defendant is excused
from the obligation to
perform
Page 37 of 330
COMMERCIAL LAW
Can be raised only
against holders not in
due course
Those mentioned in Sec.
55 (fraud, duress, force
and fear, other unlawful
means,
illegal
consideration,
negotiating in breach of
faith),
want
of
consideration,
incompleteness of the
instrument, lack of
delivery of a completed
instrument
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NEGOTIABLE INSTRUMENTS LAW
I. Liabilities of Parties
Primary liability: The unconditional promise
attaches the moment the maker makes the instrument
while the acceptor’s 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.
All other parties are “secondarily” liable [Sec. 192
NIL].
When a party is secondarily liable, the liability is
contingent on presentment and notice of dishonor,
without which they are not liable at all [CAMPOS at
603].
Promissory
Note
Bill
of
Exchange
Primarily
Liable
Maker
Secondarily
Liable
Prior Indorsers
None (unless
there is already
an
ACCEPTOR)
Drawer
and
prior indorsers
COMMERCIAL LAW
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 liability of a drawer is conditional. He agrees to
pay the bill only in the event certain conditions are
complied with:
a. Presentment;
b. Dishonor of the instrument
c. Necessary proceedings for dishonor, such
proceedings are:
● Protest – in case of foreign bills; or
● Notice of dishonor to the drawer
[CAMPOS].
The drawer warrants the existence of the payee and
the latter’s capacity to indorse the instrument at the
time of its issuance [CAMPOS].
3. Acceptor
1. Maker
Sec. 62, NIL. Liability of acceptor. – The acceptor
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
[CAMPOS].
The maker is undoubtedly a part PRIMARILY liable
[CAMPOS].
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].
2. Drawer
Sec. 61, NIL. Liability of drawer. – The drawer by
drawing the instrument admits the existence of the
by accepting the instrument engages that he will pay
it according to the tenor of his acceptance; and
admits:
a. The existence of the drawer, the genuineness of
his signature and his capacity and authority to
draw the instrument, and
b. The existence of the payee and his then capacity
to indorse.
A drawee has no liability on the bill until and unless
he accepts the same.
Once he accepts, he becomes primarily liable on the
instrument, subject to no condition whatever. He
cannot refuse to pay the holder:
a. On the ground of forgery of the drawer’s
signature since he admits its genuineness;
b. Absence of consideration; or
c. Other personal defense existing between the
acceptor and the drawer [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].
Page 38 of 330
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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].
The bank had the last clear chance to stop the
fraudulent encashment of the subject checks had it
exercised due diligence and followed the proper and
regular banking procedures in clearing checks. The
one who had the last clear opportunity to avoid the
impending harm but failed to do so is chargeable with
the consequences thereof. To reiterate, petitioners
own operations manager admitted that they could
have called up the client for verification or
confirmation before honoring the dubious checks.
Verily, petitioner had the final opportunity to avert
the injury that befell the respondent [Bank of America
v. Philippine Racing Club, G.R. No. 150228 (2009), citing
Westmont Bank v. Ong, G.R. No. 132560 (2002)].
4. Indorser
The following indorsers assume the liability to pay the
instrument:
a. General or Unqualified Indorser; and
b. Irregular Indorser
a. General or Unqualified Indorser
[Note: 2011 Bar Question]
WHO IS A QUALIFIED INDORSER?
One who is constituted as a mere assignor of the title
to the instrument by adding to his signature the words
"without recourse" or any words of similar import.
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.
Sec. 65, NIL. Warranty where negotiation by
delivery and so forth. – Every person negotiating
an instrument by delivery or by a qualified
indorsement warrants:
(a) That the instrument is genuine and in all
respects what it purports to be;
(b) That he has a good title to it;
(c) That all prior parties had capacity to
contract;
(d) That he has no knowledge of any fact which
would impair the validity of the instrument
or render it valueless.
COMMERCIAL LAW
But when the negotiation is by delivery only, the
warranty extends in favor of no holder other than the
immediate transferee.
The provisions of subdivision (c) of this section do
not apply to a person negotiating public or
corporation securities other than bills and notes.
A qualified indorser and one who negotiates by mere
delivery, do not undertake to pay the instrument in
the event of its dishonor [CAMPOS].
He is in fact merely assigning the credit and is not a
party secondarily liable. His liability is like that of a
seller. Thus, although he does not engage to pay the
instrument, he makes certain implied warranties
pertaining to the instrument, as enumerated in Sec. 65
[CAMPOS].
Sec. 65(a) covers real defenses, and thus a qualified
indorser cannot plead any of these defenses because
they are covered by the warranties implied from his
sale of the negotiable instrument [CAMPOS].
WHO 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].
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; and
(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 taken, he will pay the amount
thereof to the holder, or to any subsequent indorser
who may be compelled to pay it.
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Sec. 67, NIL. Liability of indorser where paper
negotiable by delivery. — Where a person places
his indorsement on an instrument negotiable by
delivery, he incurs all the liability of an indorser.
COMMERCIAL LAW
regardless of the order of their indorsement
[CAMPOS].
Promissory Note
Sec. 68, NIL. Order in which indorsers are
liable. – As respect one another, indorsers are liable
prima facie in the order in which they indorse; but
evidence is admissible to show that, as between or
among themselves, they have agreed otherwise.
Joint payees or joint indorsees who indorse are
deemed to indorse jointly and severally.
The general indorser makes two contracts:
1. An assignment or sale of the instrument; and
2. A special contract of indorsement
Unlike a qualified indorser, he is liable not only as a
vendor but also on his contract of indorsement
[CAMPOS].
His liability as a vendor is similar to that of a qualified
indorser. His liability on the special contract of
indorsement is similar to that of the drawer, wherein
he is SECONDARILY liable and engages to pay the
holder, if proper proceedings on dishonor are duly
taken (presentment, and notice of dishonor)
[CAMPOS].
Maker is the person
primarily liable.
Indorsers
secondarily liable.
are
Bill of Exchange
No person primarily
liable to pay until and
unless
the
drawee
accepts the order of the
drawer to pay; when the
drawee accepts, he
becomes the acceptor.
Acceptor is primarily
liable.
Drawer and indorsers
are secondarily liable.
5. Warranties
The primary or secondary liability of the parties
should be distinguished from their warranties.
a. Primary or secondary liability of the parties
makes them liable to pay the sum certain in
money stated in the instrument.
b. 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.
b. Irregular Indorser
WHO IS AN IRREGULAR INDORSER?
A person who, (a) not otherwise a party to an
instrument, (b) places thereon his signature in blank,
(c) before delivery.
He is liable as an indorser, in accordance with these
rules:
1. Instrument payable to order of 3rd person: liable to
payee and to all subsequent parties
2. Instrument payable to the order of maker/drawer, or
payable to bearer: liable to all parties subsequent
to maker/drawer
3. Signs for accommodation of payee: liable to all parties
subsequent to payee [Sec. 64, NIL]
a. Maker’s Warranties
1.
2.
The maker admits the existence of the payee
AND
His then capacity to indorse [Sec. 60, NIL].
b. Drawer’s Warranties
1.
2.
The drawer admits the existence of the payee
AND
His then capacity to endorse [Sec. 61, NIL].
c. Acceptor’s Warranties
1.
c. Order of Liability Among
Indorsers
See Sec. 68, NIL quoted above.
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,
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2.
As to the drawer, the acceptor admits:
a. His existence
b. Genuineness of his signature
c. Capacity and authority to draw the
instrument
As to the payee, the acceptor admits:
a. His existence
b. His then capacity to indorse [Sec. 62,
NIL].
U.P. 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. Qualified Indorser’s Warranties
1.
2.
3.
4.
That the instrument is genuine in and in all
respects what it purports to be
That he has a good title to it
That all prior parties had capacity to contract
That he has no knowledge of any fact which
would impair the validity of the instrument
or render it valueless [Sec. 65, NIL].
J. Presentment for Payment
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.
2.
2.
3.
4.
That the instrument is genuine in and in all
respects what it purports to be
That he has a good title to it
That all prior parties had capacity to contract
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. L26767 (1968)].
The production of a Bill of Exchange to the
drawer or acceptor for payment; or
The production of a Promissory Note to the
party liable for payment.
1. Necessity of Presentment for
Payment
e. General Indorser’s Warranties
1.
COMMERCIAL LAW
Sec. 70, NIL. Effect of want of demand on
principal debtor. – Presentment for payment is not
necessary in order to charge the person primarily
liable on the instrument; but if the instrument is, by
its terms, payable at a special place, and he is able and
willing to pay it there at maturity, such ability and
willingness are equivalent to a tender of payment
upon his part. But except as herein otherwise
provided, presentment for payment is necessary in
order to charge the drawer and indorsers.
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 [CAMPOS].
BUT, presentment is not necessary to charge the
primary party. The maker and acceptor are obliged to
pay without demand on its due date [CAMPOS].
Lastly, presentment is necessary in order to be able to
demand payment form the parties secondarily liable
upon the failure of the party primarily liable to pay,
and the proper notice or protest.
2. 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 presentment is made [Sec. 72(d),
NIL].
Exceptions: Where the person primarily liable is/are:
a. Dead – presentment for payment must be made
to his personal representative, if such there be,
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and if with the exercise of reasonable diligence he
can be found [Sec. 76, NIL].
b. Partners – presentment for payment may be
made to any one of them, even though there has
been a dissolution of the firm [Sec. 77, NIL].
c. Several persons, not partners (joint debtors)
– presentment for payment must be made to
them all [Sec. 78, NIL].
COMMERCIAL LAW
In case of waiver of protest, whether in the case
of a foreign bill of exchange or other negotiable
instruments – deemed to be a waiver not only of a
formal protest but also of presentment and notice of
dishonor [Sec. 111, NIL].
3. When the Requirement of
Presentment May Be
Dispensed With
a.
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].
b. 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].
Note: Both requisites are required
c. To charge secondary parties, presentment may be
dispensed with when:
1. After reasonable diligence, presentment
cannot be made
2. When drawee is a fictitious person
3. By waiver of presentment, express or
implied [Sec. 82, NIL].
d. Waiver of protest, whether in the case of a
foreign bill of exchange or other negotiable
instrument, is deemed a waiver of presentment
and notice of dishonor [Sec. 111].
e. When the bill of exchange has previously been
dishonored by non-acceptance and has not been
subsequently accepted [Sec. 151, NIL].
4. Dishonor by Non-Payment
The instrument is dishonored by non-payment when:
a. It is duly presented for payment and payment is
refused or cannot be obtained; or
b. Presentment is excused and the instrument is
overdue and unpaid [Sec. 83, NIL].
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K. Notice of Dishonor
COMMERCIAL LAW
a. To Whom in General
Sec. 89, NIL. To whom notice of dishonor must
be given. – Except as herein otherwise provided,
when a negotiable instrument has been dishonored
by non-acceptance or non-payment, notice of
dishonor must be given to the drawer and to each
indorser, and any drawer or indorser to whom such
notice is not given is discharged.
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
[CAMPOS at 757].
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:
1. Given by holder or his agent, or by any party who
may be compelled by the holder to pay [Sec. 90,
NIL].
2. Given to secondary party or his agent [Sec. 97,
NIL].
3. Given within the periods provided by law [Sec.
102, NIL].
4. Given at the proper place [Secs. 103 and 104,
NIL].
1. Parties to be Notified
a.
Non-acceptance [bill] – to persons secondarily
liable, namely, the drawer and indorsers as the
case may be
b. 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.
Notice of dishonor may be given either to the party
himself or to his agent in that behalf [Sec. 97, NIL].
b. 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.
If he gives notice to his principal, he must do so
within the same time as if he were the holder, and the
principal, upon the receipt of such notice, has himself
the same time for giving notice as if the agent had
been an independent holder [Sec. 94, NIL].
c. 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].
d. 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].
e. 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].
f. To Insolvent
Where a party has been adjudged a bankrupt or
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].
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COMMERCIAL LAW
It may in all cases be given by delivering it personally
or through the mail [Sec. 96 NIL].
2. Parties Who May Give
Notice of Dishonor
The notice may be given by or on behalf of the holder,
or by or on behalf of any party to the instrument who
might be compelled to pay it to the holder, and who,
upon taking it up, would have a right to
reimbursement from the party to whom the notice is
given [Sec. 90, NIL].
Notice of dishonor may be given by any agent either
in his own name or in the name of any party entitled
to given notice, whether that party be his principal or
not [Sec. 91, NIL].
WHO SHOULD GIVE THE NOTICE?
a. Holder
b. Agent or representative of holder.
c. Any party who may be compelled to pay (eg.
Prior indorser may give notice to parties prior to
him, because he is a party who might be
compelled to pay [CAMPOS])
d. Agent of any party who may be compelled [Sec.
90, NIL]
A holder, whether he is the owner of the instrument
or not, may give notice of dishonor. Thus, a restrictive
indorsee who is trustee for the benefit of another, or
an indorsee for collection, can give binding notice
[CAMPOS].
Note: A written notice need not be signed and an
insufficient written notice may be supplemented and
validated by verbal communication. A misdescription
of the instrument does not vitiate the notice unless
the party to whom the notice is given is in fact misled
thereby [Sec. 95, 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].
5. 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].
Waiver may be made before or after maturity of the
instrument, and it may be express or implied
[CAMPOS].
Example of implied waiver: A letter from the indorser to
the holder after dishonor, admitting liability
[CAMPOS].
3. 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].
4. Form of Notice
The notice may be:
a. In writing; or
b. Orally made
The notice may be given in any terms which:
a. Sufficiently identify the instrument; and
b. Indicate that it has been dishonored by nonacceptance or non-payment
6. Dispensation with Notice
When notice may be dispensed with:
a. After the exercise of reasonable diligence, it
cannot be given to the parties sought to be
charged [Sec. 112, NIL].
b. When notice of non-acceptance already given
[Sec. 116, NIL].
c. When notice has been waived [Sec. 109-110,
NIL].
d. When notice not necessary to charge drawer [Sec.
114, NIL].
e. When notice not necessary to charge indorser
[Sec. 115, NIL].
a. In General
Notice of dishonor is dispensed with when, after the
exercise of reasonable diligence, it cannot be given to
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or does not reach the parties sought to be charged
[Sec. 112, NIL].
7. Effect of Failure to Give
Notice
Reasonable diligence depends on the circumstances
of the case [CAMPOS].
b. When Notice of Non-Acceptance
Already Given
Where due notice of dishonor by non-acceptance has
been given, notice of a subsequent dishonor by nonpayment is not necessary unless in the meantime the
instrument has been accepted [Sec. 116, NIL].
c. 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].
COMMERCIAL LAW
Failure to give notice to parties secondarily liable
discharges such parties [Sec. 89, NIL].
An omission to give notice of dishonor by nonacceptance 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 [CAMPOS at
796].
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 at 797].
d. When Not Necessary to Charge
Drawer
Notice of dishonor is not required to be given to the
drawer in either of the following cases:
1. Where the drawer and drawee are the same
person;
2. When the drawee is fictitious person or a person
not having capacity to contract;
3. When the drawer is the person to whom the
instrument is presented for payment;
4. Where the drawer has no right to expect or
require that the drawee or acceptor will honor the
instrument [Sec. 114, NIL].
e. When Not Necessary to Charge
Indorser
Notice of dishonor is not required to be given to an
indorser in either of the following cases:
1. When the drawee is a fictitious person or person
not having capacity to contract, and the indorser
was aware of that fact at the time he indorsed the
instrument;
2. Where the indorser is the person to whom the
instrument is presented for payment;
3. Where the instrument was made or accepted for
his accommodation [Sec. 115, NIL].
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L. 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].
1. Discharge of Negotiable
Instrument
Sec. 119, NIL. Instrument; How discharged. - A
negotiable instrument is discharged:
(a) By payment in due course by or on behalf of the
principal debtor;
(b) By payment in due course by the party
accommodated, where the instrument is made or
accepted for his accommodation;
(c) By the intentional cancellation thereof by the
holder;
(d) By any other act which will discharge a simple
contract for the payment of money;
(e) When the principal debtor becomes the holder
of the instrument at or after maturity in his own
right.
a. Payment in Due Course
[Note: 2000 Bar Question]
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 holder’s title is defective.
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. 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.
COMMERCIAL LAW
Summary of Payment in Due Course
Mediu
Money
m
(1) By or on behalf of the principal
debtor;
By
(2)By the Party accommodated where
Whom
party
is
made/
accepted
for
accommodation whether or not he
appears to be a party to the instrument.
To
Whom
When
How
To the holder of the instrument
At or after maturity
In good faith and without notice of defect
Medium of Payment
Payment should be in money in order to effect its
discharge [CAMPOS].
By whom made:
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.
Note: 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 [CAMPOS].
When check deemed paid by Drawee
If the holder presents a check over the counter of the
drawee bank, the check is paid or discharged as soon
as the holder receives cash [CAMPOS].
If the bank credits the amount of the check to the
depositor’s account, it is equivalent to payment in
money and the check will be deemed discharged.
To Whom Made
It must be made to the holder, whether he is the
beneficial owner or merely a beneficial owner under a
restrictive indorsement [CAMPOS].
Payment to a prior holder will not discharge the
instrument unless he is authorized by the present
holder [CAMPOS].
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COMMERCIAL LAW
At or after maturity
● Payment must be made to the holder at or after
maturity in order to operate as a discharge of the
instrument [CAMPOS].
(4) By the confusion or merger of the rights of a
debtor;
(5) By compensation;
(6) By novation
In good faith and without notice of defect
If the payor at the time he pays knows that the
holder’s title is defective, payment by him even at or
after maturity will not be payment in due course under
Sec. 88, and will not discharge the instrument
[CAMPOS].
Other causes of extinguishment of obligations, such
as annulment, rescission, fulfillment of a resolutory
condition, and prescription, are governed elsewhere
in this Code.
However, if the payor did not know or did not have
notice of the defect, his payment will operate as a
discharge. As far as the maker or acceptor is
concerned, the instrument has been discharged
[CAMPOS].
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].
b. By Intentional Cancellation
[Note: 2011 Bar Question]
A cancellation made unintentionally, under a mistake,
or without the authority of the holder, is inoperative
[Sec. 123, NIL].
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.
c. By Other Acts That Discharge a
Simple Contract
Any other act which discharges a simple contract for
payment of money.
Examples of how an instrument may be discharged:
1. Rendition of services;
2. Transfer of property;
3. Foreclosure of mortgaged of property where the
proceeds are equal to the amount of the
instrument; or
4. Acceptance of a part as full settlement of the note
[CAMPOS].
Sec. 1231, NCC. Obligations are extinguished by:
(1) Payment or performance;
xxx
(3) By condonation or remission of the debt;
d. By Reacquisition of Principal
Debtor in His Own Right
e. By Material Alteration
[Note: 2011 Bar Question]
Sec. 124. Alteration of instrument; effect of.
Where a negotiable instrument is materially altered
without the assent of all parties liable thereon, it is
avoided, except as against a party who has himself
made, authorized, or assented to the alteration and
subsequent indorsers.
But when an instrument has been materially altered
and is in the hands of a holder in due course not a
party to the alteration, he may enforce payment
thereof according to its original tenor.
Sec. 125, NIL. What constitutes a material
alteration. - Any alteration which changes:
(a)
(b)
(c)
(d)
(e)
Date
Sum payable, either for principal or interest
Time or place of payment
Number or relations of the parties
Medium or currency in which payment is to be
made
(f) Or which adds a place of payment where no
place of payment is specified or any other change
or addition which alters the effect of the
instrument in any respect
Material alteration without assent of all parties liable
avoids instrument except as against party to alteration
and subsequent indorsers [Sec. 124, NIL].
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2. Discharge of Parties
Secondarily Liable
Sec. 120, NIL. When Persons Secondarily Liable
on, Discharged. – A person secondarily liable on
the instrument is discharged:
(a) By any act which discharges the instrument;
(b) By the intentional cancellation of his signature
by the holder;
(c) By the discharge of a prior party;
(d) By a valid tender or payment made by a prior
party;
(e) By a release of the principal debtor unless the
holder's right of recourse against the party
secondarily liable is expressly reserved;
(f) By any agreement binding upon the holder to
extend the time of payment or to postpone the
holder's right to enforce the instrument unless
made with the assent of the party secondarily
liable or unless the right of recourse against
such party is expressly reserved.
Discharge
of
Instrument
Carries with it the
discharge of secondary
parties
Discharge
of
Secondary Party
Does not affect the
discharge
of
the
instrument
GROUNDS UNDER SEC 120
a. By discharge of the instrument
1. Payment in due course
2. Intentional cancellation of the instrument
3. Any act that will discharge a contract
4. Reacquisition by principal debtor
5. Renunciation of holder
6. Material alteration
b. By intentional cancellation of signature
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. [Sec. 48, NIL]
c.
By discharge of prior party
d. By valid tender of payment by prior party
There must be evidence of not only ability, but also
willingness to pay [CAMPOS].
e. By release of principal debtor
Refers to the release of debtor by the creditor, and not
by operation of law [CAMPOS].
COMMERCIAL LAW
f. By extension of time of payment
The agreement is one between the holder and
principal debtor, because an extension granted to the
debtor without consent of guarantor extinguishes the
guarantee. The drawer and indorsees are indeed
guarantors of the maker and acceptor [CAMPOS].
OTHER GROUNDS
a. 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 [Sec. 122].
Note: Discharge of the instrument discharges the
secondary parties
b. 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 [Sec. 144].
c.
Except as herein otherwise provided, when a
negotiable instrument has been dishonored by
non-acceptance or non-payment, notice of
dishonor must be given to the drawer and to each
indorser, and any drawer or indorser to whom
such notice is not given is discharged [Sec. 89].
d. Where the holder of a check procures it to be
accepted or certified, the drawer and all indorsers
are discharged from liability thereon [Sec. 188].
e.
Reacquisition by prior party
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
Where instrument is paid by party secondarily liable,
it is not discharged, but:
● The party so paying it is remitted to his former
rights as regard to all prior parties;
● 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
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and has been paid by drawer or where it’s
made/accepted for accommodation and has
been paid by party accommodated [Sec. 121].
f.
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 drawer 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 an 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 [Sec. 142].
COMMERCIAL LAW
A renunciation by the holder has the effect of
discharging the instrument or any party.
Two forms of renunciation
a. A written declaration to that effect; or
b. By surrender of the instrument to the primary
party.
Need not be supported by consideration.
To Whom Made
At or after maturity in
favor of principal debtor
At or after maturity in
favor of any party
3. Right of Party Who
Discharged Instrument
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 regards to all prior parties, and he may strike
out his own and all subsequent indorsements, and
again negotiate the instrument, except:
(a) Where it is payable to the order of a third person,
and has been paid by the drawer;
(b) 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.
4. 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.
Page 49 of 330
Effect
Discharges
the
instrument
Discharge only such
party and the parties
subsequent to him
U.P. LAW BOC
NEGOTIABLE INSTRUMENTS LAW
M. Material Alteration
1. Concept
Sec. 124. Alteration of instrument; effect of.
Where a negotiable instrument is materially altered
without the assent of all parties liable thereon, it is
avoided, except as against a party who has himself
made, authorized, or assented to the alteration and
subsequent indorsers.
But when an instrument has been materially altered
and is in the hands of a holder in due course not a
party to the alteration, he may enforce payment
thereof according to its original tenor.
required to be stated under Sec. 1 of the NIL. In the
case at bar, the check was altered so that the amount
was increased from P1,000.00 to P91,000.00 and the
date was changed from 24 November 1994 to 14
November 1994. Apparently, since the entries altered
were among those enumerated under Section 1 and
125, namely, the sum of money payable and the date
of the check, the instant controversy therefore
squarely falls within the purview of material alteration
[Metropolitan Bank and Trust Company v. Cabilzo, G.R.
No. 154469 (2006)].
2. Effect of Material Alteration
a.
Sec. 125, NIL. What constitutes a material
alteration. - Any alteration which changes:
(a)
(b)
(c)
(d)
(e)
Date
Sum payable, either for principal or interest
Time or place of payment
Number or relations of the parties
Medium or currency in which payment is to be
made
(f) Or which adds a place of payment where no
place of payment is specified or any other change
or addition which alters the effect of the
instrument in any respect
COMMERCIAL LAW
Alteration by a party – Avoids the instrument
except as against the party who made, authorized,
or assented to the alteration and subsequent
indorsers. However, if an altered instrument is
negotiated to a HDC, he may enforce payment
thereof according to its original tenor regardless of
whether the alteration was innocent or
fraudulent.
b. Alteration by a stranger (spoliation) - The
effect is the same as where the alteration was
made by a party wherein a HDC can recover on
the original tenor of the instrument [Sec. 124,
NIL].
[Note: 2018 Bar Question]
Any change in the instrument which affects or
changes the liability of the parties in any way.
A material alteration, since it changes the contract of
the parties, avoids the instrument and discharges all
the parties, unless they authorized or consented
[CAMPOS].
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.
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
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N. Acceptance
2. Manner
1. Definition
a. Express Acceptance
It is the signification by the drawee of his assent to
the order of the drawer [Sec. 132, NIL]. “Acceptance”
as used in the NIL means acceptance completed by
delivery or notification [Sec. 191, NIL].
a. Requisites
1.
2.
3.
In writing
Signed by the drawee
Does not express that the drawee will perform
his promise by and other means that the payment
of money [Sec. 132, NIL]
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. 133,
NIL].
b. Implied Acceptance
1.
b. Kinds of Acceptance
1.
2.
COMMERCIAL LAW
General – assents without qualification to the
order of the drawer [Sec. 139, NIL].
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. As to drawee – The acceptance of some,
one or more of the drawees but not of all
2.
3.
If the drawee refuses to return the instrument
within 24 hours after it was delivered for
acceptance [Sec. 137, NIL].
If the drawee destroys the same [Sec. 137, NIL].
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 [Sec. 135, NIL].
3. Time for Acceptance
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 [Sec. 136, NIL].
c. Proof of Acceptance
4. Rules Governing Acceptance
The written acceptance may be in the instrument itself
or in a separate instrument. However, under Sec. 133,
“the holder of a bill presenting the same for
acceptance may require the acceptance be written on
the bill, and, if such request is refused, may treat the
bill as dishonored” [SUNDIANG and AQUINO].
Implications of payment without acceptance by a
drawee
● 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 [FEBTC vs. Gold Palace Jewellery Co,
G.R. No. 168274 (2008)].
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.
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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].
COMMERCIAL LAW
O. Presentment for
Acceptance
Requisites:
1. By the holder, or by some person authorized to
receive payment on his behalf;
2. At a reasonable hour on a business day;
3. At a proper place as herein defined;
4. To the person primarily liable on the instrument,
or if he is absent or inaccessible, to any person
found at the place where the presentment is
made.
General Rule: Presentment for acceptance 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.
In no other case is presentment for acceptance
necessary in order to render any party to the bill liable
[Sec. 143, NIL].
Presentment for acceptance refers to bills of exchange
only. It means the production or exhibition of the bill
of exchange to the drawer for the purpose of
obtaining his acceptance or assent to the order of the
drawer. There are cases where presentment for
acceptance is essential (Sec. 143), and other cases
where it has no effect [CAMPOS].
Checks are not meant to be presented for acceptance
or certification, and if so presented and certification
refused, they will not be deemed dishonored
[CAMPOS].
Presentment for acceptance is necessary only in the
instances where the law requires it. In the instances
where presentment for acceptance is not necessary,
the holder of the bill of exchange can proceed directly
to presentment for payment [HSBC v. CIR, G.R. No.
166018 (2014)].
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COMMERCIAL LAW
Where the drawee has been adjudged a bankrupt
or insolvent or has made an assignment for the
benefit of creditors –
Presentment may be made to him or to his trustee or
assignee
1. Time/Place/Manner of
Presentment
a. When Made
The holder of a bill that is required under Sec. 143,
NIL must present it for acceptance within a
reasonable time [Sec. 144].
Note: Reasonable time depends on the nature of the
instrument, the usage of trade or business, and the
facts of each particular case [Sec. 193].
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].
b. 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 presentment is made.
[Sec. 72, NIL].
c. How Made
d. When Excused
Sec. 147, NIL. Presentment where time is
insufficient. – Where the holder of a bill drawn
payable elsewhere than at the place of business or the
residence of the drawee has no time, with the
exercise of reasonable diligence, to present the bill
for acceptance before presenting it for payment on
the day it falls due, the delay caused by presenting the
bill for acceptance before presenting it for payment
is excused and does not discharge the drawers and
indorsers.
Sec. 148, NIL. Where presentment is excused. –
Presentment for acceptance is excused and a bill may
be treated as dishonored by non-acceptance in either
of the following cases:
(a) Where the drawee is dead, or has absconded, or
is a fictitious person or a person not having
capacity to contract by bill.
(b) Where, after the exercise of reasonable diligence,
presentment can not be made.
(c) Where, although presentment has been irregular,
acceptance has been refused on some other
ground.
Sec. 147 excuses delay in making presentment and
Sec. 148 excuses non-presentment for acceptance.
2. Effect of Failure to Make
Presentment
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 [Sec. 145, NIL].
Failure to make presentment discharges the drawer
and all indorsers [Sec. 144, NIL].
3. Dishonor by Non-
Acceptance
Where a bill is addressed to 2 or more drawees
who are not partners –
General rule: presentment must be made to them all
Exception: One has authority to accept/refuse for all
Where the drawee is dead –
Presentment may be made to his personal
representative. But this merely permissive, since Sec.
148(a) excuses presentment [CAMPOS].
WHEN
DISHONORED
BY
NONACCEPTANCE
A bill is dishonored by non-acceptance:
a. When it is duly presented for acceptance and
such an acceptance as is prescribed by this
Act is refused or cannot be obtained; or
b. When presentment for acceptance is excused and
the bill is not accepted [Sec. 149, NIL].
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Duty of holder: Where a bill is duly presented for
acceptance and is not accepted within the prescribed
time, the person presenting it must treat the bill as
dishonored by non-acceptance or he loses the right of
recourse against the drawer and indorsers [Sec. 150,
NIL].
Effect for when a bill is dishonored by nonacceptance: An immediate right of recourse against the
drawer and the indorsers accrues in favor of the
holder and no presentment for payment is necessary [Sec.
151, NIL].
Notice of dishonor needed
Except as herein otherwise provided, when a
negotiable instrument has been dishonored by nonacceptance or non-payment, notice of dishonor must be
given to the drawer and to each indorser, and any drawer or
indorser to whom such notice is not given is
discharged [Sec. 89, NIL].
COMMERCIAL LAW
P. 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.
If notice not given: 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]
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e.
Q. Checks
1. 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].
2. Kinds
a.
Cashier’s 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)].
b. Manager’s 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
cashier’s check as to the effect and use.
In issuing a manager’s check, the bank assumed the
liabilities of the acceptor under Sec. 62, NIL [Equitable
PCI Bank v. Ong, G.R. No. 156207 (2006)].
c.
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.
d. 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].
Certification is equivalent to acceptance [Sec. 187,
NIL].
Where the holder of a check procures it to be
accepted or certified, the drawer and all indorsers are
discharged from liability [Sec. 188, NIL].
COMMERCIAL LAW
Crossed Check – The NIL is silent with respect
to crossed checks, although the Code of
Commerce makes reference to such instruments.
“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” [Art. 541, Code of
Commerce].
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)].
The Court has taken judicial cognizance of the
practice that a check with two parallel lines on the
upper left hand corner means that it could only be
deposited and not converted into cash. The crossing
of a check with the phrase “Payees Account Only” is
a warning that the check should be deposited in the
account of the payee. It is the collecting bank which
is bound to scrutinize the check and to know its
depositors before it can make the clearing
indorsement, all prior indorsements and/or lack of
indorsement guaranteed [Salazar v. J.Y. Brothers
Marketing Corporation, G.R. No. 171998 (2010)].
TYPES OF CROSSED CHECKS
a. Special: 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.
b. General: The 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.
3. 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].
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].
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a. Time
Sec. 186, NIL. Within what time a check must be
presented. – A check must be presented for
payment within a reasonable time after its issue or
the drawer will be discharged from liability thereon
to the extent of the loss caused by the delay.
Sec. 193, NIL. Reasonable time, what
constitutes. – In determining what is a "reasonable
time" regard is to be had to the nature of the
instrument, the usage of trade or business with
respect to such instruments, and the facts of the
particular case.
A check is intended for immediate use. Hence, a
special rule with respect to presentment for payment
applies to check, wherein presentment for payment of
a check must be made within a reasonable time after
its issue [CAMPOS].
As to what constitutes a reasonable time, it is mostly
a question of fact [CAMPOS].
COMMERCIAL LAW
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]. But
this applies only to indorsers at the time of
certification and not to those who indorse
subsequent to such certification [CAMPOS].
Refusal of drawee bank to certify
Unlike refusal to accept a bill, however, refusal to
certify a check does not constitute a dishonor, and
thus the holder has no action against the bank but he
has a right of action against the drawer [CAMPOS].
The drawer in turn has right of action against the bank
based on the original contact of deposit between
them.
The drawer will be discharged from liability thereon
to the extent of the loss caused by the delay [Sec. 186,
NIL].
Certification
Once a check is certified
at the request of the
holder,
the
bank
becomes the solitary
debtor and the drawer
and
indorsers
are
discharged
Thus, if no such loss is shown by the drawer, he
remains liable despite the unreasonable delay.
Certification
obtained by
Effect
As to indorsers, the unreasonable delay would fully
discharge them regardless of any loss suffered by him.
Not being covered by Sec. 186, he would be governed
by the general provisions of bills of exchange under
which indorsers are fully discharged by an
unreasonable delay in presentment [PNB v Seeto, G.R.
No. L-4388 (1952)].
Holder
Bank becomes the solitary debtor
and the drawer and indorsers are
discharged.
Drawer
Secondary parties are not released.
b. Effect of Delay
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. Certification is
equivalent to an acceptance in that it imposes primary
liability upon the certifying bank [CAMPOS].
Thus, the Supreme Court has held that payment of a
judgement obligation by way of certified check is
sufficient to prevent the sale at auction of the
defendant’s properties to satisfy such obligation [New
Pacific Timber and Supply Co. v. Seneris, G.R. No. L41764 (1980)].
Page 56 of 330
Acceptance
Acceptance
of
an
ordinary bill does not
release the secondary
parties who remain
liable
should
the
acceptor fail to pay
U.P. LAW BOC
INSURANCE CODE
COMMERCIAL LAW
INSURANCE CODE
Commercial Law
Page 57 of 330
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INSURANCE CODE
III. INSURANCE
COMMERCIAL LAW
a. Definition
A. 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.
1. Contract of Insurance
Sec. 2 (a). Whenever used in this Code, the
following terms shall have the respective meanings
hereinafter set forth or indicated, unless the
context otherwise requires:
xxx
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.
xxx
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.
Insurance is essentially a contract by which one party
(the insurer), for a consideration that is usually paid in
money, either in a lump sum or at different times
during the continuance of the risk, promises to make
a certain payment, usually of money, upon the
destruction or injury of “something” in which the
other party (the insured) has an interest [CARALE,
The Philippine Insurance Law (2014)].
A contract of insurance involves public interest. Thus, the
business is regulated by the state through the
requirement of license or certificate of authority
[White Gold Marine Services v. Pioneer Insurance, G.R. No.
154514 (2005)].
Thus, a contract of insurance is:
1. A contract of indemnity;
2. Wherein one undertakes for a consideration;
3. To indemnify another against loss, damage, or
liability;
4. Arising from an unknown or contingent event.
A contingent event is one that is not certain to take
place. An unknown event is one which is certain to
happen, but the time of its happening is not known.
A past event may be a designated event only in cases
where it has happened already but the parties do not
know about it, e.g., prior loss of a ship at sea
(applicable only to marine insurance) [DE LEON,
The Insurance Code of the Philippines Annotated
(2014)].
b. 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.
May an insurance contract be oral?
The Insurance Code has no provision requiring a
particular form for the validity of an insurance
contract. There are provisions, however, dealing with
the form of the policy and of riders and
endorsements. In our jurisdiction, the Supreme Court
has not made a categorical ruling against the validity
of an oral contract of insurance [CARALE].
c. 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
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INSURANCE CODE
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]
2. 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).
The court applied the “principal object and
purpose test,” based on American case law, when it
ruled that Philippine Health Care is not engaged in the
business of insurance. The test determines whether
the assumption of risk and indemnification of loss are
the principal object and purpose of the organization
or whether they are merely incidental to its business.
COMMERCIAL LAW
If these are the principal objectives, the business is
that of insurance. But if they are merely incidental and
service is the principal purpose, then the business is
not insurance.
The court said that although risk is a primary element
of an insurance contract, it is not necessarily true that
risk alone is sufficient to establish it because almost
anyone who undertakes a contractual obligation
always bears a certain degree of financial risk
[CARALE].
Thus, the Court clarified that:
a. Contracts that 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 insurance
contracts but are contracts for personal services;
b. 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 [Philippine Health Care Providers
Inc. v. CIR, G.R. No. 167330 (2009)].
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
Protection and Indemnity agreement as an insurance
contract.
3. Governing Law
General Rule: The Insurance Code primarily governs
insurance contracts.
Exception: When there is a special law which
specifically governs (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.
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Other special laws:
a. National Health Insurance Act of 2013 (RA 10606,
amending RA 7875)
b. The Revised Government Service Insurance Act of
1997 (RA 8291)
c. The Social Security Act (RA 8282)
d. The Property Insurance Law (RA 656, as amended
by PD 245)
e. The Philippine Deposit Insurance Act of 1963 (RA
3591)
4. 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.
Requirements
As prescribed by the Commissioner and the Bangko
Sentral ng Pilipinas.
Note: To engage in bancassurance arrangement, a
bank is not required to have equity ownership of the
insurance company.
Form
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. 375].
License to sell
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 [Sec. 376].
6. Pre-Need Plans
Sec. 4(B), RA 9829 (Pre- Need Code). Pre-need
Two Parties to a Contract of Insurance:
a. 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; May be any person, partnership,
association, or corporation [Sec. 6]; and
b. 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 [CARALE].
May be any person except a public enemy [Sec. 7]
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].
5. Bancassurance
RA 10607 introduced
bancassurance.
COMMERCIAL LAW
provisions
governing
Bancassurance means 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 [Sec. 375].
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.
Pre-need plans are contracts which provide for the
rendering of services or payment of money to plan
holders or their beneficiaries when the actual need for
such payment or rendition of services accrues
[CARALE].
They are governed by the Pre-Need Code (RA 9829).
They are not considered as insurance contracts
because:
a. Pre-need plans can have insurance coverage,
implying that they are separate contracts; and
b. 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
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does not exceed P100,000, which decision shall be
final and executory [Sec. 55, RA 9829].
7. 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.
COMMERCIAL LAW
B. Elements of an Insurance
Contract
1. Insurable interest - the insured possesses an
interest of some kind which the event insured
against may cause loss or damage
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 Scheme – 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.
1. Insurable Interest
Sec. 25. Every stipulation in a policy of insurance
for the payment of loss whether the person insured
has or has not any interest in the property insured,
or that the policy shall be received as proof of such
interest, and every policy executed by way of
gaming or wagering, is void.
Insurable interest is the interest which the law
requires the owner of an insurance policy to have in
the person or thing insured [CARALE].
In terms of the event insured against, it is the relation
between the insurer and the risk insured such that the
occurrence of the risk will cause substantial loss or
harm of some kind to the insured [CARALE].
Note: Insurable interest is not required in industrial life
insurance [Sec. 235-237].
2. 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:
a. Damnify or cause loss to a person; or
b. Create liability against him [Sec. 3]
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3. 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].
COMMERCIAL LAW
C. Characteristics of an
Insurance Contract
1. In General
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 (1951)].
An insurance contract is:
a. Consensual;
b. Voluntary;
c. Aleatory;
d. Executory and unilateral, but synallagmatic;
e. Conditional;
f. Contract of adhesion;
g. Personal contract;
h. Uberrimae fides contract (i.e. a contract of the
highest degree of good faith).
4. Risk-Distributing Scheme
a. Consensual
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.
It is perfected by the meeting of the minds of the
parties. There must be concurrence of offer and
acceptance. Unless otherwise stipulated, the policy is
not essential to the existence of the contract. It merely
evidences the terms and conditions thereof
[CAMPOS, Insurance (1983)].
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 at 67].
General rule: Contracts of Insurance are not
compulsory and the parties are free to incorporate
such terms and conditions they may deem convenient
provided they are not contrary to law, morals, good
customs, public order, or public policy [DE LEON].
5. Meeting of the Minds
The two parties to a contract of insurance whose
minds need to meet regarding the essential elements
are:
a. 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
b. 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 at 74].
The insured is not always the person whom the
proceeds are paid. Such person is the beneficiary
[VANCE at 309-310].
b. Voluntary
Exceptions: Insurance contracts particularly liability
insurance, may be required by law in certain instances:
1. For motor vehicles [Compulsory Motor Vehicle
Liability Insurance, Secs 386-402, Insurance
Code];
2. For employees [Compulsory Coverage in State
Insurance Fund, Articles 168-184, Labor Code];
3. As a condition to granting a license to conduct
business or calling affecting the public safety or
welfare [DE LEON at 19]
4. Social Insurance for members of the
Government Service Insurance System (GSIS)
and for the employees of the private Sector
covered by the Social Security System (SSS).
c. Aleatory
It is aleatory because it depends upon some
contingent event. The obligation of the insurer to pay
depends on the happening of an event which is
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uncertain, or though certain, is to occur at an
indeterminate time [Art. 2010, NCC].
unfounded [Cebu Shipyard and Engineering Works v.
William Lines, G.R. No. 132607 (1999)].
Being an aleatory contract does not necessarily mean
that it is a “contract of change” because in a contract
of insurance, the parties seek to distribute possible
loss by reason of mischance, unlike a wagering
contract [CARALE].
Exception: Where the terms of the insurance contract
are ambiguous and susceptible to various
interpretations, the issue is to be resolved against the
insurer, being the party that prepared the contract
[Art 1377, NCC].
d. Executory and Unilateral but
Synallagmatic
The “Other Insurance Clause” is not free from
ambiguity, thus the provisions, conditions, or
exceptions in policies which tend to work a forfeiture
of insurance policies should be construed most
strictly against those for whose benefit they are
inserted, and most favorably towards those whom
they are intended to operate [Geagonia v. CA, G.R. No.
114427 (1995)].
Once the insured pays the premium, the contract
already takes effect. After the payment of premiums,
the insurance imposes a unilateral obligation on the
insurer who promises to indemnify in case of loss.
It is also synallagmatic and reciprocal such that
even if the contingent event or designated peril does
not occur, the insurer has still provided protection
against the risk for the period covered by the
insurance contract.
g. Personal Contract
e. Conditional
The insured cannot assign, before the happening of
the loss, his rights under a property policy to others
without the consent of the insurer [Sec. 20, 58, and
83].
It is conditional because the insurer incurs liability
only upon the happening of the event insured against.
However, many other conditions are usually required
(e.g. payments of premium or performance of other
act) as precedent to the right of the insured to claim
benefit under the insurance.
f. 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.
General Rule: When the terms of the contract are clear
and leave no doubt upon the intention of the
contracting parties, the literal meaning of its
stipulations shall control [Art. 1370, NCC].
There was no manifestation of any intention to
constitute CSEW as co-assured. It is axiomatic when
the terms of a contract are clear, its stipulations
control. Thus, when the insurance policy involved
named only William Lines as the assured thereunder,
the claim of CSEW that it is a co-assured is
The contract of insurance is basically between the
insurer and the insured.
Property insurance is personal in the sense that it is the
damage to the personal interest not the property that
is being reimbursed.
h. Uberrimae fides Contract
Each party is required to deal with each other in
utmost good faith and disclose conditions affecting
the risk, of which he is aware, or any material fact
which the applicant knows and those which he ought
to know. Violation of this duty gives the aggrieved
party the right to rescind the contract. Where the
aggrieved party is the insured, the bad faith of the
insurer will preclude it from denying liability on the
policy based on breach of warranty [CAMPOS].
2. For Specific Kinds of
Insurance Contracts
For specific kinds of insurance contracts:
a. Contract of Indemnity (for non-life insurance)
b. Property (for life insurance)
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D. Classes
a. For Non-Life Insurance
Contract of Indemnity
The insured who has insurable interest over the
property is only entitled to recover the amount of
actual loss sustained. The burden is upon him to
establish the amount of such loss.
General rule: Only non-life insurance or property
insurance contracts are contracts of indemnity. Life
insurance contracts are not contracts of indemnity
because the value of a life is immeasurable.
Exception: Where the basis of the insurable interest of
the policy owner on the life of the insured is a
commercial relationship (e.g., creditor-debtor,
mortgagor/guarantor-mortgagee, supporter and
supportee), then such contract of life insurance is an
indemnity contract.
1. Marine Insurance
a. 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.
As presently worded, marine insurance covers loss or
damage to property, and even persons, in connection
with all risks or perils of navigation. In addition,
marine insurance includes “marine protection and
indemnity insurance against liability incidental to
ownership, operation, maintenance or construction
of vessels and facilities therefore [CARALE].
Sec. 101. Marine insurance includes:
b. For Life Insurance
NATURE OF PROPERTY
Life insurance policies, unlike property insurance, are
generally assignable or transferrable [Sec. 81] as
they are in the nature of property.
(a) Insurance against loss of or damage to:
(1)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 builder’s risks, and all
personal property floater risks;
(2)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);
(3)Precious stones, jewels, jewelry, precious
metals, whether in
course of
transportation or otherwise; and
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(4)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.
(b) 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
b. 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. It also covers risks
of lake, river or other inland waterway
transportation and other waterborne perils
outside those covered by ocean marine insurance.
c. Loan on Bottomry and
Respondentia Distinguished
COMMERCIAL LAW
A Respondentia loan is a loan that is obtained as
security for the value of the cargo to be transported.
Both loans depend on upon the safe conclusion of the
voyage [CARALE].
d. Risks
TWO KINDS OF RISKS
1. Perils of the Sea
2. Perils of the Ship
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, 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, G.R. No. L-66935 (1985)].
A Bottomry loan is a loan that is obtained for the
value of the vessel on a voyage. 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.
Exception: The exception to a “perils of the sea”
condition for insurer liability is when there is an “allrisk policy” [Malayan Insurance Corp v. CA, G.R. No.
119599 (1997)].
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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 ship’s owner to
provide the vessel with the proper equipment to
convey the cargo under ordinary conditions [DE
LEON].
Perils of the Sea
Covers those casualties
due to unusual violence
or extraordinary action
of wind and wave, or to
other
extraordinary
causes connected with
navigation.
Covers losses that are of
an extraordinary nature,
or arise from some
overwhelming power,
which
cannot
be
guarded against by the
ordinary exertion of
human
skill
and
prudence.
It is caused by:
1. A total destruction of the thing insured;
2. The irretrievable loss of the thing by sinking,
or by being broken up;
3. Any damage to the thing which renders it
valueless to the owner for the purpose for
which he held it;
4. Any other event which effectively deprives
the owner of the possession, at the port of
destination of the thing insured [Sec. 132].
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. 134].
Perils of the Ship
Covers losses resulting
from ordinary wear and
tear, or other damage
incident to the voyage
Covers losses which
result
from
the
negligent failure of the
ship’s owner to provide
the vessel with proper
equipment to convey
the
cargo
under
ordinary
conditions.
[Roque v. IAC, G.R. No.
L-66935, (1985)]
RULE ON ALL 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)].
e. Loss
Loss may be total or partial.
Total loss may be actual or constructive.
TOTAL LOSS
1. Actual 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 at 935-937].
COMMERCIAL LAW
2.
Constructive total loss or “technical total loss”
is one in which the loss, although not actually
total, is of such character that the insured is
entitled, if he thinks fit, to treat it as total by
abandonment [45 CJS 1150].
Sec. 133. A constructive total loss is one which
gives to a person insured a right to abandon, under
Sec. 141.
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 ¾ of its value [DE LEON].
A person insured by a contract of marine insurance
may abandon the thing insured and recover for a total
loss thereof, when the cause of the loss is a peril
insured against:
1. If more than ¾ 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 ¾;
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 ¾ the value of the thing
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abandoned or a risk which a prudent man would
not take under the circumstances; or
If the thing insured (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 ¾ the value of the thing
abandoned or a risk which a prudent man would
not take under the circumstances [Sec. 141].
Note: Freightage cannot in any case be abandoned
unless the ship is also abandoned.
f. Abandonment
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.
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
insured is entitled to a reasonable time to make
inquiry [Sec. 143];
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.
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.
4.
5.
6.
7.
COMMERCIAL LAW
The abandonment be neither partial nor
conditional [Sec. 142];
It must be made within a reasonable time after
receipt of reliable information of the loss [Sec.
143];
It must be factual [Sec. 144];
It must be made by giving notice thereof to the
insurer which may be done orally or in writing
[Sec. 145]; and
The notice of abandonment must be explicit and
must specify the particular cause of the
abandonment [Sec. 146].
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];
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].
g. Average
Sec. 138. Where it has been agreed that an
insurance upon a particular thing, or class of
things, shall be free from particular average, a
marine insurer is not liable for any particular
average loss not depriving the insured of the
possession, at the port of destination, of the whole
of such thing, or class of things, even though it
becomes entirely worthless; but such insurer is
liable for his proportion of all general average loss
assessed upon the thing insured.
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 OR GENERAL AVERAGE
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
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both at the same time from a real and known risk [Art.
811, Code of Commerce].
The loss is borne not by the owner of the vessel alone,
but by all the owners of the interests involved, who
are pro tanto obliged to give proportionate or “general
average” contributions to make up for such loss
[CARALE].
COMMERCIAL LAW
Marine Insurance is unique in that it has certain
implied warranties:
1. Implied Warranty of Seaworthiness
2. Implied Warranty of Against Improper
Deviation
3. Implied Warranty of proper Documentation
The reason for this distribution of loss is that the
sacrifice was made for the common benefit of all who
have an interest in the venture [Art 812, Code of
Commerce].
Implied Warranty of Seaworthiness. In every
marine insurance upon a ship or freight, or freightage,
or upon anything which is the subject of marine
insurance, a warranty is implied that the ship is
seaworthy [Sec. 115].
To claim general average contributions, the requisites
are:
1. There must be a common danger to the vessel or
cargo;
2. The sacrifice must be for the common safety or
for the benefit of all;
3. It must be successful (i.e., resulted in the saving
of the vessel and/or cargo)
4. Expenses or damages should have been incurred
or inflicted after taking proper legal steps and
authority [Magsaysay v. Agan, G.R. No. L-6393
(1955)].
A vessel is seaworthy if:
1. It is fit to perform the service and to encounter
the ordinary perils of the voyage contemplated by
the parties to the policy [Sec. 116];
2. It is properly laden;
3. It is provided with a competent master;
4. It is provided with a sufficient number of
competent officers and seamen;
5. It is provided with the requisite appurtenances
and equipment;
6. It is provided with other necessary or proper
stores and implements for voyage. [Sec.118]
Vance, however, includes as part of the requisites:
1. Sacrifice was made by the master or upon his
authority; and
2. That it was not caused by any fault of the party
asking for the contribution [CARALE]
A vessel should be seaworthy at the time
commencement of the risk or start of the voyage,
except:
1. When the insurance is made for a specified length
of time, the implied warranty is not complied
with unless the ship be seaworthy at the
commencement of every voyage it
undertakes during that time (Time Policy);
2. When the insurance is upon the cargo which, by
the terms of the policy, description of the voyage,
or established custom of the trade, is to be
transhipped at an intermediate port, the implied
warranty is not complied with unless each vessel
upon which the cargo is shipped, or transhipped,
be seaworthy at the commencement of each
particular voyage (Cargo Policy) [Sec. 117].
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].
Simply put, particular average losses are merely those
losses suffered by and borne alone by particular
interests in a venture, and not by all persons
contributing ratably [CARALE].
An example of particular average loss would be the
wages of the crew when the vessel is detained by
reason of force majeure. In such a case, the loss is only
partial and must be borne by the owner of the vessel
alone [CARALE].
h. Warranties
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].
The insurer is not liable despite breach of
warranty when the ship becomes unseaworthy
during the voyage to which an insurance relates, but
there is an unreasonable delay in repairing the defect
[Sec. 120].
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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]
Deviation is proper (Insurer remains liable):
1. When caused by circumstances over which
neither the master nor the owner of the ship has
any control;
2. When necessary to comply with a warranty, or to
avoid a peril, whether or not the peril is insured
against;
3. When made in good faith, and upon reasonable
grounds of belief in its necessity to avoid a peril;
od) When made in good faith, for the purpose of
saving human life or relieving another vessel in
distress [Sec. 126].
Every deviation not specified in the last section is
improper [Sec. 127]. Effect of any loss subsequent to an
improper deviation: Insurer is not liable [Sec. 128].
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].
2. Fire
a. 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 cause fire [Western
COMMERCIAL LAW
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. Risks
Rule: The risk assumed by the insurer is the loss and
damage caused by hostile fire and not friendly fire.
Hostile Fire
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].
Friendly Fire
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].
Friendly
fire
may
become hostile fire by
escaping from the place
where it ought to be to
some place in which it
ought to be [CARALE].
The principle underling this distinction is that the
policy shall not be construed to protect the insured
from injury consequent upon his negligent use or
management of fire, so long as it burns in the place
where it ought to be [CARALE].
c. 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
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policy, which does not increase the risk, does not
affect a contract of fire insurance.
Sec. 172. A contract of fire insurance is not
affected by any act of the insured subsequent to
the execution of the policy, which does not violate
its provisions, even though it increases the risk and
is the cause of the loss.
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 at
406].
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 Co.
d. Measure of Indemnity
1.
2.
3.
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;
In a valued policy, the parties are bound by the
valuation, in the absence of fraud or mistake,
similar to marine insurance [Sec. 173].
The parties may provide for an option-torebuild clause concerning the repairing,
rebuilding, or replacing of buildings or structures
wholly or partially damages [Sec. 174].
VALUED POLICY
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].
OPEN POLICY
COMMERCIAL LAW
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.
The contract of fire insurance is a contract of
indemnity, and thus the plaintiff only entitled
therefore to recover the amount of the actual loss
sustained by him, there being no express valuation in
the policy [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 [Development. Ins. Corp. v. IAC, G.R.
No. 71360 (1986)].
OPEN TO REBUILD CLAUSE
Whenever the insured desires to have a valuation
named in his policy, insuring any building or structure
against fire, he may require such building or structure
to be examined by an independent appraiser and the
value of the insured’s interest therein may then be
fixed as between the insurer and the insured. The cost
of such examination shall be paid for by the insured.
A clause shall be inserted in such policy stating
substantially that the value of the insured’s interest in
such building or structure has been thus fixed [Sec.
174].
3. Casualty
a. 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,
employer’s 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, marine, suretyship and life. It includes, but is
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not limited to, employer’s liability insurance,
workmen’s 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)]
b. 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. Divisions
Casualty insurance has two general divisions:
1. Liability Insurance - against specified perils
which may give rise to liability on the part of the
insured; and
2. Indemnity insurance – against specified perils
which may affect the persons.
Except with respect to compulsory motor vehicle
liability insurance, the Insurance Code contains no
other provisions applicable to casualty insurance or to
robbery insurance in particular. These contracts are,
therefore, governed by the general provisions
applicable to all types of insurance. Outside of these,
the rights and obligations of the parties must be
determined by the terms of their contract, taking into
consideration its purpose and always in accordance
with the general principles of insurance law [Fortune
Insurance & Surety Co. v. CA, G.R. No. 115278 (1995)].
COMMERCIAL LAW
Liability Insurance
Under policies of this type, the insurer assumes the
obligation to pay the third party in whose favor the
liability of the insured arises. The liability of the
insurer attaches as soon as the liability of the insured
to the third party is established. It covers liability
incurred from quasi-delict or criminal negligence but
cannot cover deliberate criminal acts [DE LEON].
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].
d. 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 before the person injured recover
on the policy
However, a no-action clause cannot prevail over the
Rules of Court provisions which are aimed at avoiding
multiplicity of suits. Parties (i.e. 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 [Sec. 5, Rule
2 and Sec. 6, Rule 3, 1997 Rules of Civil Procedure]
[Guingon v. Del Monte, G.R. No. L-22042 (1967)].
4. 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 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 surety’s
main business is that of suretyship, and not where the
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COMMERCIAL LAW
contract is merely incidental to any other legitimate
business or activity of the surety.
insurance contract for purposes of the Insurance
Code.
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].
Life insurance is an insurance policy the proceeds of
which are payable either upon:
1. Death of the person;
2. Having survived a specified period; or
3. On the continuance of cessation of life [Sec. 182]
It is an accessory contract unlike a contract of
insurance which is the principal contract itself.
PARTIES [CARALE]
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 obligor’s assets and assumes a regular
party to the undertaking.
Owner of the policy
Cestui que vie
Beneficiary
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.
5. Life
a. 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 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
With the power to name
the beneficiary, assign
It, cash it in or use as
collateral, with the
obligation to pay the
premiums
One on whose life
insurance is obtained
One to whom the
proceeds may be paid
There are also cases wherein there may be one person
only for all three parties.
b. Types
There are 4 types of Life Insurance
1. Individual Life
2. Group Life
3. Industrial Life; and
4. Microinsurance
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.
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
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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].
COMMERCIAL LAW
c. Other Classifications of Life
Insurance Policies
1.
INDUSTRIAL LIFE
Sec. 235. The term Industrial life insurance as used
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 the
insurer pays the insured if the insured
survives a specified period. If the insured
dies within the period, the insurer is released
from liability and unless the contract
otherwise provides, need not reimburse any
part of the premiums paid;
h. Endowment policy – where the insured is
paid the face value of the policy if he outlives
the designated period. If he dies within said
period, the insurer pays the proceeds to the
beneficiary. This is a combination of term
policy and pure endowment policy.
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].
MICROINSURANCE
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.
2.
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Term Life Insurance, which provides for the
payment of a specified amount if death occurs
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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 [CARALE].
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.
d. Risks
Five important risks:
1. Death or Survival;
2. Suicide
3. Death at the hands of the law;
4. Killing by the beneficiary; and
5. Accidental Death
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.
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].
Death of the insured must be proven by the
beneficiary before the insurer can be made to pay.
SUICIDE
Insurer is liable in any of the following cases:
1. If committed after 2 years from the date of the
policy’s issue or its last reinstatement unless the
policy provides for a shorter period.
Note: Any stipulation extending the 2-year period
is void.
2.
COMMERCIAL LAW
If committed in a state of insanity regardless of
the date of the commission unless suicide is an
excepted peril [Sec. 183].
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].
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 [CAMPOS at 168].
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 the
death or injury is not the natural or probable result of
the insured’s voluntary act, or if something
unforeseen occurs in the doing of the act which
produces the injury, the resulting death is within the
protection of the policies insuring against death or
injury from accident [CARALE at 176].
In the case of Calanoc v. CA [G.R. No. L-8151 (1955)],
the Court held that an event is not an accident if it is
due to a voluntary and intentional act on the part of
anyone, including third parties. The court noted that
there was no proof that the incident was intentional,
that the robber had aimed for the watchman, because
there was nothing on record that showed how the
fatal shot was fired. The house being robbed was not
event and that the house guarded by the murdered
watchman. Thus, the insurer was ordered to pay the
watchman’s widow the value of the supplemental
policy covering death by accident.
However, in the case of Biagtan v. Insular [G.R. No. L25579 (1972)], the Court held that the victim was
killed intentionally, thus not covered by the
supplemental insurance on death by accident. There
were nine wounds in all and cannot be considered
accidental.
KILLING BY THE BENEFICIARY
General rule: The interest of a beneficiary in a life
insurance policy shall be forfeited when the
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6. 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.
COMMERCIAL LAW
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
driver’s 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)].
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].
The insurer’s liability is direct and primary so the
insurer need not wait for final judgment in the
criminal case to be liable. The purpose is to give
immediate financial assistance to victims of motor
vehicle accidents and/or their dependents, especially
if they are poor, regardless of the financial capability
of motor vehicle owners or operators responsible for
the accident sustained [Shafer v. Judge, RTC 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 (i.e. third-party liability) or the
victim of the contingent event.
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E.Insurable Interest
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 [Sec. 25].
General Rule: Insurable interest muse be capable of
pecuniary estimation because the purpose of
insurance is to indemnify. It would be difficult to
measure if the benefit derived or the loss incurred is
not capable of pecuniary estimation.
Exception: The insurable interest need not always be
pecuniary in nature; (e.g., in insuring the life of a
person, the purpose is not to indemnify but to act as
an investment or savings instrument) [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].
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].
When insurable interest should exist
Insurable Interest Required
Intervening Occurrence
Inception
Period
of Loss
Life/Health ✓
Property
✓
✓
COMMERCIAL LAW
For Life Insurance: Insurable interest over
life/health must exist 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 contract and
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].
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]
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 policy. It does not affect
the policy except his interest passes to his heir or
legal representative who may continue the
insurance policy on the property by continuing
paying premiums [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
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7.
INSURANCE CODE
exclusively to the proper interest if the person in
whose name or for whose benefit it is made.
An express prohibition against alienation in the
policy [Art. 1306, NCC], in which case alienation
will not merely suspend the contract but avoid it
entirely.
1. In Life/Health
Sec. 10. Every person has an insurable interest in
the life and health:
(a) Of himself, of his spouse and of his
children;
(b) Of any person on whom he depends
wholly or in part for education or
support, or in whom he has a pecuniary
interest;
(c) Of any person under a legal obligation to
him for the payment of money, or
respecting property or services, of which
death or illness might delay or prevent the
performance; and
(d) Of any person upon whose life any estate
or interest vested in him depends.
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].
a. In Life Insurance
TYPES OF LIFE INSURANCE
Life insurance policies may be divided into two
general classes:
1. Insurance upon one’s life
2. Insurance upon the life of another
Interest in one’s 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].
COMMERCIAL LAW
Evidence that the insurance is regarded as a wager
policy:
1. The original proposal to take out insurance was
that of the beneficiary.
2. The premiums are paid by the beneficiary
3. The beneficiary has no interest, economic or
emotional, in the continued life of the insured.
[DE LEON]
INTEREST IN LIFE OF ANOTHER
The insurable interest in the life of another must be a
pecuniary one and it exists whenever the relation
between the assured and the insured (whether by
blood, marriage or commercial intercourse) is such
that the assured has a reasonable expectation of
deriving benefit from the continuation of the life
insured or of suffering detriment through its
termination [DE LEON].
However, the loss in life insurance can seldom be
measured pecuniarily. Still, a definitive interest of
some sort in the life of the cestui que vie is required.
Certainly, a person is not allowed to take out
insurance upon the life of a stranger. There is no
general rule fixing the degree of relationship within
which an insurable interest exists, but more decisions
are found supportive of the rule that close
relationship by blood or marriage between the insured
and the cestui que vie is sufficient to constitute insurable
interest [CARALE].
The insurable interest must be based on moral and
legal grounds. Such interest exists whenever the
insured has a responsible expectation of deriving
benefit from the continuation of the life of the other
person or of suffering detriment through its
termination.
There is no insurable interest in the life of an
illegitimate spouse.
A creditor may take out insurance on the life of his
debtor but his insurable interest is only up to the
amount of the debt and only when the debt is
unsecured [CARALE at 55-56].
When the owner of the policy insures the life of
another — the cestui que vie — and designates a
third party as beneficiary, both the owner and
beneficiary must have an insurable interest in the
life of the cestui que vie.
Exception: An assignee of the insurance contract is not
required to have insurable interest in the life of the
insured (since insurable interest over life should exist
only during the inception of the contract). To require
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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.
BENEFICIARY OF LIFE INSURANCE
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 beneficiary’s 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 at 102].
Exceptions: Any person who is forbidden from
receiving any donation under Art. 739, Civil Code
cannot be named beneficiary of a life insurance policy
by the person who cannot make any donation to him
[Art. 2012, NCC].
Art. 739, NCC. 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 consideration
thereof;
(3) Those made to a public officer or his wife,
descendants and ascendants, by reason of his
office.
In the case referred to in No. 1, the action for
declaration of nullity may be brought by the spouse
of the donor or donee; and the guilt of the donor
and donee may be proved by preponderance of
evidence in the same action.
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
beneficiary’s 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].
COMMERCIAL LAW
b. 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 creditor’s 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 company’s 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.
c. 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].
There is no right of subrogation in life insurance,
because it is not a contract of indemnity.
2. In Property
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:
(a) An existing interest;
(b) An inchoate interest founded on an existing
interest; or
(c) An expectancy, coupled with an existing
interest in that out of which the expectancy
arises.
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].
The insurable interest may be in the property itself
(e.g., ownership), or any relation thereto (e.g., interest
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of a trustee or a commission agent), or liability in
respect thereof (e.g., interest of a carrier or depository
of goods).
a. 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
b. Inchoate interest must be founded on
existing interests – It exists but is incomplete or
unripe until the happening of an event. Examples
of inchoate interests are the interest of
stockholders with respect to dividends in case of
profits and shares in the assets, and the interest
of a partner in the properties belonging to the
partnership.
c. 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].
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 [Sec. 16].
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.
Pursuant to Art. 777 of the Civil Code, the rights to the
succession are transmitted only from the death of the
father. His expectancy in the property may never
materialize because prior to such moment, the
property could have been validly sold or transferred
by the decedent [CARALE].
COMMERCIAL LAW
General rule: Interest in property insured must exist
both at inception and at time of loss, but not in the
intervening period [Sec. 19].
This means that the insurable interest in the property
must exist both at the inception of the contract and at
the time of the loss [CARALE].
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 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]
Note: This makes a distinction between a transfer in
favor of a partner and in favor of a stranger. The latter
will avoid the policy while the former will not
[CARALE].
Mere transfer of the property does not transfer the
policy but suspends it until the same person becomes
the owner of both the policy and the thing insured
[Sec. 20].
b. Measure of Indemnity
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, G.R. No. 85141 (1989)].
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].
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. 147839 (2006)].
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.
A carrier or depository of any kind has an insurable
interest in a thing held by him as such, to the extent
of his liability but not to exceed the value thereof [Sec.
15].
a. Time of Existence
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which requires disclosure of other existing insurance
policy. In such case, non-disclosure will avoid the
policy. Such clause is intended to prevent over
insurance and thus avert the perpetration of fraud.
c. Interest in Property and Life
Distinguished
Property
Life
Extent
Limited to actual value
of the interest thereon
COMMERCIAL LAW
Unlimited (save in life
insurance effected by a
creditor on the life of
the debtor – amount of
debt only)
Existence
Must exist when the
insurance takes effect
and when the loss
occurs, BUT need not
exist in the meantime
Must exist at the time
the insurance takes
effect, BUT need not
exist thereafter
Must have legal basis
Need not have legal basis
Must have insurable
interest over the thing
insured
Need not have insurable
interest over the life of
the insured if the
insured himself secured
the policy. But if the
insurance was obtained
by the beneficiary, the
latter
must
have
insurable interest over
the life of the insured
[SUNDIANG
and
AQUINO]
Expectation of benefit to be derived
Interest of beneficiary
3. Double Insurance and Over
Insurance; Reinsurance
a. Double Insurance
Sec. 95. Double insurance exists where the same
person is insured by several insurers separately in
respect to the same subject and interest.
Requisites:
1. The same person is insured;
2. Two or more insurers insuring separately;
3. The same subject matter;
4. The same interest insured; and
5. The same risk or peril insured against [Malayan
Insurance v. Philippine First Insurance, G.R. No.
184300 (2012)]
Double insurance is not prohibited under the law,
unless the policy contains a stipulation to the contrary.
Usually, insurance policies contain other insurance clause
If there is double insurance and loss occurs, each of
the insurers will be liable only up to the face value of
their respective policies and the insured has the
option of choosing the order by which he will claim
from the insurers [CARALE].
b. Over Insurance
Occurs when the value of the insurance exceeds the
value of the insurable interest. Over-insurance is not
per se void but recovery is allowed only to the extent
of the loss or damage incurred by the insured
[CARALE].
If there is over-insurance and loss occurs, then the
insurers will pay pro-rata (or in the order as stated in
contract or excess clause) in case of loss.
Nonetheless, under Sec. 64(f), an insurer may 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” subject to the requirement of prior notice.
Also, under Sec. 83, “in case of an over insurance by
several insurers other than life, the insured is entitled
to a ratable return of the premium, proportioned to
the amount by which the aggregate sum insured in all
the policies exceeds the insurable value of the thing at
risk.”
Double Insurance
Amount of insurance
may or may not exceed
the value of the
insured’s
insurable
interest
There are always several
insurers
Over Insurance
Amount of insurance
exceeds the value of the
insured’s
insurable
interest
There may be one or
more insurers
c. Rules for Payment
Sec. 96. Where the insured in a policy other than
life is over insured by double insurance:
(a) The insured, unless the policy otherwise
provides, may claim payment from the
insurers in such order as he may select, up to
the amount for which the insurers are severally
liable under their respective contracts;
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(b) Where the policy under which the insured
claims is a valued policy, any sum received by
him under any other policy shall be deducted
from the value of the policy without regard to
the actual value of the subject matter insured;
(c) Where the policy under which the insured
claims is an unvalued policy, any sum received
by him under any policy shall be deducted
against the full insurable value, for any sum
received by him under any policy;
(d) Where the insured receives any sum in excess
of the valuation in the case of valued policies,
or of the insurable value in the case of
unvalued policies, he must hold such sum in
trust for the insurers, according to their right
of contribution among themselves;
(e) Each insurer is bound, as between himself and
the other insurers, to contribute ratably to the
loss in proportion to the amount for which he
is liable under his contract.
Sec. 96 enunciates the principle of contribution which
requires each insurer to contribute ratably to the loss
or damage considering that the several insurances
cover the same subject matter and interest against the
same peril. If the loss is greater than the sum total of
all the policies issued, each insurer is liable for the
amount of his policy.
d. Reinsurance
COMMERCIAL LAW
A reinsurance treaty is an agreement between two
insurance companies whereby one agrees to cede and
the other to accept reinsurance business pursuant to
provisions specified in the treaty [DE LEON].
A reinsurance policy is a contract of indemnity one
insurer makes with another to protect the first insurer
from a risk it has already assumed.
Reinsurance treaties and reinsurance policies are not
synonymous. Treaties are contracts for insurance;
policies are contracts of insurance [Philamlife v. Auditor
General, G.R. No. 19255 (1968)].
Double
Insurance
Distinguished
Double Insurance
Same interest
Insurer remains as the
insurer
Insured is a party in
interest in the insurance
contracts
Property is the subject
matter
Insured has to give his
consent
and
Reinsurance
Reinsurance
Different interest
Insurer becomes the
insured in relation to
the insurer
The original insured is
not a party in the
reinsurance contract
The original insurer’s
risk is the subject matter
Insured’s consent is not
necessary
4. Multiple or Several Interests
on Same Property
Sec. 97. A contract of reinsurance is one by which
an insurer procures a third person to insure him
against loss or liability by reason of such original
insurance.
Sec. 99. A reinsurance is presumed to be a
contract of indemnity against liability, and not
merely against damage.
Sec. 100. The original insured has no interest in a
contract of reinsurance.
Reinsurance has been referred to as “an insurance of
an insurance.”
Original Insurance Contract and Reinsurance
Contract Distinguished
The original insurance contract is separate and
distinct from the reinsurance contract. An original
insurance contract covers indemnity against damages,
while reinsurance covers indemnity against liability.
Reinsurance Treaty and Policy Distinguished
The Insurance Code recognizes that both the mortgagor
and mortgagee have each separate and distinct
insurable interest in the mortgaged property and that
they may take out separate policies with the same or
different insurance companies. Consequently,
insurance taken by one on his own name only does
not inure to the benefit of the other [Sec. 53].
Thus, a mortgagor has an insurable interest equal to
the value of the mortgaged property and a mortgagee,
only to the extent of the debt Secured by the mortgage
[Geagonia v. CA, G.R. No. 114427(1995)].
Mortgagor
As owner, the interest is
to the extent of the
value of the property,
regardless of whether it
equals to the mortgage
debt or not
His interest lies in that
the loss or destruction
of the property will not
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Mortgagee
Only to the extent of
the debt secured.
What is insured is not
the property, but his
interest as mortgagee,
U.P. LAW BOC
Mortgagor
extinguish his mortgage
debt
INSURANCE CODE
Mortgagee
which subsists until the
mortgage
debt
is
extinguished
[CARALE]
When mortgagee takes out insurance policy
When a mortgagee insures his own interest in the
mortgaged property without reference to the right of
the mortgagor, mortgagee is entitled to the proceeds
of the policy in case of loss to the extent of his credit
[DE LEON].
a. If the proceeds are more than the total amount
of credit, then mortgagee has no right to the
excess.
b. If the proceeds are equal to the credit, then
insurer is subrogated to the mortgagee’s rights
and mortgagee can no longer recover the
mortgagor’s indebtedness.
c. 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 mortgagee insured his own interest and a loss
occurs, he is entitled to recover on the insurance. The
mortgagee, however, is not allowed to retain his claim
against the mortgagor, but it passes by subrogation to
the insurer, to the extent of the insurance money paid
[Palileo v. Cosio, G.R. No. L- 7667 (1955)].
When mortgagor takes out insurance policy
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,
supra].
COMMERCIAL LAW
the mortgagee acquires an equitable lien upon the
proceeds
a. 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.
b. Union Mortgage or Standard
Mortgage Clause
A standard or union mortgage clause makes a separate
and distinct contract of insurance on the interest of
the mortgagee, thus any act of the mortgagor will not
affect the mortgagee [CARALE].
This clause is similar to an open loss payable clause,
except that it is stipulated that the acts of the
mortgagor cannot invalidate the insurance, provided
that if the mortgagor fails to pay the premiums due,
the mortgagee shall, on demand, pay said premiums
[DE LEON].
Ways where mortgagee may be the beneficial
payee [Geagonia v. CA, G.R. No. 114427 (1995)]:
a. As assignee with the consent of the insurer
b. A pledge without such consent
c. The original policy may contain a mortgage
clause
d. A rider making the policy payable to the
mortgagee “as his interest may appear” may be
attached
e. A “standard mortgage clause,” containing a
collateral independent contract between the
mortgagee and the insurer, may be attached
f. The policy, though by its terms payable
absolutely to the mortgagor, may have been
procured by a mortgagor under a contract duty to
insure for the mortgagee's benefit, in which case
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F. Perfection of the Contract
of Insurance
1. 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)].
The court applied the Cognition Theory in the case of
Enriquez v. Sun Life Assurance Co. [G.R. No. L-15895
(1920)] when it ruled that an acceptance made by
letter shall not bind the person making the offer
except from the time it came to his knowledge. The
court held that:
a. The submission of an application, even with
premium payment is a mere offer on the part of
the applicant, and does not bind the insurer;
b. 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;
c. 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)].
COMMERCIAL LAW
a. 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)]
b. Delivery of Policy
Delivery is the act of placing the insurance policy (i.e.
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.
2. 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 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
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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: The exceptions provided by law are as follows:
a. Life and industrial life policy [Sec. 77]
b. 90-day credit extensions covered by broker or
agency agreements with licensed intermediaries
[Sec. 77]
c. Acknowledgment in the contract that the
premium has been paid [Sec. 79]
Jurisprudence decided before RA 10607 provides two
further exceptions:
a. Agreement to grant payment of premium in
installment basis and partial payment has been
made [Makati Tuscany v. CA, G.R. No. 95546,
(1992)]
b. When parties are barred by Estoppel [UCPB v.
Masagana Telemart, G.R. No. 137172 (2001)]
a. 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 agent’s acknowledgement
of receipt of payment of premium [American Home
Assurance Co. v. Chua, G.R. No. 130421 (1999)]
b. 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
COMMERCIAL LAW
would retroact to the date of the instrument and its
acceptance by the creditor [Vitug, Commercial Laws
and Jurisprudence (2006)]
c. 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 premiums does not
affect the validity of the contracts unless, by express
stipulation, it is provided that the policy shall in that
event be suspended or shall lapse.
In case of individual life insurance, the policy holder
is entitled a grace period of either 30 days or one
month within which payment of any premium after
the first may be made [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].
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 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)].
3. 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
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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].
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.
b. Alternatives to CSV
1.
4. Non-Default Options in Life
Insurance
Sec. 233 (f). A provision specifying the options to
which the policyholder is entitled to in the event of
default in a premium payment after three (3) full
annual premiums shall have been paid. Such
option shall consist of:
(1) A cash surrender value payable upon
surrender of the policy which shall not be less
than the reserve on the policy, the basis of
which shall be indicated, for the then current
policy year and any dividend additions thereto,
reduced by a surrender charge which shall not
be more than one-fifth (1/5) of the entire
reserve or two and one-half percent (2½%) of
the amount insured and any dividend
additions thereto; and
(2) One or more paid-up benefits on a plan or
plans specified in the policy of such value as
may be purchased by the cash surrender value.
COMMERCIAL LAW
2.
3.
a. 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)(1)].
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 company’s credit for advances is paid out of the
cash value or cash surrender value, that value and the
company’s liability is diminished [Manufacturer’s Life
Ins. v. Meer, G.R. No. L-2910(1951)].
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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.
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.
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.
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5. Reinstatement of a Lapsed
e.
Policy of Life Insurance
Sec. 233(j) – A provision that the policyholder
shall be entitled to have the policy reinstated at any
time within three (3) years from the date of default
of premium payment unless the cash surrender
value has been duly paid, or the extension period
has expired, upon production of evidence of
insurability satisfactory to the company and upon
payment of all overdue premiums and any
indebtedness to the company upon said policy,
with interest rate not exceeding that which would
have been applicable to said premiums and
indebtedness in the policy years prior to
reinstatement.
f.
g.
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)]
a. It must be exercised within three years from date
of default;
b. The insured must present evidence of insurability
satisfactory to the insurer;
c. He must pay all back premiums and all
indebtedness to the insurer (with interest)
d. The CSV must not have been duly paid to the
insured nor the extension period expired;
e. The application must be filed during the insured’s
lifetime [Andres v. Crown Life Ins., G.R. No. L10874 (1958)].
6. Refund of Premiums
Return of premiums can be made in the following
cases:
a. If the thing insured was never exposed to the
risks insured against, the whole premium should
be refunded [Sec. 80(a)]
b. When the contract is voidable due to the fraud or
misrepresentation of insurer or his agent, the
whole premium should be refunded [Sec. 82]
c. 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]
d. When the contract is voidable because of the
existence of facts of which the insured was
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ignorant without his fault, the whole premium
should be refunded [Sec. 82]
Where the insurance is for a definite period and
the insured surrenders his policy, the portion of
the premium that corresponds to the unexpired
time at a pro rata rate, unless a short period rate
has been agreed upon and appears on the face of
the policy should be return [Sec. 80(b)]
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]
When rescission is granted due to the insurer’s
breach of contract.
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COMMERCIAL LAW
But, Sec. 27, uses the phrase “injured party”, thus the
insured may also rescind the contract.
G.Rescission of Insurance
Contracts
Rationale: The contract of insurance is one of perfect
good faith (uberrimae fides) not for the insured alone,
but equally for the insurer; in fact it is more so for the
latter, since its dominant bargaining position carries
with it the stricter responsibility [Qua Chee Gan v. Law
Union & Rock Insurance, G.R. No. L-4611(1955)].
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. Proof of Fraud in Concealment
1. 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. L16163 (1963)].
Concealment is the failure to disclose facts which the
applicant at the time of application, knows or ought
to know and are material to the insurance applied for
[CARALE].
Exception: When the concealment is made by the
insured in relation to the falsity of a warranty, the nondisclosure must be intentional and fraudulent in order
that the contract may be rescinded [Sec. 29]
Sec. 26. A neglect to communicate that which a
unintentional entitles the injured party to rescind a
contract of insurance.
Rationale: The insured is under no obligation to reveal
things of which he makes a warrant because it would
constitute a superfluity of disclosure. Thus, the reason
for the requirement of intent is that the insurer needs
to rely not so much on the fact that a warrant was
made, but rather on the truth of what was warranted
[CARALE].
Sec. 28. Each party to a contract of insurance must
b. Test of Materiality
party knows and ought to communicate, is called a
concealment.
Sec. 27. A concealment whether intentional or
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 warrant, and
which the other has not the means of ascertaining.
Sec. 29. An intentional or fraudulent omission, on
the part of one insured, to communicate
information of matters proving or tending to
prove the falsity of a warranty, entitles the insurer
to rescind.
Requisites:
a. A party knows a fact which he neglects to
communicate or disclose to the other;
b. Such party concealing is duty bound to disclose
such fact to the other;
c. Such party concealing makes no warranty of the
fact concealed;
d. The other party has not the means of ascertaining
the fact concealed;
e. The fact concealed is material.
Failure of the insured to disclose conditions affecting
the risk, of which he is aware, makes the contract
voidable at the insurer’s option, the ratio being that a
contract of insurance is of good faith.
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 omitting to make further inquiries and in
accepting the application for insurance.
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 would influence the party in
making the contract [DE LEON].
In several cases, the cause of death may have no
relation to the fact or facts concealed. As clearly
provided in Sec. 31, the test of materiality is whether
the insurer would have agreed to issue the policy had
it known of the facts concealed or, perhaps, impose
additional terms or require higher premium
[CARALE]
c. 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].
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Exceptions:
1. 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].
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.
2. Waiver or estoppel;
3. 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;
d. The want of necessary documents; and
e. The use of false and simulated papers [Sec.
112]
4. 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].
INCONTESTABILITY CLAUSE
Sec. 48. Whenever a right to rescind a contract of
insurance is given to the insurer by any provision
of this chapter, such right must be exercised
previous to the commencement of an action on
the contract.
After a policy of life insurance made payable on
the death of the insured shall have been in force
during the lifetime of the insured for a period of
two (2) years from the date of its issue or of its last
reinstatement, the insurer cannot prove that the
policy is void ab initio or is rescindable by reason
of
the
fraudulent
concealment
or
misrepresentation of the insured or his agent.
Sec. 233. In the case of individual life or
endowment insurance, the policy shall contain in
substance the following conditions:
xxx
(b) A provision that the policy shall be
incontestable after it shall have been in force
during the lifetime of the insured for a period
COMMERCIAL LAW
of two (2) years from its date of issue as shown
in the policy, or date of approval of last
reinstatement, except for nonpayment of
premium and except for violation of the
conditions of the policy relating to military or
naval service in time of war;
A provision that the policy shall be incontestable after
it shall have been in force during the lifetime of the
insured for a period of 2 years from its date of issue
as shown in the policy, or date of approval of last
reinstatement [Sec. 233(b)].
Note: This only applies to life insurance.
Exceptions:
1. Non-payment of premium
2. Violation of the conditions of the policy relating
to military or naval service in time of war [Sec.
233(b)]
Effect of the incontestable clause
The insurer cannot prove that the policy is
1. Void ab initio; or
2. Rescissible by reason of:
a. Fraudulent concealment by the insured or
his agent
b. Misrepresentation by the insured or his agent
[Sec. 48]
The incontestability clause is made for the benefit of
the insured, and not the insurer, considering that its
effect and purpose is to cut off, after a considerable
period, any assertion that the policy is invalid.
Defenses, other than concealment, misrepresentation
and breach of warranty are still available to the
insurer, subsequent to the 2-year period. The insurer
may still challenge the policy by way of defense to an
action brought against the policy by the insured
[CARALE at 146].
Grounds:
1. Non-payment of premium to make the policy
effective or remain in force
2. Lack of insurable interest
3. Coverage such that the loss/damage did not arise
from the risks covered
4. Violation of military or naval service provisions
of the policy (also an issue of coverage)
5. Failure to commence action within reglementary
period
6. Failure to comply with conditions (proof of loss,
etc.) subsequent to the loss; or
7. The particular viciousness of the fraud employed
by the insured to procure the contract, such as:
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Where the policy was taken pursuant to a scheme
to murder the insured, or
b. the insured substitutes himself with another
during the medical examination
COMMERCIAL LAW
a.
d. Concealment in Marine and
Ordinary Private Insurance
Distinguished
Required
Disclosure
Effect
of
Concealment
Marine
Insurance
Exact
and
whole truth
Concealment
of the matters
specified in Sec.
112 will not
entirely avoid
the contract
but will merely
exonerate the
insurer from
losses resulting
from the risk
concealed.
f. 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.
Ordinary
Insurance
Substantial
truth
Any kind of
concealment
will make the
insurer
not
liable.
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].
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)].
e. Concealment in Non-Medical
Insurance
g. Matters which Need Not be
Disclosed
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)].
1.
2.
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)].
3.
4.
5.
6.
7.
Matters already known to the insurer [Sec. 30(a)];
Matters which each party are bound to know
[Sec. 30(b) and Sec. 32];
Matters of which the insurer waives
communication [Sec. 30(c) and Sec. 33];
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)];
Matters which relate to a risk excepted in the
policy, and which are not otherwise material [Sec.
30(e)];
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]
Matters of opinion [Sec. 35]
Sec. 32. Each party to a contract of insurance is
bound to know all the general causes which are
open to his inquiry, equally with that of the other,
and which may affect the political or material perils
contemplated; and all general usages of trade.
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Like in concealment, fraud or intent is not essential to
entitle the insurer to rescind on the ground of
misrepresentation [Sec. 45].
2. Misrepresentation/
Omissions
Sec. 36. A representation may be oral or written.
a. Kinds of Representations
Sec. 37. A representation may be made at the time
1.
Sec. 41. A representation may be altered or
2.
Sec. 42. A representation must be presumed to
A promissory representation is substantially a
condition or warranty [DE LEON].
of or before, the issuance of the policy.
withdrawn before the insurance is effected but not
afterwards.
refer to the date on which the contract goes into
effect.
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. It
may be about a past, an existing fact, or a future
happening.
Because representations are not part of the contract,
it may be altered or withdrawn before the contract
actually takes place but not after the insurer has agreed
to assume the risk due to that representation.
Misrepresentation is a false representation which
the insured states with knowledge that is untrue,
intended to deceive the insurer into accepting risk. It
can be distinguished from concealment in a sense that
it is an active form of deception, while concealment is
the passive form thereof [CARALE].
Just like concealment, misrepresentation is committed
before or at the time of the commencement of the
insurance contract. Subsequent to this time, an
insured may no longer be guilty of misrepresentation
as the insurer had already been persuaded to assume
the risk [CARALE].
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.
Requisites of misrepresentation:
a. The insured stated a fact which is untrue;
b. 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;
c. Such fact in either case is material to the risk.
Affirmative – Refers to any allegation as to the
existence or non-existence of a fact when the
contract begins [DE LEON]
Promissory - Any promise to be fulfilled after
the contract has come into existence; or any
statement concerning what is to happen during
the existence of the insurance [Sec. 39].
b. Test of Materiality
Sec. 46. The materiality of a representation is
determined by the same rules as the materiality of
a concealment.
Materiality is a judicial question and not left to the
insurance company’s sole discretion.
c. 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)].
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
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misstated, the amount payable for the policy shall
be as if the policy was purchased at the correct
age [Sec. 233(d)] [CARALE].
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.
COMMERCIAL LAW
Injured party is entitled to rescind a contract of
insurance on ground of concealment or false
representation, whether intentional or not.
3. Breach of Warranties
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].
A warranty is a statement or promise by the insured
set forth in the policy itself or incorporated in it by
proper reference, the untruth or nonfulfillment of
which in any respect and without reference to
whether the insurer was in fact prejudiced by such
untruth or non-fulfillment, renders the policy
voidable by the insurer [VANCE].
There is fraud and misrepresentation when another
person takes the place of the insured in the medical
examination [Eguaras v. Great Eastern, G.R. No. L10436 (1916)].
Statements or promises agreed upon by both parties
to the insurance contract which are contained in the
contract or properly incorporated constitute
warranties [CARALE].
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. L34200 (1982)].
A warranty may also be made by the insurer
[CARALE].
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 [Florendo v. Philam Plans, G.R. No. 186983
(2012)].
Concealment
Misrepresentation
Who may commit
May be committed by
either
insured
or
insurer
Committed
insured
only
by
Act involved
Passive form
Active form
Insured
makes
Insured
withholds
erroneous statements of
information of material
facts with the intent of
facts from the insurer;
inducing the insurer to
he maintains silence
enter into the insurance
when he ought to speak
contract
Materiality
Determined by the same rules
Effects
Same effects on the part of the insured; insurer has
right to rescind
Sec. 68. A warranty may relate to the past, the
present, the future, or to all of these.
Sec. 69. No particular form of words is necessary
to create a warranty.
a. Warranties, Riders, and
Endorsements
Sec. 50. The policy shall be in printed form which
may contain blank spaces; and any word, phrase,
clause, mark, sign, symbol, signature, number, or
word necessary to complete the contract of
insurance shall be written on the blank spaces
provided therein.
Any rider, clause, warranty or endorsement
purporting to be part of the contract of insurance
and which is pasted or attached to said policy is not
binding on the insured, unless the descriptive title
or name of the rider, clause, warranty or
endorsement is also mentioned and written on the
blank spaces provided in the policy.
Unless applied for by the insured or owner, any
rider, clause, warranty or endorsement issued after
the original policy shall be countersigned by the
insured or owner, which countersignature shall be
taken as his agreement to the contents of such
rider, clause, warranty or endorsement.
Notwithstanding the foregoing, the policy may be
in electronic form subject to the pertinent
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provisions of Republic Act No. 8792, otherwise
known as the ‘Electronic Commerce Act’ and to
such rules and regulations as may be prescribed by
the Commissioner.
COMMERCIAL LAW
c. Effect of Breach
MATERIAL WARRANTY
A rider is a printed or typed stipulation contained in
a slip of paper attached to the policy and forming an
integral part thereof. Thus, it does not need to be
signed by the insured.
Sec. 74. The violation of a material warranty, or
The signature of the insured is required only if the
warranties, or endorsements are in another
instrument.
Sec. 76. A breach of warranty without fraud
b. Kinds of Warranties
1. Express Warranty
The Code does not prescribe a particular form for a
warranty to be considered as such [Sec. 69].
However, the Code prescribes a requirement for
express warranties. It must be an agreement contained
in the policy or clearly incorporated therein as part
thereof relating to the person or thing insured or to
the risk as a fact [Sec. 71].
other material provision of the policy, on the part
of either the insured or insurer, entitles the other
to rescind.
merely exonerates an insurer from the time that it
occurs, or where it is broken in its inception,
prevents the policy from attaching to the risk.
Breach of a material warranty may either be:
1. Without fraud, in which case, the insurer will be
exonerated from the time it occurs. If made
during the inception, it will prevent the policy
from taking effect [Sec. 76].
2. With fraud, in which case, the policy is avoided
ab initio and the insured is not entitled to the
return of the premiums paid [DE LEON].
Thus, it is not enough, for a stipulation to become a
warranty, that the parties intended it as such. It must
form part of the contract of insurance.
Exceptions:
1. Loss occurs before the time of performance of
the warranty [Sec. 73]
2. Performance becomes unlawful [Sec. 73];
3. Performance becomes impossible [Sec. 73];
4. Waiver or estoppel
2. Implied Warranty
IMMATERIAL WARRANTY
Deemed included in the contract although not
expressly mentioned (e.g., implied warranty of
seaworthiness of the vessel in marine insurance and
implied warranty not to alter the circumstances of the
thing insured). This is only available for marine
insurance.
3. Affirmative Warranty
Asserts the existence of a fact or condition at the time
it is made
4. Promissory Warranty or Executory
Warranty
The insured stipulates that certain facts or conditions
pertaining to the risk shall exist or that certain things
with reference thereto shall be done or omitted. It is
in the nature of a condition subsequent [Sec. 72 and
73].
Sec. 75. A policy may declare that a violation of
specified provisions thereof shall avoid it,
otherwise the breach of an immaterial provision
does not avoid the policy.
General rule: Breach of an immaterial provision does
not avoid the policy [Sec. 75].
Exception: Breach of an immaterial provision avoids
the policy when the parties stipulate that violation of
a particular provision, though immaterial, shall avoid
the policy. In effect, the parties converted the
immaterial provision into a material one
[SUNDIANG and AQUINO]
A condition in the policy which requires insured to
disclose to the insurer of any insurance that, if
violated by the insured, would ipso facto avoid the
contract [Pioneer v. Yap, G.R. No. L-36232 (1974)].
Insurer is barred by waiver (or estoppel) to claim
violation of the so-called hydrants warranty when,
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despite knowing fully that only 2 fire hydrants existed
(out of the 11 hydrants required), it still issued the
insurance policies and received the premiums [Qua
Chee Gan v. Law Union, G.R. No. L-4611 (1955)].
Warranty
Mere
inducement
collateral
Requires
only
substantial truth and
compliance
Applies
a. Causes of loss
Written on the policy,
actually or by reference
May be written in the
policy or may be oral
Presumed material
Must be proved to be
material
Materiality
Compliance
strictly
Applicability of incontestability clause
Does not apply
Loss in insurance law embraces injury or damage
Requisites: Recovery upon a loss requires that:
a. The insured must have insurable interest in the
subject matter;
b. The interest is covered by the policy;
c. There be a loss; and
d. The loss must be one for which the insurer is
liable;
e. Notice and proof of loss must be given if policy
is fire insurance or when the same is stipulated in
the policy.
Form
Must
be
complied with
H. Claims Settlement and
Subrogation
1. Concept of Loss
Representation
Nature
Part of the contract
COMMERCIAL LAW
1. Remote Cause
An event preceding another in a causal chain, but
separated from it by other events
2. Proximate Cause
That cause, which, in natural and continuous
sequence, unbroken by any efficient intervening
cause, produces the injury, and without which the
result would not have occurred [Vda. De Bataclan v.
Medina, G.R. No. L-10126 (1957)].
3. Immediate Cause
The cause, not the proximate cause, which
immediately precedes the loss.
b. Liability for Loss
Loss for which the
insurer is liable
Loss the proximate
cause of which is the
peril insured against
[Sec. 86]
Loss the immediate
cause of which is the
peril insured against
except
where
the
proximate cause is an
excepted peril
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Loss for which the
insurer is not liable
Loss by insured’s willful
act
Loss due to connivance
of the insured [Sec. 89]
U.P. LAW BOC
Loss for which the
insurer is liable
Loss
through
negligence of insured
except where there was
gross
negligence
amounting to willful
acts
Loss caused by efforts
to rescue the thing from
peril insured against if,
during the course of the
rescue, the thing is
exposed to a peril not
insured against, which
permanently deprives
the insured of its
possession in whole or
in part [Sec. 87]
INSURANCE CODE
Loss for which the
insurer is not liable
Loss
where
the
excepted peril is the
proximate cause
COMMERCIAL LAW
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].
Time for Giving Notice
Notice of loss must be given within reasonable time
[Bachrach v. Britain American Assurance, G.R. No. L5715 (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].
b. Proof of Loss
2. Notice and Proof of Loss
a. Notice of Loss
This refers to the formal notice given the insurer by
the insured or claimant under a policy of the
occurrence of the loss insured against.
Purpose
Its purpose is to apprise the insurance company so
that it may make proper investigation and take such
action as may be necessary to protect its interest.
In fire insurance, an insurer is exonerated, if notice
thereof be not given to him by an insured, or some
person entitled to the benefit of the insurance,
without unnecessary delay [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
(1987)] but there is a ruling to the contrary [Col. Sav.
Bank v. American Surety, 87 P 118].
Form
In case of loss as regards fire insurance, there must be
a written notice thereof [Sec. 90]. But as to other nonlife insurance policies, the law does not provide for a
necessity of written notice [DE LEON].
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].
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].
RULES FOR RECOVERY
Sec. 90. In case of loss upon an insurance against
fire, 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.
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].
The notice of loss may be in the form of an informal
or provisional claim containing a minimum of
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Exceptions:
1. For both notice and proof of loss, defects or
delay in the presentation of notice may be waived:
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.
3. Guidelines on Claims
Settlement
Claims settlement is the indemnification of the loss
suffered by the insured. The claimant may be the
insured or reinsured, the insurer who is entitled to
subrogation, or a third party who has a claim against
the insured
Where a policy gives the insurer the control of the
decision to settle claim or litigate it, the insurer
nevertheless is required to observe a certain measure
of consideration for the interest of the insured.
(1)Life Insurance
Non-Life Insurance
Maturity
Either:
1. Upon death of the 1. Upon happening of
person insured;
event insured against;
2. Upon his surviving a
and
specific period; or
2. Event must occur
3. Otherwise
within the period
contingently on the
specified in policy,
continuance
or
otherwise
insurer
cessation of life [Sec.
has no liability
182]
General
Delivery of Proceeds
rule: The
proceeds should be
delivered immediately
upon maturity of policy.
Exceptions:
1.
If
payable
in
installments or as an
annuity, when such
installments
or
annuities
become
due;
1.
Within 30 days after:
a. Proof of loss is
received
by
insurer; and
b. Ascertainment
of
loss
or
damage is made
either
by
agreement
between
the
insured
and
COMMERCIAL LAW
2. If maturity is upon
death, within 60 days
after presentation of 2.
claim and filing of
proof of death of
insured. [Sec. 248]
insurer or by
arbitration
If ascertainment is
not made within 60
days after such
receipt by insurer of
proof of loss, then
loss or damage shall
be paid within 90
days after such
receipt. [Sec. 249]
Effect of refusal or failure to pay claim within
time prescribed
1.
This entitles the beneficiary to collect interest on
the proceeds of policy for the duration of the
delay at rate of twice the ceiling prescribed by the
monetary board (unless refusal to pay is based on
ground that claim is fraudulent)
2. In case damages are awarded, this includes
attorney’s fees and other expenses incurred due
to delay (plus the interest) [Sec. 248 and 249]
In case of litigation, it is the duty of the Commissioner
or the Court to determine whether the claim has been
unreasonably denied or withheld. Failure to pay any
such claim within the time prescribed shall be
considered prima facie evidence of unreasonable delay
in payment [Sec. 250].
a. 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;
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Failing to adopt and implement reasonable
standards for the prompt investigation of claims
arising under its policies;
In compulsory motor vehicle insurance, the action
prescribes in one year from the denial of the claim
[Sec. 397].
Not attempting in good faith to effectuate prompt,
fair and equitable settlement of claims submitted
in which liability has become reasonably clear; or
Note: The period of commencing an action under a
policy of insurance under Sec. 63 is to be computed
not from the time when the loss actually occurs but
from the time when the insured has a right to bring
an action against the insurer.
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 Commissioner’s
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 company’s certificate of
authority
Sec. 247 lists the grounds which are sufficient cause
for the suspension or revocation of the insurer’s
certificate of authority [Sec. 247(c)].
b. Prescription of Action
Should the insurer reject the claim of the insured, the
remedy of the latter would be to file an action against
the insurer with the proper tribunal [CARALE].
An “action” or “suit” is an act by which one sues
another in a court of justice for the enforcement or
protection of a right, or the prevention or redress of
a wrong [Lopez v. Filipinas Compania de Seguros, G.R.
No. L-19613 (1966)].
In the absence of an express stipulation in the policy,
it being based on a written contract, the action
prescribes in ten years [Art. 1144, NCC].
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].
The right of the insured to the payment of his loss
accrues from the happening of the loss. However, the
cause of action in an insurance contract does not
accrue until the insured's claim is finally rejected by
the insurer. This is because before such final rejection,
there is no real necessity for bringing suit [Eagle Star
Insurance vs Chia Yu, G.R. No. L-5915 (1955)].
c. Subrogation
The right of subrogation is provided in the Civil
Code. :
Art. 2207. If the plaintiff’s property has been
insured, and he has received indemnity from the
insurance company for the injury or loss arising
out of the wrong or breach of contract complained
of, the insurance company shall be subrogated to
the rights of the insured against the wrongdoer or
the person who has violated the contact. If the
amount paid by the insurance company does not
fully cover the injury or loss, the aggrieved party
shall be entitled to recover the deficiency from the
person causing the loss or injury.
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.
Note: Subrogation applies only to property insurance
and non-life insurance.
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)].
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The insured can no longer recover from the offended
party what was paid to him by the insurer but he can
recover any deficiency if the damages suffered are
more than what was paid. The deficiency is not
covered by the right of subrogation.
The insurer must present the policy as evidence to
determine the extent of its coverage [Wallem Phil.
Shipping v. Prudential Guarantee, G.R. No. 152158
(2003)].
Where 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 insured’s 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]
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- 52756 (1987)].
COMMERCIAL LAW
I. Insurance Commissioner
1. Jurisdiction and
Adjudicatory Powers
The
Insurance
Commissioner
exercises
administrative supervision over insurance companies,
mutual benefit associations and trusts for charitable
uses. He has the duty to see that all laws relating to
insurance companies and other insurance matters are
faithfully executed [CARALE].
In addition to administrative powers, the
Commissioner has the power to adjudicate disputes
relating to an insurance company’s 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.
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]
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].
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2. Revocation of Certificate of
Authority
The Certificate of Authority issued to the domestic or
foreign company by the Commission may be revoked
or suspended by the Insurance Commissioner for any
of the following grounds:
a. The company is in an unsound condition
b. That it has failed to comply with the provisions
of law or regulations obligatory upon it
c. That its condition or method of business is such
as to render its proceedings hazardous to the
public or its policyholders
d. 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
e. 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 company’s estimated
receipts and disbursements, as well as the basis
therefor, for the next succeeding three years [Sec.
254].
3. Liquidation of Insurance
Company
If the company is determined by the Commissioner
to be insolvent or cannot resume business, he shall, if
public interest requires, order its liquidation [Sec.
256].
This should be distinguished from a situation where a
conservator is appointed when the Commissioner
finds that a company is in a state of continuing
inability or unwillingness to maintain a condition of
solvency or liquidity adequate to protect the
policyholders and creditors. The conservator will take
charge of the management of the insurance company
[Sec. 255].
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TRANSPORTATION LAWS
COMMERCIAL LAW
TRANSPORTATION
LAWS
Commercial Law
IV. TRANSPORTATION
LAWS
A. Common Carriers
1. 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 [Crisostomo v CA, G.R. No.
138334 (2003)].
Parties to the contract:
a. 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
b. Carrier (may sometimes be referred to as
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.
c. 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:
a. 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
b. Common or public carriers [Art. 1732, NCC]
Common carriers are:
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a. Persons, corporations, firms or associations;
b. Engaged in the business of carrying or
transporting;
c. Passengers or goods or both;
d. By land, water, or air;
e. For compensation;
f. Offering their services to the public [Art. 1732,
NCC].
Art. 1732 makes no distinction:
a. 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, G.R. No. 111127 (1996)];
b. 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, G.R. No. 131621 (1999)];
c. Between a carrier offering its services to the
general public and one who offers services or
solicits business only from a narrow segment of the
general population [De Guzman v. CA, G.R. No. L47822 (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 duties and obligations that the law
imposes [Perena v. Nicolas, G.R. No. 157917 (2012)].
A common carrier need not have fixed and
publicly known routes. Neither does it have to
maintain terminals or issue tickets [Asia Lighterage and
Shipping v. CA, G.R. No. 147246 (2003)].
One engaged in the business of transporting
petroleum products from refineries via pipeline is
a common carrier. It is engaged in the business of
transporting or carrying goods, i.e., petroleum
products, for hire as a public employment. It
undertakes to carry for all persons indifferently, that
is, to all persons who choose to employ its services,
and transports the goods by land and for
compensation. The fact that it has a limited clientele
COMMERCIAL LAW
does not exclude it from the definition of a common
carrier [First Phil. Industrial v. CA, G.R. No. 125948
(1998)].
A customs broker may be regarded as a common
carrier. As long as a person holds itself to the public
for the purpose of transporting goods as a business,
it is already considered a common carrier regardless
if it owns the vehicle used or has to hire one [Schmitz
Transport v. CA, G.R. No. 150255. (2005)]
A travel agency is not a common carrier. It is not
an entity engaged in the business of transporting
either passengers or goods and is therefore neither a
private nor a common carrier. Its covenant with its
customers is simply to make travel arrangements on
their behalf [Crisostomo v. CA, G.R. No. 138334
(2003)].
DIFFERENCE
BETWEEN
COMMON
CARRIER AND PRIVATE CARRIER
Common Carrier
Private Carrier
Availability
Holds himself out in
common, that is, to all
persons who choose to
employ him, as ready to
carry for hire
Agrees in some special
case with some private
individual to carry for
hire
Bound to carry all who
offer
and
tender
reasonable
compensation
for
carrying them
Not bound to carry for
any reason, such goods
as it is accustomed to
carry, unless it enters
into a special agreement
to do so
Binding Effect
Diligence Required
Extraordinary diligence
Ordinary diligence
Civil Code; Code of
Commerce and special
laws, if not regulated by
the Civil Code (Art.
1766); law of the
country to which the
goods are to be
transported,
if
regarding liability for
loss, destruction, or
deterioration of goods
(Art. 1753)
Law on obligations and
contracts
A
public
service,
therefore subject to
provisions governing
common carriers and
public utilities
Not
subject
to
regulation as a common
carrier
Governing Law
Regulation
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It is not necessary that the carrier be issued a
certificate of public convenience [Loadstar Shipping
Co., Inc. v. CA, G.R. No. 131621 (1999)].
REGISTERED OWNER RULE:
The person who is the registered owner of a vehicle
is liable for any damage caused by the negligent
operation of the vehicle although the same was
already sold. [Filcar Transport v. Espinas, G.R. No.
174156 (2012)]
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Kabit system:
a.
It is an arrangement whereby a person who has
been granted a certificate of convenience allows
another person who owns motor vehicles to
operate under such franchise for a fee [Lita
Enterprises, Inc. v. IAC, G.R. No. L-64693 (1984)].
b. It is invariably recognized as being contrary to
public policy and therefore void and inexistent
under Art. 1409. Thus, for the safety of
passengers and the public, the registered owner
of the vehicle is not allowed to prove that
another person has become the owner so that he
may be thereby relieved of responsibility [Lim v.
CA, G.R. No. 125817 (2002)].
c. One of the primary factors considered in the
granting of a certificate of public convenience
for the business of public transportation is the
financial capacity of the holder of the license, so
that liabilities arising from accidents may be duly
compensated. The kabit system renders illusory
such purpose and, worse, may still be availed of
by the grantee to escape civil liability caused by a
negligent use of a vehicle owned by another and
operated under his license. [Dizon v. Octavio
(1955)]
d. 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, G.R. No. 125817 (2002)].
TRANSPORTATION NETWORK VEHICLE
SERVICE
Transport Network Company or TNC is defined
as an organization whether a corporation,
partnership, or sole proprietor, that provides prearranged 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].
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
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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 702015].
Note: Please be guided by the requirements under Art.
1732.
COMMERCIAL LAW
presumption of negligence because the goods are not
lost, deteriorated, or destroyed [Art. 1735, NCC].
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, NCC].
Art. 1733, NCC. Common carriers, from the
2. Diligence Required of
nature of their business and for reasons of public
policy, are bound to observe extraordinary
diligence in the vigilance over the goods and for
the safety of the passengers transported by them,
according to all the circumstances of each case.
Common Carriers
a. 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, NCC]
Such extraordinary diligence in the vigilance over
the goods is further expressed in Articles 1734,
1735, and 1745, Nos. 5, 6, and 7, while the
extraordinary diligence for the safety of the
passengers is further set forth in Articles 1755 and
1756.
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 Arts.
1755 and 1756 [Art. 1733, NCC].
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.
Extraordinary diligence
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, NCC];
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, G.R. No. 113003 (1997)].
b. 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, G.R. No. L-15652
(1920)].
Note: While delay in the delivery of goods is a breach
of contract of carriage, it does not raise the
Art. 1755, NCC. A common carrier is bound to
Note: Mere failure to reach one’s destination, without
injury or death, does not raise the presumption of
negligence because it does not involve safety of the
passengers.
3. Liabilities of Common
Carriers
The obligation of the common carrier consists in the
transportation of passengers or goods or both [Art.
1732, NCC].
Principles governing the liability of common
carriers:
a. The liability of a carrier is contractual and arises
upon breach of its obligation. There is breach if
it fails to exert extraordinary diligence according
to all circumstances of each case;
b. A carrier is obliged to carry its passenger with the
utmost diligence of a very cautious person,
having due regard for all the circumstances;
c. A carrier is presumed to be at fault or to have
acted negligently in case of death of, or injury to,
passengers, it being its duty to prove that it
exercised extraordinary diligence; and
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d. The carrier is not an insurer against all risks of
travel. [Isaac v. A.L. Ammen, G.R. No. L-9671
(1957)].
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B. Vigilance over Goods
Thus, in De Guzman v. CA [G.R. No. L-47822 (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.
1. Liability, in General
NATURAL DISASTER OR CALAMITY
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, NCC].
Requisites:
a. The natural disaster must have been the
proximate and only cause of the loss;
b. 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, NCC]; and
c. The common carrier must not have negligently
incurred delay [Art. 1740, NCC];
Under Philippine law, the liability of the common
carrier with respect to vigilance over goods, in
general, are as follows:
a. Common carriers are responsible for the loss,
destruction, or deterioration of the goods [Art.
1734, NCC]. In fact, they are liable even in those
cases where the cause of the loss or damage is
unknown [AGBAYANI].
b. 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, NCC].
Note: Two-pronged analysis in determining liability:
a. Whether or not the cause of the loss, destruction,
or deterioration is included under Art. 1734;
b. If not, whether or not the common carrier
exercised extraordinary diligence.
2. 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:
a. Flood, storm, earthquake, lightning, or other
natural disaster or calamity;
b. Act of the public enemy in war, whether
international or civil;
c. Act of omission of the shipper or owner of the
goods;
d. The character of the goods or defects in the
packing or in the containers;
e. Order or act of competent public authority [Art.
1734, NCC].
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,
NCC].
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.,
G.R. No. 135645 (2002)].
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,
G.R. No. L-69044 (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].
ACT OF PUBLIC ENEMY
Requisites:
a. The act of the public enemy was committed
either in an international or civil war [Art. 1734
(2), NCC];
b. The act of the public enemy must have been the
proximate and only cause; and
c. 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, NCC].
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Thieves, rioters, robbers, and insurrectionists, though
at war with social order, are not in a legal sense
classed as public enemies, but are merely private
depredators for whose acts a carrier is answerable.
Pirates on the high seas, however, stand as an
exception to this rule. They are considered the
enemies of all civilized nations, and indeed of the
human race, and consequently their depredations on
a common carrier will excuse him from liability.
[AQUINO].
COMMERCIAL LAW
of sufficient proof that the issuance of the order was
attended with such force or intimidation as to
completely overpower the will of the carrier’s
employees [Ganzon v. CA, G.R. No. L-48757 (1988)].
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, NCC].
CHARACTER OF THE GOODS
Requisites:
a. 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.
1734 (4), NCC]; and
b. The common carrier must exercise due diligence
to forestall or lessen the loss [Art. 1742, NCC].
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, G.R.
No. L-16629 (1962)].
ORDER OF COMPETENT AUTHORITY
Requisites:
a. There must be an order or act of competent
public authority through which the goods are
seized or destroyed [Art. 1734 (5), NCC]; and
b. The said public authority must have had the
power to issue the order [Art. 1743, NCC].
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
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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.
A fortuitous event has the following characteristics:
a. 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;
b. 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;
c. The occurrence must be such as to render it
impossible for the debtor to fulfill his obligation
in a normal manner; and
d. 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, G.R. No.
113003 (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, G.R. No. L-6092
(1912)].
COMMERCIAL LAW
b. The shipper or owner merely contributed to such
loss, destruction, or deterioration [Art. 1741,
NCC].
4. Duration of Extraordinary
Responsibility for Goods
Instances when carrier has responsibility to exercise
extraordinary diligence:
a. From the time the goods are unconditionally
placed in the possession of, and received by the
carrier [Art 1736, NCC] or its authorized agent
[Compania Maritima v. Insurance Co., G.R. No. L18965 (1964)], until the same are delivered
actually and constructively by the carrier to the
consignee or to the person who has a right to
receive them;
b. When goods are temporarily unloaded or stored
in transit, unless the shipper or owner has made
use of the right of stoppage in transitu [Art 1737,
NCC];
c. During storage in a warehouse of the carrier at
the place of destination, until consignee has
been advised of the arrival of the goods and has
had reasonable opportunity to remove or
dispose them [Art 1738, NCC];
In dealing with the contract of common carriage of
passengers, for purpose of accuracy, there are two (2)
aspects of the same, namely:
1. contract ‘to carry (at some future time),’ which
contract is consensual and is necessarily
perfected by mere consent; and
2. contract ‘of carriage’ or ‘of common carriage,’
which should be considered as a real contract for
not until the carrier is 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.
a. Delivery of Goods to Common
Carriers
3. Contributory Negligence
The liability of the common carrier shall be equitably
reduced when the loss, destruction, or deterioration
of the goods when:
a. The negligence of the common carrier was the
proximate cause thereof; and
Under Art. 1736, delivery means unconditionally
placing the goods in the possession of the carrier and
the carrier receiving them for transportation.
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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 [Compania Maritima v Insurance Co.,
G.R. No. L-18965 (1964)].
b. Actual or 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, such
as agents, brokers, and the like.
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, G.R. No. L-9840
(1957)].
It is settled in maritime law jurisprudence that cargoes
while being unloaded generally remain under the
COMMERCIAL LAW
custody of the carrier [Asian Terminals, Inc. v. Philam
Insurance Co., G.R. No. 181163 (2013)]
c. Temporary Unloading or Storage
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 [Art 1737, NCC] .
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].
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].
5. Stipulation for Limitation of
Liability
There are two possible stipulations limiting the
liability of the common carrier:
a. Stipulation limiting the common carrier’s liability
as to the diligence required;
b. Stipulation limiting the common carrier’s liability
as to the amount of liability.
An agreement limiting the common carrier’s liability
for delay on account of strikes or riots is also valid
[Art. 1748, NCC].
a. 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:
1. In writing, signed by the shipper or owner;
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2.
3.
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Supported by a valuable consideration other than
the service rendered by the common carrier; and
Reasonable, just and not contrary to public
policy [Art. 1744, NCC].
Any of the following or similar stipulations shall be
considered unreasonable, unjust and contrary to
public policy:
1. That the goods are transported at the risk of the
owner or shipper;
2. That the common carrier will not be liable for
any loss, destruction, or deterioration of the
goods;
3. That the common carrier need not observe any
diligence in the custody of the goods;
4. That the common carrier shall exercise a degree
of diligence less than that of a good father of a
family, or of a man of ordinary prudence in the
vigilance over the movables transported;
5. That the common carrier shall not be responsible
for the acts or omission of his or its employees;
6. That the common carrier’s liability for acts
committed by thieves, or of robbers who do not
act with grave or irresistible threat, violence or
force, is dispensed with or diminished;
7. That the common carrier is not responsible for
the loss, destruction, or deterioration of goods
on account of the defective condition of the car,
vehicle, ship, airplane or other equipment used
in the contract of carriage [Art. 1745, NCC].
The following stipulations are also void:
1. Stipulation exempting the common carrier from
any and all liability for loss or damage occasioned
by its own negligence;
2. Stipulation providing for an unqualified
limitation of such liability to an agreed
stipulation [Heacock v. Macondray, G.R. No. L16598 (1921)]
b. Limitation of Liability to Fixed
Amount
A stipulation that the common carrier’s 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, NCC].
A contract fixing the sum that may be recovered by
the owner or shipper for the loss, destruction or
deterioration of the goods is valid if:
1. It is reasonable and just under the circumstances;
and
2. It has been fairly and freely agreed upon [Art.
1750, NCC].
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While a passenger may not have signed the plane
ticket, he is nevertheless bound by the provision
thereof; such provisions have been held to be part of
the contract of carriage and valid and binding upon
the passenger regardless of the latter’s lack of
knowledge or assent to the regulation. It is what is
known as a contract of adhesion wherein one party
imposes a ready-made form of contract on the other.
The one who adheres to the contract is in reality free
to reject it entirely. A contract limiting liability upon
an agreed valuation does not offend against the policy
of the law forbidding one from contracting against
his own negligence [Ong Yiu v. CA, G.R. No. l-40597
(1979)].
[However], the fact that the conditions are printed at
the back of the ticket stub in letters so small that they
are hard to read would not warrant the presumption
that the [shipper] was aware of those conditions such
that he had “fairly and freely agreed” to those
conditions [Shewaram v. PAL, G.R. No. L-20099
(1966)].
Factors Affecting Agreement
The effect of these stipulations is subject to the
following provisions:
1. An agreement limiting the common carrier’s
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, NCC].
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 carrier’s liability cannot be availed of in
case of the loss, destruction, or deterioration of
the goods [Art. 1747, NCC]. 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 carrier’s liability is reasonable, just and
in consonance with public policy [Art. 1751,
NCC].
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,
NCC].
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c. Limitation of Liability in
Absence of Declaration of
Greater Value
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, NCC].
A stipulation that the common carrier’s 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, NCC].
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.
6. Liability for Baggage of
Passengers
Baggage are things that a passenger will bring with
him consistent with a temporary absence from where
he lives. Passenger’s baggage must have a direct
relationship with the passenger who is traveling.
For instance, a balikbayan box or suitcase is
passenger’s 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].
There are two kinds of passenger’s baggage, which
are governed differently:
a. Passenger baggage in the custody of the
passenger (or carry-on luggage); and
b. 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.
a. Checked-In baggage
The provisions of Arts 1733-1753 shall apply to
passenger’s baggage which is not in his personal
custody or in that of his employee [Art. 1754, NCC].
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.
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, NCC]; or
4. A thief or robber done without the use of arms
or irresistible force [Art. 2001, NCC].
The carrier is not liable if loss or injury is caused by:
1. Force majeure [Art 2000, NCC];
2. Theft or robbery with the use of arms or
irresistible force[Art 2001, NCC];
3. The acts of the passenger, his family, servants, or
visitors;
4. The character of the baggage [Art 2002, NCC].
The following provisions also figure in 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, NCC].
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, NCC].
b. Baggage in Possession of
Passengers
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Based on jurisprudence, the duty that the carrier of
passengers owes to its patrons extends to persons
boarding the cars as well as those alighting therefrom
[Del Prado v. Manila Electric Company, G.R. No. L29462 (1929)].
C. Safety of Passengers
1. Liability, in general
Under Philippine law, the liability of the common
carrier with respect to the safety of passengers, in
general, are as follows:
a. 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, NCC].
b. 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, NCC].
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,
G.R. No. 85691 (1990)]. Bachelor Express illustrates
that force majeure is not itself a defense; the exercise
of the diligence required by law is the defense.
2. 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,
NCC].
Exception: When a passenger is carried gratuitously,
a stipulation limiting the common carrier’s liability
for negligence is valid [Art 1758, NCC].
Exception to the exception: Even when a passenger is
carried gratuitously, a stipulation limiting the
common carrier’s liability for willful acts or gross
negligence is invalid [Art 1758, NCC].
The reduction of fare does not justify any limitation
of the common carrier’s liability [Art. 1758, NCC].
3. Duration of Liability
As in the contract of carriage of 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.
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:
a. In case a voyage already begun should be
interrupted:
1. The passengers shall be obliged to pay the
fare in proportion to the distance covered;
and
2. Have the following reliefs:
Cause of
Relief
interruption
An accidental cause Without right to
or force majeure
recover for losses
and damages
By the captain With a right to
exclusively
indemnity
(1) Caused by the (a) He may not be
disability of the
required to pay
vessel and
any
increased
(2) A
passenger
price of passage;
should agree to
but
await the repairs (b) His
living
expenses during
the stay shall be
for his own
account.
b. In case of delay in the departure of the vessel,
the passengers have:
1. The right to remain on board;
2. 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;
3. 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
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passengers may be, making all the stops indicated in
its itinerary.
a. Waiting for Carrier or Boarding
of Carrier
As to the commencement of the duty of the common
carrier, it was held that the duty that the carrier of
passengers owes to its patrons extends to persons
boarding the cars as well as to those alighting
therefrom. 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 Electric Company, G.R.
No. L-29462 (1929)].
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,
G.R. No. 95582 (1991)].
With respect to carriage of passengers by trains, the
extraordinary responsibility of common carriers
commences the moment the person who purchases
the ticket from the carrier presents himself at the
proper place and in a proper manner to be
transported with a bona fide intent to ride the coach
[AQUINO citing Vda. de Nueca, et al. vs. Manila Railroad
Company].
Similarly, with respect to carriage of passengers by
sea, the duty of the carrier commences as soon as the
person with bona fide intention of taking passage
places himself in the care of the carrier or its
employees and is accepted as passenger. [AQUINO]
b. 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 carrier’s 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 carrier’s
premises. What is a reasonable time or a reasonable
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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
company’s 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, G.R. No. L-20761
(1966)].
The reasonableness of time should be made to
depend on the attending circumstances of the case,
such as the kind of common carrier, the nature of its
business, the customs of the place, and so forth, and
therefore precludes a consideration of the time
element per se without taking into account such other
factors. The primary factor to be considered is the
existence of a reasonable cause as will justify the
presence of the victim on or near the petitioner’s
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, G.R. No. 84458 (1989)].
The relation of carrier and passenger continues until
the latter has been landed at the port of destination
and has left the carrier’s 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, G.R. No.
L-82619 (1993)].
Note: Despite the Court’s 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.’
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4. Liability for Acts of Others
a. Employees
General rule: Common carriers are liable for the death
of or injuries to passengers through the negligence or
willful acts of the former’s employees, although such
employees may have acted beyond the scope of their
authority or in violation of the orders of the common
carriers.
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, NCC].
This liability cannot be eliminated or limited by
stipulation, by the posting of notices, by statements
on the tickets or otherwise [Art. 1760, NCC].
Ratio: The servant is clothed with delegated authority
and charged with the duty to execute the carrier’s
undertaking to carry the passenger safely
[AGBAYANI]. Also, the defense of diligence in the
selection and supervision of employees does not
obtain because the liability is not based on quasidelict, 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 employee’s duty. It is no defense for
the carrier that the act was done in excess of authority
or in disobedience of the carrier’s orders. The
carrier’s liability here is absolute in the sense that it
practically secures the passengers from assaults
committed by its own employees [Maranan v. Perez,
G.R. No. L-22272 (1967)].
Exception: A common carrier is not responsible for
acts falling under force majeure.
When a party is unable to fulfill his obligation because
of force majeure, the general rule is that he cannot be
held liable for damages for non-performance [Japan
Airlines vs. CA, G.R. No. 118664 (1998)].
Note: In order to be exempted from liability due to a
fortuitous event, a common carrier must still prove
that it was not negligent in causing the death or injury
resulting from an accident. In other words, there
must be a complete exclusion of human agency from
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the cause of injury or death. Hence, it was held that,
under the circumstances, the explosion of the new
tire may not be considered a fortuitous event as there
are human factors involved in the situation [Yobido v.
CA, G.R. No. 113003 (1997)].
b. Other Passengers and Strangers
General Rule: A common carrier is not liable for
injuries inflicted by strangers or co-passengers.
Exception: 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 carrier's employees,
through the exercise of the diligence of a good
father of a family, could have prevented or stopped
the act or omission [Art. 1763, NCC].
Note: The law speaks of injuries suffered by the
passenger but not death. However, there appears to
be no reason why the common carrier should not be
held liable under such circumstances. The word
“injuries” should be interpreted to include death
[Agbayani (1987)].
Under 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 carrier’s
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, 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,
G.R. No. 52159 (1989)].
c. Manufacturers of Equipment
In case of mechanical defects, it was held that while a
carrier is not an insurer of the safety of the
passengers, it should nevertheless be held to answer
for the flaws of its equipment if such flaws were at all
discoverable. In this connection, the manufacturer of
the defective appliance is considered in law the agent
of the carrier, and the good repute of the
manufacturer will not relieve the carrier from liability.
The rationale of the carrier’s liability is the fact that
the passenger has no privity with the manufacturer of
the defective equipment; hence, he has no remedy
against him, while the carrier usually has [Necesito vs.
Paras, G.R. No. L-10605 (1958)].
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1.
a.
5. Contributory Negligence
The passenger must observe the diligence of a good
father of a family to avoid injury to himself [Art.
1761, NCC].
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, NCC].
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, G.R. No. L-9671 (1957)]. 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.
6. Extent of Liability for
In case the common carrier acted in good faith:
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, NCC].
In the absence of a showing that common carrier’s
attention was called to the special circumstances
requiring prompt delivery of a passenger’s luggage,
the common carrier cannot be held liable for the
cancellation of passenger’s 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, G.R. No. 70462
(1988)].
b. Moral Damages
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.
Moral damages, though incapable of pecuniary
computation, if they are the proximate result of the
common carrier’s wrongful act or omission, may be
recovered [Art. 2217, NCC].
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, NCC].
In cases of breach of contract of carriage, moral
damages may be recovered where:
1. The common carrier acted fraudulently;
2. The common carrier acted in bad faith [Art.
2220, NCC];
3. Death of a passenger resulted even in the
absence of bad faith or fraud [Art. 2206, NCC].
Thus, the damages recoverable are:
a. Actual or compensatory damages;
b. Moral damages;
c. Exemplary damages;
d. Nominal, temperate, and liquidated damages;
e. Attorney’s fees.
a. Actual or Compensatory
Damages
Actual or compensatory damages refer to adequate
compensation for such pecuniary loss suffered as
duly proved [Art. 2199, NCC].
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, G.R. No. L-21438 (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, G.R. No. L-28773 (1975)].
Under Art. 2201, the liability for damages include:
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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,
G.R. No. 124110 (2001)].
c. 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, NCC].
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, G.R. No. 88052
(1989)].
d. Nominal, Temperate, and
Liquidated Damages
Nominal damages are adjudicated in order that a
right of the plaintiff, which has been violated by the
defendant, may be vindicated or recognized, not for
the purpose of indemnifying the plaintiff for any loss
suffered by him [Art. 2221, NCC]. 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, NCC].
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surgeries and rehabilitative therapy. As the records
indicated, Paras was first rushed for emergency
treatment to the San Pablo Medical Center in San
Pablo City, Laguna, and was later brought to the
National Orthopedic Hospital in Quezon City where
he was diagnosed to have suffered a dislocated hip,
fracture of the fibula on the right leg, fracture of the
small bone of the right leg, and closed fracture on the
tibial plateau of the left leg. He underwent surgeries
on March 4, 1987 and April 15, 1987 to repair the
fractures. Thus, the CA awarded to him temperate
damages of P50,000.00 in the absence of definite
proof of his actual expenses towards that end.
Liquidated damages are those damages agreed
upon by the parties to a contract, to be paid in case
of breach thereof [Art. 2226, NCC].
e. Attorney’s Fees
Under Art. 2208, as applicable to a contract of
carriage, attorney’s fees and expenses of litigation
may be recovered in the following cases:
1. When exemplary damages are awarded;
2. When the common carrier’s 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
plaintiff’s valid, just and demandable claim;
4. In any other case where the court deems it just
and equitable that attorney’s fees and expenses
of litigation should be recovered.
A violation of the passenger’s 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, G.R. No. 95536 (1922)].
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, NCC].
In the case of Philtranco v Paras [G.R. No.
161909(2012)], the Supreme Court upheld the award
of temperate damages by the CA. Paras failed to show
receipts of at least two surgeries as well as
rehabilitative therapy. Nonetheless, the CA was
convinced that Paras should not suffer from the lack
of definite proof of his actual expenses for the
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D. Bill of Lading
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 [Compania Maritima v Insurance Co.,
G.R. No. L-18965 (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, G.R. No. 95529
(1991)].
1. Three-Fold Character
a.
Receipt as to the quantity and description of the
goods shipped;
b. Contract to transport and deliver the goods to
the consignee or other person therein
designated, on the terms specified in such
instrument; and
c. Document of title, which makes it a symbol of
the goods.
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, Code of Commerce]
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not admissible to vary or contradict a complete and
enforceable agreement embodied in a document,
subject to well defined exceptions [Magellan Mfg.
Marketing Corp. v. CA, G.R. No. 95529 (1991)].
2. 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 at the time of their receipt, without
damage or impairment [Art. 363, COC].
a. 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, COC].
In case of failure to deliver, the carrier shall pay the
indemnity agreed upon in the bill of lading, neither
the shipper nor consignee being entitled to anything
else.
Should there be no period previously fixed, the
carrier is bound to forward the goods in the first
shipment of the same or similar merchandise which
he may make to the point of delivery. Should he not
do so, he shall be liable for damages cause by the
delay [Art. 358, COC].
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, COC].
Period of delivery is
stipulated
Period of delivery is
NOT stipulated
Indemnity for delay is
fixed in Bill of Lading
Indemnity for delay
NOT fixed
Bill of Lading is covered by the Parol Evidence Rule
in which the terms of the contract are rendered
conclusive upon the parties and evidence aliunde is
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Delivery must be made
within period fixed
Delivery must be made
through
the
first
shipment of the same
or similar merchandise.
If not made on the first
shipment, delay arises.
Liability is limited to
the stipulation
Liable for all damages
which may have been
caused by the delay.
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b. 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, par. 2, COC].
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, par.
3, COC].
The surrender of the original bill of lading is not a
condition precedent for a common carrier to be
discharged of its contractual obligation. If surrender
of the original bill of lading is not possible,
acknowledgment of the delivery by signing the
delivery receipt suffices [National Trucking and
Forwarding Corp v Lorenzo Shipping Corp, G.R. No.
153563 (2005)].
c. 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, COC].
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, COC];
3. In case part of the goods is in good condition
and separation is possible, the consignee may
refuse to receive only the damaged goods [Art.
365, COC].
4. Where the delay is through the fault of the carrier
[Art. 371, COC].
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.
COMMERCIAL LAW
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, COC].
3. 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:
a. Within 24 hours, if the indications of the damage
cannot be ascertained from the exterior of the
packages (i.e., latent damage); or
b. 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 (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 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:
a. After the periods mentioned have elapsed; or
b. 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)].
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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, G.R.
No. 168433 (2009)].
The validity of a contractual limitation of time for
filing a suit against a carrier that is shorter than the
statutory period has been generally held valid as such
stipulation merely affects the shipper’s remedy and
does not affect the liability of the carrier. In the
absence of any statutory limitation and subject only
to the requirement on the reasonableness of the
stipulated limitation period, the parties to a contract
of carriage may fix, by agreement, a shorter time for
the bringing of suit on a claim for the loss of or
damage to the shipment than that provided by the
statute of limitations. Such limitation is not contrary
to public policy for it does not in any way defeat the
complete vestiture of the right to recover, but merely
requires the assertion of that right by action at an
earlier period than would be necessary to defeat it
through the operation of the ordinary statute of
limitations. [PHILAMGEN v. Sweet Lines, Inc., G.R.
No. 87434 (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, COC]. It
is only when the carrier’s fault is so gross as to
amount to actual fraud that the actual amount of the
losses and damages suffered may be proved by the
shipper against the carrier.
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, COC].
4. Period for Filing Actions
a. 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, NCC].
2. Within 10 years, if a bill of lading was issued [Art.
1146, NCC].
b. International Carriage of Goods
by Sea
COMMERCIAL LAW
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 COGSA, as adopted and embodied in CA 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, G.R. No. 77638 (1990) ].
Code of Commerce
COGSA
Primarily
governs
Applicable law for all
domestic transport, but
contracts for carriage
nothing stops parties
of goods by sea to
from stipulating that
Philippine ports in
COGSA applies in their
foreign trade
contract)
File claim for apparent loss: upon receipt
File claim within 24
File claim within 3 days
hours from delivery if
from delivery if damage
damage or loss is not
or loss is not apparent
apparent
Filing of the claim is
mandatory; condition Filing of the claim is
precedent for filing of not mandatory
action for damages
Prescriptive period to
Prescriptive period to
file an action:
file an action:
1 year from discharge
10 years from breach if
of goods, or date when
bill of lading/written
they should have been
receipt/contract
is
delivered. The 1 year
issued, 6 years from
period
may
be
breach if only through
extended
by
oral contract
stipulation.
c. 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
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defrayed by the carrier, and in the contrary, by the
shipper [Art. 357, COC].
COMMERCIAL LAW
E.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. Hence, jurisdiction is with the MTC if the
amount of the claim does not exceed Php 300,000
outside Metro Manila or Php 400,000 in Metro
Manila. Otherwise, jurisdiction is with the RTC.
VESSEL
Vessels are those engaged in navigation, whether
coastwise or on the high seas 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, G.R. No. L-29166 (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.
1. 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 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, G.R. No. 131166 (1999)].
Bill of lading distinguished from a charter party
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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.
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:
a. Bareboat or demise charter;
b. Time charter; and
c. Voyage or trip charter [Litonjua Shipping, Inc. v.
National Seamen Board, G.R. No. L-51910 (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. If the charter is a contract of affreightment,
which leaves the general owner in possession of the
ship as owner for the voyage, the rights,
responsibilities of ownership rest on the owner and
the charterer is usually free from liability to third
persons in respect of the ship [Puromines Inc. v. CA,
G.R. No. 91228 (1993)].
BAREBOAT
DISTINGUISHED
FROM
CONTRACT OF AFFREIGHTMENT
Contract of
Demise or Bareboat
Affreightment
Charterer
becomes Owner remains liable as
liable to others caused carrier and must answer
by its negligence
for any breach of duty
Charterer regarded as
Charterer is not regarded
owner pro hac vice for
as owner
the voyage
Owner of vessel
relinquishes
possession,
command,
and
navigation
to
charterer
Common carrier is
converted to private
carrier
COMMERCIAL LAW
The vessel owner retains
possession, command,
and navigation of the
ship
Common carrier is not
converted to private
carrier
Persons who make a charter
a. Owner or owners of the vessel, either in whole
or in part, who have legal control and possession
of the vessel;
b. Charterer may subcharter entire vessel to 3rd
person only if not prohibited in original charter
[Art 679, COC];
c. Ship agent if authorized by the owner/s or given
such power in the certificate of appointment [Art
598, COC]; or
d. Captain in the absence of the ship agent or
consignee and only if he acts in accordance with
the instructions of the agent or owner and
protects the latter’s interest [Art 609, COC].
Requisites for a valid charter party
a. Consent of the contracting parties;
b. Existing vessel which should be placed at the
disposition of the shipper;
c. Freight; and
d. Compliance with the formal requisites under
Article 652 of the Code of Commerce which
include the requirement that the charter party
must be in (a) writing, (b) drawn in duplicate, and
(c) signed by the parties [AQUINO (2016)].
a. 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 vessel’s navigation,
including the master and the crew, who thereby
become the charterer’s “servants” [AQUINO
(2011)].
To create a demise, the owner of a vessel must
completely and exclusively relinquish possession,
command and navigation thereof to the charterer,
anything short of such a complete transfer is a
contract of affreightment (time or voyage charter
party) or not a charter party at all.
Although a charter party may transform a common
carrier into a private one, the same, however, is not
true in a contract of affreightment on account of the
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COMMERCIAL LAW
distinctions between a contract of affreightment and
a demise or bareboat charter [Puromines Inc. v. CA,
G.R. No. 91228 (1993)].
person who is primarily liable for damages sustained
in the operation of the vessel, based on the provisions
of the Code of Commerce.
Note: In a bareboat or demise charter, the common
carrier is converted to private carrier.
Ship Agent - the person entrusted with the
provisioning of a vessel, or who represents her in the
port in which she happens to be [Art. 586, COC].
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, G.R.
No. 91228 (1993)].
b. 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,
G.R. No. L-51910(1989)].
c. 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, G.R. No. L51910(1989)].
2. Liability of Ship Owners and
Shipping Agents
The persons participating in maritime commerce are
the following:
a. Ship owners or ship agents
b. Captains and masters
c. Other officers and crew
d. Supercargoes
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
Based on the definition of the ship agent in the Code
of Commerce, it is evident that the ship agent is
jointly and severally liable with the owner. The joint
and several liability applies both for breach of
contract and extra-contractual obligation such as tort.
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 the right of the owner,
the vessel and its equipment and freight [AQUINO
(2016)].
Captains - 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 - those who command smaller ships
engaged exclusively in coastwise trade. In maritime
commerce, masters and captains are the same.
Crew - a person on board who is involved in highly
technical tasks and in the manning of the vessel (e.g.
master, mate).
Complement - a person, not a crew, who is not
directly involved in the manning of the vessel (e.g.
cook).
Supercargo - 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,
COC].
The ship owner or ship agent is liable:
a. For the acts of the captain, unless the latter
exceeds his authority [Art. 586, COC].
b. For contracts entered into by the captain to
repair, equip and provision the vessel, provided
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that the amount claimed was invested for the
benefit of the vessel [Art. 586, COC].
c. 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, COC].
d. For damages to third persons for tort or quasidelict committed by the captain, except collision
with another vessel [Art. 1759, NCC]
e. 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, COC].
a. Liability 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, G.R. No. 115286 (1994)].
The captain shall be liable to the agent, and the
latter to third persons [Art. 618, COC]:
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 and maneuvers for the purpose
of preventing collisions.
COMMERCIAL LAW
b. Limited Liability Rule
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., G.R. No.
100446 (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,
COC];
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, COC].
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,
COC].
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
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extinguished, as well as the agent for the recovery
of the advances made [Art. 643, COC].
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 coextensive 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, G.R. No. L-47447 (1941)]
c. Exceptions to the Limited
Liability Rule
1.
2.
3.
4.
5.
6.
Claims under the Workmen’s Compensation Act
[Abueg v. San Diego, G.R. No. L-773 (1946)];
Expenses for repairing, provisioning and
equipping the vessel [Government v Insular
Maritime, G.R. No. L-21495 (1924)];
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.,
G.R. No. 100446 (1993) ];
Vessel is insured, to the extent of the insurance
proceeds [Vasquez v. CA, G.R. No. L-42926
(1985)];
There was no total loss and the vessel is not
abandoned [Yangco v. Laserna, G.R. No. L-47447
(1941)];
Collision between two negligent vessels.
3. Accidents and Damages in
Maritime Commerce
a. 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, COC].
There are two kinds of averages:
1. Particular or simple average; and
2. Gross or general average.
COMMERCIAL LAW
Averages pertain to expenses and damages:
1. Expense – to constitute an average, an expense
must be:
a. Extraordinary or accidental
b. Incurred during the voyage, and
c. Incurred in order to preserve the vessel, the
cargo, or both.
2. Damages or Deterioration – to constitute an
average, it must:
a. Have been suffered from the time the vessel
put to sea from the port of departure until it
casts anchor in the port of destination, and
b. Have been suffered by the merchandise
from the time they are loaded in the port of
shipment until they are unloaded in the port
of consignment.
PARTICULAR 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, COC].
The owner of the goods which gave rise to the
expense or suffered the damage shall bear this
average [Art. 810, COC].
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,
COC].
The gross or general average shall be borne by those
who benefited from the sacrifice. These include the
ship owner and the owners of the cargoes that were
saved. Contribution may also be imposed on the
insurers of the vessel or cargoes that were saved, as
well as lenders on bottomry or respondentia.
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; and
4. That the expenses or damages should have been
incurred or inflicted after taking proper legal
steps and authority [Magsaysay, Inc. v. Agan, G.R.
No. L-6393 (1955)].
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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, G.R. No. L-6393 (1955)].
Note: When a vessel is stranded unintentionally, the
damages incurred cannot constitute general averages.
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;
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
11.
12.
13.
14.
COMMERCIAL LAW
order of the Government, or in order to repair
the damage caused for the common good;
The loss suffered in the value of the goods sold
at arrivals under stress in order to repair the
vessel because of gross average;
The expenses of the liquidation of the average
[Art. 811];
If in lightening a vessel on account of a storm, in
order to facilitate her entry into a port or
roadstead, part of her cargo should be
transferred to lighters or barges and be lost, the
owner of said part shall be entitled to indemnity,
as if the loss has originated from a gross average
[Art. 817];
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.
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].
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].
Although the Code of Commerce provisions on
averages are still in force, the parties may, by
stipulation in the charter party or any written
agreement, agree that the York-Antwerp Rules shall
be applied. In addition, the York-Antwerp Rules may
also be used to solve controversies where no
provision in the Code of Commerce is in point
because said rules embody the custom of maritime
states [AQUINO (2016)].
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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,
COC];
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,
COC];
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, COC];
7. Captain shall ratify the minutes under oath [Art.
814, COC].
b. 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 steamer’s greater facility of 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, G.R. No. L-7675.
[1913)].
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, G.R. No. L-56294 (1991)].
Note: Although the liability with respect to collision is
not governed by quasi-delict, liability in collision
cases is still negligence based. In other words, courts
are still called upon to determine the negligence of
the persons involved in order to impose liability. The
person who caused the injury is both civilly and
criminally liable [AQUINO (2016)].
COMMERCIAL LAW
In some respect, however, the rules that apply to
quasi-delict cannot be applied to collision cases. For
example, the view is that the doctrine of last clear
chance and the rule on contributory negligence
cannot be applied in collision cases because of Art.
827 of the Code of Commerce.
Thus if both vessels were negligently operated, it does
not matter if the other has the last clear chance of
avoiding the injury because under Article 827, each
must suffer its own damage if both of them are
negligent [C.B. Williams v. Yangco, G.R. No. L-8325
(1914)].
Similarly, proof that the plaintiff was negligent will
bar recovery from the defendant in collision cases
even if the plaintiff’s negligence can be classified as
merely contributory [Gorgonio De Sarasola v. Yu Biao
Sontua, G.R. No. L-22630 (1925)].
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.
Fortuitous
When it is due to a fortuitous event or force majeure,
each vessel and its cargo shall bear its own damages
[Art. 830, COC].
When, by reason of force majeure, 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, COC].
Culpable
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, COC].
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, COC].
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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, COC].
c. Arrival under stress
COMMERCIAL LAW
The losses and deterioration suffered by the vessel
and her cargo shall be individually for the account of
the owners [Art. 840, COC].
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, COC].
Arrival under stress is the arrival of a vessel at the
nearest and most convenient port instead of at 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, COC].
It is unlawful when [Art 820, COC]:
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.
The captain has the duty to continue the voyage
without delay after the cause of the arrival under
stress has ceased, otherwise, he shall be liable for
damages caused by the delay [Art. 825, COC].
Note: Expenses for arrival under stress are particular
averages Art. 821, COC].
d. 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.
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e. 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; and
3. Success, in whole or in part, or that the service
rendered contributed to such success [Erlanger &
Galinger v. Swedish East Asiatic Co. Ltd, G.R. No.
L-10051 (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 ].
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:
SALVAGE
TOWAGE
A person preserves the
goods or the ship A vessel is engaged to
which the owner either tow another vessel from
abandoned in distress one port to another for
at sea, or is unable to consideration.
protect and secure.
In salvage, the crew of In contract for towage,
the salvaging ship is the crew does not have
entitled to salvage, and any interest or rights
can look to the salvage with the remuneration
vessel for its share pursuant to the contract;
[Barrios v. Go Thong, only the owner of the
G.R. No. L-17192 towing vessel is entitled
(1963)].
to remuneration.
4. Carriage of Goods by Sea
Act
a. 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:
Common Carrier
Private carrier
Coming to the Philippines from foreign
trade*
Derelict Required
The requirement of Section 1 of the Salvage Law that
the vessel sought to be salvaged is shipwrecked
beyond the control of the crew or abandoned, is
present when the vessel is considered a derelict
[AQUINO (2016)].
1.
2.
3.
A derelict is defined as a ship or her cargo which is
abandoned and deserted at sea by those who were in
charge of it, without any hope of recovering it (sine spe
recuperandi), or without any intention of returning it
(sine animo revertendi ).
If those in charge left with the intention of returning,
or of procuring assistance, the property is not
derelict, but if they quitted the property with the
intention of finally leaving it, it is a derelict, and a
change of their intention and an attempt to return will
not change its nature [Erlanger & Galinger v. Swedish
East Asiatic Co. Ltd, G.R. No. L-10051 (1916)]
COMMERCIAL LAW
New
Civil
Code
(Common
Carriers)
COGSA
Code
of
Commerce
1.
2.
3.
COGSA
Code
of
Commerce
New
Civil
Code
(Provisions
NOT
on
common
carriers,
i.e.
torts,
contracts)
From Philippines to foreign country
Apply laws of such foreign country [1753, NCC]
* Nothing stops parties from stipulating that COGSA
shall primarily apply; even domestic carriers can
stipulate such. With respect to vessels destined for
foreign ports, the COGSA does not apply unless
parties make it 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
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special laws. Thus, although a special law, COGSA
only applies when the Civil Code has no provision
dealing with the matter.
b. Notice of Loss or Damage
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, G.R. No. 143133 (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.
c. 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].
COGSA, as a special law, prevails over the general
provisions of the Civil Code on prescription of actions
[Maritime Agencies & Services, Inc. v. CA, G.R. No.
77638 (1990)].
d. Limitation of Liability
COMMERCIAL LAW
This is deemed incorporated in the bill of lading even
if not mention therein [Eastern Shipping Lines v. IAC,
G.R. No. L-69044 (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 carrier’s liability in the
absence of a shipper’s declaration of a higher value in
the bill of lading. [Belgian Overseas Chartering and
Shipping v. Philippine First Ins. Co, G.R. No. 143133
(2002)]
5. Special Contracts of
Maritime Commerce
a. Loans on Bottomry and
Respondentia
Loan on bottomry 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
borrower’s personal responsibility being deemed the
principal security for the performance of the
contract, which is therefore called respondentia. The
lender must be paid his principal and interest, though
the ship perishes, provided that the goods are saved.
Under Section 4(5), COGSA, the limit is set at a
maximum of $500 per package or customary freight
unit.
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COMMERCIAL LAW
F. The Warsaw Convention
6. 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, COC].
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,
COC].
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, COC].
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
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.[Art. 698, CoC]
4. To be taken directly to the port or ports of
destination, making all the stops indicated in its
itinerary [Art. 698, COC].
1. Applicability
The Warsaw Convention applies to:
a. All international carriage of persons, baggage, or
cargo performed by aircraft for reward;
b. 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:
a. Within the territories of two high contracting
parties, regardless of whether or not there be a
break in the transportation or a transshipment;
or
b. 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),
WC].
A carriage to be performed by several successive
air carriers is deemed, for the purposes of the
Convention, to be one undivided carriage, if it has been
regarded by the parties as a single operation, whether
it had been agreed upon under the form of a single
contract or of a series of contracts [Art. 1(3), WC].
The carrier is liable for damages for:
a. Death or injury of a passenger if the accident
causing it took place:
1. On board the aircraft;
2. In the course of the operations of
embarking or disembarking; or
3. When there was delay [Art. 17 and 19, WC];
b. Destruction, loss, or damage to any baggage
or goods that are checked in, if damage
occurred:
1. During the transportation by air; or
2. When there was delay [Art. 18 and 19, WC];
c. Delay in the transport by air of passengers,
baggage or goods [Art. 19, WC].
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.
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It does not cover any transportation by land, by sea,
or by river performed outside an airport.
If transportation takes place in the performance of a
contract by air, for the purpose of loading, delivery,
or transshipment, any damage is presumed, subject to
proof to the contrary, to have been the result of an
event which took place during the transportation by
air [Art. 18, WC].
The Warsaw Convention does not provide for an
exclusive enumeration of instances when the carrier
is liable. It does not provide an absolute limit of
liability and it does not preclude the application of the
Civil Code and other pertinent local laws in the
determination of the extent of liability of the
common carrier [Philippine Airlines v. CA, G.R. No.
(1996)]. Hence, a complaint for quasi-delict can still
be filed even if the filing is beyond the prescriptive
period provided for under the Convention so long as
it is within the prescriptive period of four years under
the Civil Code [Villanueva].
Notice of claim with the international carrier is a
mandatory or condition precedent under the Warsaw
Convention.
a. Baggage: within 3 days from receipt; in case of
delay, within 14 days from the time the baggage
was placed at the disposal of the passenger
b. Goods: within 7 days from delivery
COMMERCIAL LAW
Under Art. 29, WC, 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.
Sec. 22(2), WC does not operate as an exclusive
enumeration of the instances of an airline’s liability,
or as an absolute limit of the extent of that liability.
The Convention’s provisions do not regulate or
exclude the following areas:
a. Liability for other breaches of the contract by the
carrier;
b. Misconduct of its officers and employees; and
c. For some particular or exceptional type of
damage (i.e. moral, nominal, temperate or
exemplary damages) [Alitalia v. IAC, G.R. No.
71929 (1990)]
a. Liability to Passengers
General rule: In the carriage of passengers, the liability
of the carrier for each passenger is limited to “100 000
Special Drawing Rights for the aggregate of the
claims” in respect of damage suffered as a result of
death or personal injury to each passenger [Art. 22(1),
WC as amended by Additional Protocol No. 3
(1975)].
In case of an action for damage to passenger baggage,
the case must be filed in court within two years.
Exception: By special contract, the carrier and the
passenger may agree to a higher limit [Art. 22(1),
WC].
2. Limitation of Liability
b. Liability for Checked Baggage
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.
General rule: “In the carriage of cargo, the liability of
the carrier is limited to a sum of 17 Special Drawing
Rights per kilogramme” [Art. 22(1), WC as
amended by Additional Protocol No. 3 (1975)].
Also, under Art. 25, WC:
a. 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;
b. Similarly, the carrier shall not be entitled to avail
himself of the said provisions, if the damage is
caused as aforesaid by any agent of the carrier
acting within the scope of his employment.
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),
WC].
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c. Liability for Hand-Carried
Baggage
As regards hand-carried baggage, the liability of the
carrier is limited to “332 Special Drawing Rights
per passenger” [Art. 22(3) WC, as amended by
Additional Protocol No. 2 (1975)].
The Guatemala Protocol of 1971 increased the limit for
passengers to $100,000 and for baggage to $1,000.
However, the Supreme Court noted in Santos III v.
Northwest Orient Airlines [G.R. No. 101538(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 v. IAC,
G.R. No. 71929 (1990)]
Note: The Montreal Convention 1999 changed the
limits of liability in relation to delay, baggage and
cargo as follows:
1. In the case of damage caused by delay as
specified in Article 19 in the carriage of persons,
the liability of the carrier for each passenger
is limited to 4,150 Special Drawing Rights.
2. In the carriage of baggage, the liability of the
carrier in the case of destruction, loss, damage or
delay is limited to 1,000 Special Drawing
Rights for each passenger x x x
3. In the carriage of cargo, the liability of the carrier
in the case of destruction, loss, damage or
delay is limited to a sum of 17 Special
Drawing Rights per kilogramme x x x [Art.
22, Montreal Convention].
COMMERCIAL LAW
Receipt by the person entitled to the delivery of
baggage or cargo without complaint is prima facie
evidence that the same has been delivered in good
condition and in accordance with the document of
carriage [Art. 26, WC].
4. Jurisdiction
An action for damages must be brought at the option
of the plaintiff:
a. Before the court of the domicile of the carrier;
b. The court of its principal place of business;
c. The court where it has a place of business
through which the contract had been made; or
d. 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 III v
Northwest Airlines, supra].
It is settled that allegations of tortious conduct
committed against an airline passenger during the
course of the international carriage do not bring the
case outside the ambit of the Warsaw Convention
[Lhuillier v. British Airways, G.R. No. 171092 (2010)].
Note: The Montreal Convention adds a 5th
jurisdiction: residence of the plaintiff.
3. Willful Misconduct
A common carrier may not avail of the limitation in
the following cases:
a. Willful misconduct;
b. Default amounting to willful misconduct [Art.
25, WC];
c. Accepting passengers without ticket [Art. 3(2),
WC];
d. Accepting goods without airway bill or baggage
without baggage check.
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COMMERCIAL LAW
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Commercial Law
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V. CORPORATION
LAW
COMMERCIAL LAW
c. Has the Right of Succession
A. Corporation
1. Definition
A Corporation is an artificial being created by
operation of law, having the right of succession and
the powers, attributes, and properties expressly
authorized by law or incident to its existence [Sec. 2,
unless otherwise indicated, all sections cited herein are from
B.P. 68, or the Corporation Code].
ATTRIBUTES OF A CORPORATION
a. An Artificial Being
A corporation is a juridical entity that exists apart
from its stockholders. It has its own set of rights and
obligations as provided for by law. Technically, it has
no physical existence although it occupies a principal
place of business.
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 such purpose by corporate by-laws or by a special
act of the Board of Directors (BOD) [Swedish Match
Philippines, Inc. v. Treasurer of the City of Manila, G.R. No.
181277 (2013)].
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, G.R. No. L-13203
(1961)].
Since one of the attributes of a corporation is that it
is an artificial being with a distinct personality, the
corporation’s existence is unaffected by a change in
the composition of stockholders. Its existence is
limited only by the Articles of Incorporation (AOI),
may be subject to Quo Warranto proceedings (Rule 66
of the Rules of Court), and may be shortened by
dissolution (Title XIV of the Corp. Code)
d. 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,
G.R. No. 152542 (2004)].
Being a creature of the law, its powers are limited by:
1. The law (see Sec. 36 of the Corp. Code for
general powers and Secs. 37 to 44 for specific
powers),
2. By the express terms of its AOI as well those
essential or necessary to carry out its purpose or
purposes under such Articles (see Sec. 36, last
par.), and
3. By those necessary or incidental to its powers so
conferred (see Sec. 45)
b. 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.
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CORPORATION CODE
B. Classes of Corporations
1. Stock Corporation
Stock corporations – corporations which have
capital stock divided into shares AND are authorized
to distribute to the holders of such shares dividends
or allotments of the surplus profits on the basis of
shares held [Sec. 3]. It is organized for profit.
The governing body of a stock corporation is usually
the BOD (except in certain instances, e.g. close
corporations).
Note: A corporation is deemed to have the power to
declare dividends. So long as the corporation has
capital stock and there is no prohibition in its Articles
of Incorporation or in its by-laws for it to declare
dividends, such corporation is a stock corporation
[Sec. 43].
2. Non-Stock Corporation
All other corporations are non-stock corporations
[Sec. 3].
Non-stock corporations – One where no part of
the income is distributable as dividends to its
members, trustees, or officers, subject to the
provisions of the Code on dissolution [Sec. 87]. It is
not organized for profit.
Its governing body is usually the Board of Trustees
(BoT). However, non-stock corporations may,
through their articles of incorporation or their bylaws, designate their governing boards by any name
other than as board of trustees [Sec. 138].
Stock
Have
capital
stock
divided into shares [Sec.
3]
Are
authorized
to
distribute to the holders
of such shares dividends
or allotments of surplus
profits on the basis of the
shares held [Sec. 3]
Composed
stockholders
1
of
Non-Stock
No part of income is
distributable as dividends
to its members or
trustees [Sec. 87]
Any profit may obtain as
an incident to its
operations shall, when
necessary or proper, be
used for the furtherance
of its purpose or
purposes [Sec. 87]
Composed of members
Under the Revised Corporation Code (RCC), when so authorized in the
bylaws or by a majority of the board of directors, the stockholders or
COMMERCIAL LAW
Stock
It is for profit
Non-Stock
It is not for profit [Sec.
88]
Other distinctions
Stock
Non-Stock
Members may vote by
Stockholders must act in proxy, mail or other
meetings in person or by similar
means,
if
proxy. [Sec. 58]
provided in the by-laws
(BL) [Sec. 89] 1
Cumulative voting in
Cumulative voting in
election of trustees is
election of directors is
only available if provided
provided by law [Sec. 24]
in AOI or BL [Sec. 24]
Maximum of 15 directors
except in merger or May be more than 15
consolidation of banks [Sec. 92]
[Sec. 14]
Term of director is 1 year Maximum term of a
[Sec. 23]
trustee is 3 years [Sec. 92]
Stockholders’ meetings
must be in the city or
May be anywhere within
municipality where the
Philippine territory. [Sec.
principal office is located,
93]
preferably
in
the
principal office. [Sec. 51]
Right to vote of members
One class of shares must
of any class may be
always have complete
denied in the AOI or BL
voting rights [Sec. 6]
[Sec. 89]
Transfer of membership
There is free transfer of
cannot be made without
shares. Membership is
consent
of
the
not personal to the
corporation. [Sec. 90]
stockholder.
Membership is personal.
Vote by proxy can be
May always vote by proxy
denied in the AOI or BL
[Sec. 58]
[Sec. 89]
Upon transfer of share,
seller is no longer part of
corporation.
Transfer
may only be subject to Membership may be
restrictions noted down terminated according to
in AOI, BL, and stock causes provided in the
certificate, and must not BL. [Sec. 91]
be more onerous than
right of first refusal. [Sec.
98]
Residual assets are to be
Generally, members are
distributed
to
the
not allowed to participate
stockholders
upon
in distribution of assets.
dissolution,
after
members may also vote through remote communication or in absentia.
[Sec. 23, RCC]
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Stock
payment of creditors.
Dissolution is effected
through the methods
provided in the Code.
[Sec. 117]
CORPORATION CODE
Non-Stock
Assets are to be
distributed
to
such
persons,
societies,
organizations
or
corporations as may be
specified in a plan of
distribution. [Sec. 94]
3. Other Corporations
a. Public Corporation
Public corporation – one formed or organized for
the government of a portion of the state. Its purpose
is for the general good and welfare [Sec. 3, Act 1456].
Beyond cavil, a GOCC has a personality of its own,
distinct and separate from that of the government,
and the intervention in a transaction of the Office of
the President through the Executive Secretary does
not change the independent existence of a
government entity as it deals with another
government entity [Polytechnic University of the Phils. v.
CA, G.R. No. 143513 (2001)].
Not all corporations which are not GOCCs are ipso
facto to be considered private corporations as there
exists another distinct class of corporations or
chartered institutions which are otherwise known as
“public corporations.” These corporations are
treated by law as agencies or instrumentalities of the
government which are not subject to the tests of
ownership or control and economic viability but
to different criteria relating to their public
purposes/interests or constitutional policies and
objectives and their administrative relationship
to the government or any of its Departments or
Offices [Boy Scouts of the Philippines v. COA, G.R. No.
177131 (2011)].
b. Private Corporation
c. 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]
Ordinary Stock
Corporation
Close Corporation
AOI must provide:
a. Not to be held by
more than a certain
number
of
Stockholders, not to
exceed 20
b. Transfer restrictions
allowed
Has an AOI with a
c. Shall not be listed,
general template
and shall not publicly
offer
Further, a corporation
which is not a close corp.
cannot own more than
75% of the outstanding
capital stock
Private corporation – One formed for some private
purpose, benefit, aim or end [Sec. 3, Act 1456]; it may
be either stock or non-stock, government-owned or
controlled or quasi-public.
The test to determine whether GOCC or private
corporation: if a corporation is created 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, G.R. No. 136374 (2000)].
COMMERCIAL LAW
No limit to number of
corporators allowed by
authorized shares
May list in Philippine
Stock Exchange (PSE)
In general, all businesses
may be carried out by
corporation
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Not more than
according to AOI
20,
May not list on PSE
Mining,
Oil,
Stock
Exchange,
Banks
Insurance, Public Utility,
U.P. LAW BOC
CORPORATION CODE
Ordinary Stock
Corporation
Powers exercised
board,
elected
stockholders
Close Corporation
by
by
Pre-emptive right subject
to Sec. 39 limitations
Appraisal right must be
for reasons listed in the
code
Dissolution must comply
with all the requirements
SEC may not regulate if
purpose not illegal
No classification
directors
of
BOD elects directors
Must have unrestricted
retained earning (URE) to
buy own shares
No arbitration in case of
intra-corporate deadlock
Educational,
Public
Interest
cannot
be
organized
as
close
corporation
Stockholders may manage
affairs directly, subject to
the same rights and
liabilities of directors
No limit to pre-emptive
rights. Thus, includes sale
of treasury shares and for
acquisition of properties
Appraisal right can be for
any cause. And no need
for URE, so long as the
corporation would not
thereby become insolvent
Any stockholder may
petition for dissolution
for stated grounds
SEC may intervene in
management of corp. in
case of deadlocks
May classify directors
Shareholders, as directors,
directly elect officers, if
provided by AOI
No need for URE to
acquire shares if ordered
by SEC in intra-corporate
deadlock
Arbitration allowed
d. Educational Corporation
COMMERCIAL LAW
If organized as a stock corporation
For institutions organized as stock corporations, the
number and term of directors shall be governed by
the provisions on stock corporations [Sec. 108].
e. Religious Corporations
Classes of Religious Organization
a. Corporation Sole – incorporated by one
person; and
b. Religious Societies – incorporated by more
than one person [Sec. 109]
Corporation sole – is one formed for the purpose of
administering and managing, as trustee, the affairs,
property and temporalities of any religious
denomination, sect, or church, by the chief
archbishop, bishop, priest, rabbi, or other presiding
elder of such religious denomination, sect or church
[Sec.110].
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,
G.R. No. L-8451 (1957)].
Religion Society (Corporation Aggregate)
Corporation aggregate – is a religious corporation
incorporated by more than one person.
f. Eleemosynary Corporation
Eleemosynary corporation– One organized for a
charitable purpose.
Educational corporation – One organized for
educational purposes [Sec. 106].
Except upon favorable recommendation of the
Ministry of Education and Culture, the Securities and
Exchange Commission shall not accept or approve
the articles of incorporation and by-laws of any
educational institution [Sec. 107].
If organized as a non-stock corporation
Trustees of educational institutions organized as nonstock corporations shall not be less than five (5) nor
more than fifteen (15). Provided, however, that the
number of trustees shall be in multiples of five (5).
They shall classify themselves in such a way that the
term of 1/5 of them expires every year [Sec. 108].
g. Domestic Corporation
Domestic corporation– One formed, organized, or
existing under the laws of the Philippines.
h. 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].
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COMMERCIAL LAW
i. Corporation Created By Special
Laws Or Charter
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.
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].
Exception: In quo warranto proceedings brought on
behalf of the State where the main action is to
question the validity or existence of such juridical
personality [Villanueva].
j. Subsidiary Corporation
Requisites:
1. There is an apparently valid statute under
which the corporation may be formed;
2. There has been colorable compliance with the
legal requirements in good faith; and
3. There has been user of corporate powers, i.e.
the transaction of business as if it were a
corporation [Campos].
Subsidiary corporation – One in which control, in
the form of ownership of majority of its shares, is in
another corporation [the parent corporation].
k. Parent Corporation
Parent corporation – Its control lies in its power,
directly or indirectly, to elect the subsidiary’s directors
thus controlling its management policies.
Holding company – a parent company which has
no other business aside from the holding of the
shares of its subsidiaries, which it controls.
Investment company – a parent company which
holds shares in other corporations not for the
purpose of controlling them but merely to invest
therein.
l. Corporation De Jure
Corporation de jure – A corporation organized in
accordance with the requirements of the law. Not
every defect however precludes de jure corporation.
As long as the mandatory requirements for
incorporation are substantially complied with, a
corporation de jure will be formed [CAMPOS].
m. De facto Corporation
De facto corporation – A corporation where there
exists a flaw in its incorporation.
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].
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, G.R. No. L-2598 (1950)].
n. 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.
EFFECTS
ESTOPPEL
OF
CORPORATION
BY
1. 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].
2. 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].
3. As to third party
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One who assumes an obligation to an ostensible
corporation as such, cannot resist performance
thereof on the ground that there was in fact no
corporation [Sec. 21].
The doctrine of estoppel applies to a third party only
when he tries to escape liability on a contract from
which he has benefited on the ground of defective
incorporation. It does not apply to a third party
who is not trying to escape liability from the contract,
but rather is the one claiming from the contract
[International Express Travel v. CA, G.R. No. 119002
(2000)].
Comparison with Sec. 15, Rule 3 of the ROC
Corporation by
(1) Sec.15, Rule 3
Estoppel
Clothes a non-entity with
The
unincorporated
personality to sue a third
entity may only be sued
person who seeks to
but has no personality to
evade liability in favor of
sue
the former
Merely creates a fiction
whereby an association Does not concede to the
of persons is treated as a association of persons
corporation only for the cover of a corporate
purposes
of entity even for such
exacting/enforcing
purposes of litigation
liability
For purposes of both Procedural remedy for
protecting, as well as drawing out the persons
imposing liability against, who will truly answer for
third parties
the liability
De facto Corporation vs. Corporation By
Estoppel
De facto
Estoppel
Where all the requisites If any of the requisites are
of
a
de
facto absent, then the estoppel
corporation
are doctrine may be applied
present,
then
the only if any of the parties is
defectively
formed estopped from defending:
corporation will have a. The
defendant
the status of a de jure
association is estopped
corporation in all cases
from defending on the
brought by or against it,
ground of its lack of
except only as to the
capacity to be sued, or
State in a direct b. The defendant third
proceeding
party had dealt with
the plaintiff as a
corporation and is
deemed
to
have
admitted its existence.
COMMERCIAL LAW
C. Nationality of
Corporations
1. Place of Incorporation Test
The corporation is a national of the country under
whose laws it is organized or incorporated
Domestic corporations – organized and governed
under, and by, Philippine laws.
Foreign corporations – organized under laws other
than those of the Philippines and can operate only in
the territory of the state under whose laws it was
formed. However, they may be licensed to do
business here [Sec. 123].
2. 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 Filipinoalien 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
capital is owned by such citizens.” [Sec. 11, Art.
XII, Const.]
THE GAMBOA RULINGS
2011 Gamboa Ruling
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
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CORPORATION CODE
total outstanding capital stock [common and nonvoting 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 meet the required Filipino
equity. Full beneficial ownership of the stocks,
coupled with appropriate voting rights is essential.
Thus, stocks, the voting rights of which have been
assigned or transferred to aliens cannot be considered
held by Philippine citizens or Philippine nationals.
[Gamboa v. Teves, G.R. No. 176579 (2011)]
COMMERCIAL LAW
rights must rest in the hands of Filipino nationals.
Thus, for purposes of determining compliance
with the constitutional or statutory ownership,
the required percentage of Filipino ownership
shall be applied to both the (a) total number of
outstanding shares of stock entitled to vote in the
election of directors; and (b) the total number of
outstanding shares of stock, whether or not
entitled to vote. [Jose M. Roy III v. Chairperson Teresita
Herbosa, G.R. No. 207246 (2017)]
SEC Memorandum Circular No. 8 dated 20 May
2013
Sec. 1. Covered corporations: All corporations
2012 Gamboa Ruling
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.
The term “capital” is not limited 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.
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.
In 2012, the Supreme Court reversed its ruling,
stating now that:
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 requirement in favor of
Filipino citizens must apply separately to each class
of shares, whether common, preferred non-voting,
preferred voting or any other class of shares. [Gamboa
v. Teves, G.R. No. 176579 (2012)]
2017 Gamboa Ruling (Roy III v Herbosa)
However, in 2017, the Supreme Court explained
its ruling in the 2012 Gamboa decision. It stated
that the resolution of the 2012 Gamboa resolution,
specifically its dispositive portion, did not modify the
2011 Gamboa decision.
The Supreme Court clarified that the Gamboa
Decision already held, in no uncertain terms, that
what the Constitution requires is full and legal
beneficial ownership of 60 percent of the outstanding
capital stock, coupled with 60 percent of the voting
Note: This was the SEC Memorandum put in
question in the Roy III v. Herbosa case, and
subsequently upheld by the Court as constitutional.
3. 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 latter’s
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
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CORPORATION CODE
nationalized activity or business [SEC Opinion re:
Silahis Int’l Hotel (1987)].
The Grandfather Rule applies only when the 60-40
Filipino foreign equity ownership is in doubt (i.e. in
cases where the joint venture corporation with
Filipino and foreign stockholders with less than 60%
Filipino stockholdings (or 59%) invests in another
joint venture corporation which is either 60-40%
Filipino alien or 59% less Filipino). Stated differently,
where the 60-40 Filipino foreign equity
ownership is not in doubt, the Grandfather Rule
will not apply [Narra Nickel Mining and Dev. Corp v.
Redmont Consolidated Mines Corp., G.R. No. 195580
(2014)].
The Control Test can be, as it has been, applied
jointly with the Grandfather Rule to determine the
observance of foreign ownership restriction in
nationalized economic activities. The Control Test
and the Grandfather Rule are not, as it were,
incompatible ownership-determinant methods that
can only be applied alternative 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 manner, if the subject corporation’s
Filipino equity falls below the threshold 60%, the
corporation is immediately considered foreignowned, in which case, the need to resort to the
Grandfather Rule disappears.
On the other hand, a corporation that complies with
the 60-40 Filipino to foreign equity requirement can
be considered a Filipino corporation if there is no
doubt as to who has the “beneficial ownership” and
“control” of the corporation. In that instance, there
is no need for a dissection or further inquiry on the
ownership of the corporate shareholders in both the
investing and investee corporation or the application
of the Grandfather Rule. As a corollary rule, even if
the 60-40 Filipino to foreign equity ratio is
apparently met by the subject or investee
corporation, a resort to the Grandfather Rule is
necessary if doubt exists as to the locus of the
“beneficial ownership” and “control.” In this case
(where based on the incorporation papers, the
COMMERCIAL LAW
Filipino-Owned corporation subscribed to 60% of
the capital while the foreign corporation subscribed
to 40% but the subscription of the former is only
nominally paid-up and such corporation entered into
a financial assistance agreement with the foreignowned corporation), a further investigation as to the
nationality of the personalities with the beneficial
ownership and control of the corporate shareholders
in both the investing and investee corporations is
necessary [Narra Nickel Mining and Dev. Corp v.
Redmont Consolidated Mines Corp., G.R. No. 195580
(2015)].
Fully/Partially Nationalized Areas [10th Foreign
Investment Negative List, E.O. 184 (2015)]
Nationality
Industry
Requirement
• Mass media, except
recording
• Practice of profession
• Retail trade
• Cooperatives
• Private security agencies
• Small-scale mining
• Utilization of marine
resources in archipelagic
waters, territorial sea,
exclusive economic zone,
100% Filipino
as well as rivers, lakes,
ownership
bays, and lagoons
• Ownership,
operation
and management of
cockpits
• Manufacture,
repair,
stockpiling
and/or
distribution of nuclear
weapons
• Manufacture
of
firecrackers and other
pyrotechnic devices
80%
Filipino •
ownership
•
•
75%
Filipino
ownership
Page 138 of 330
•
Private
radio
communications network
Private recruitment
Contracts
for
construction and repair of
locally-funded
public
works, except: (1) infra
projects under RA 7718
(BOT Law), and (2)
foreign-funded projects
Contracts
for
construction of defenserelated structures
U.P. LAW BOC
CORPORATION CODE
Nationality
Requirement
70%
voting
stock
Filipino
ownership [but •
may be reduced
to 60%]
70%
Filipino
•
ownership
•
•
•
60%
capital
stock
Filipino
ownership
•
•
•
•
D. Corporate Juridical
Personality
Industry
Banks
Banks]
[except
COMMERCIAL LAW
Rural
Advertising
Manufacture,
repair,
storage
and/or
distribution of products
and/or
ingredients
requiring
Philippine
National Police (PNP)
clearance (i.e, firearms,
ingredients
used
in
making explosives, etc)
Manufacture,
repair,
storage,
and/or
distribution of products
requiring Department of
National Defense (DND)
clearance;
Manufacture
and
distribution of dangerous
drugs
Sauna
and
steam
bathhouses,
massage
clinics and other like
activities regulated by law
because of risks posed to
public health and morals
All forms of gambling,
except those covered by
investment agreements
with PAGCOR
Domestic
market
enterprises with paid-in
equity capital of less than
the
equivalent
of
US$200,000
Domestic
market
enterprises which involve
advanced technology or
employ at least fifty (50)
direct employees with
paid-in equity capital of
less than the equivalent of
US$100,000
It commences from the date the SEC issues a
certificate of incorporation under its official seal [Sec.
19].
1. Doctrine of Separate
Juridical Personality
a. Concept
A corporation has a personality separate and
distinct from that of its stockholders and members
and is not affected by the personal rights, obligations,
and transactions of the latter.
A corporation, upon coming into existence, is
invested by law with a personality separate and
distinct from the persons comprising it as well as
from any other legal entity to which it may be related.
By this attribute, a stockholder may not, generally, be
made to answer for acts or liabilities of said
corporation, and vice versa [Land Bank of the
Philippines v. CA, G.R. No. 127181 (2001)].
b. 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
limited liability). Although a stockholder’s 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, G.R. No.
46997 (1940)].
c. Liability for Tort and Crime
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 G.R.
No. L-27155 (1978)].
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
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corporation itself [Time Inc. v. Reyes, G.R. No. L28882 (1971)].
d. Recovery of Moral Damages
A corporation can recover moral damages under Art
2219 (7) if it was the victim of defamation [Filipinas
Broadcasting Network v. Ago Medical and Educational
Center, G.R. No. 141994 (2005)].
Note: Filipinas Broadcasting pointed out that the
doctrine in Mambulao Lumber v. PNB (1968), to the
effect that a corporation may recover moral damages
for besmirched reputation, is obiter dictum.
e. 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 Eng’g Co. v. PCGG, G.R. No.
75885 (1987)].
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a. Grounds for Application of the
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., G.R. No. 142936
(2002)].
b. Test in Determining
Applicability
2. Doctrine of Piercing the
Corporate Veil
Piercing the veil of corporate entity is an equitable
remedy: The veil of separate corporate personality
may be lifted when such personality is used to defeat
public convenience, justify wrong, protect fraud or
defend crime; or used as a shield to confuse the
legitimate issues; or when the corporation is merely
an adjunct, a business conduit or an alter ego of
another corporation or where the corporation is so
organized and controlled and its affairs are so
conducted as to make it merely an instrumentality,
agency, conduit or adjunct of another corporation; or
when the corporation is used as a cloak or cover for
fraud or illegality, or to work injustice, or where
necessary to achieve equity or for the protection of
the creditors. In such cases, the corporation will be
considered as a mere association of persons. The
liability will directly attach to the stockholders or to
the other corporation [China Banking v. Dyne-Sem,
G.R. No. 149237 (2006)].
If evidence of any such purpose is present, the courts
will pierce the veil of corporate fiction. Aside from
this general guideline, no hard and fast rule can be
laid down to cover all cases where the corporate
entity theory cannot be availed of, and each case will
have to be considered on its merits [CAMPOS].
Specifically, it is used in the following specific
contexts:
1. When the liability belongs to the
corporations but the plaintiff seeks to hold
the individual liable. Mere controlling interest
is not enough. There must be a clear showing
that the corporate fiction is used to defeat public
convenience, justify wrong, protect fraud or
defend crime [Koppel Phil v. Yatco, G.R. No. L47673 (1946)]
Note the following badges of fraud: (1) used as a
shield to further an end subversive of justice; or
(2) for purposes that could not have been
intended by the law that created it; or (3) to
defeat public convenience; (4) justify wrong; (5)
protect fraud; or (6) defend crime; or (7) to
perpetuate fraud or confuse legitimate issues; or
(8) to circumvent the law or perpetuate
deception.
2.
Page 140 of 330
Where the liability is personal to the
individual and he seeks to evade it by hiding
behind a corporate vehicle.
Isabelo Calingasan and defendant Fely
Transportation may be regarded as one and the
same person. It is evident that Isabelo
Calingasan's main purpose in forming the
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corporation was to evade his subsidiary civil
liability resulting from the conviction of his
driver, Alfredo Carillo. This conclusion is borne
out by the fact that the incorporators of the Fely
Transportation are Isabelo Calingasan, his wife,
his son, Dr. Calingasan, and his two daughters.
We believe that this is one case where the
defendant corporation should not be heard to
say that it has a personality separate and distinct
from its members when to allow it to do so
would be to sanction the use of the fiction of
corporate entity as a shield to further an end
subversive of justice [Palacio v. Fely Transportation,
G.R. No. L-15121 (1962)].
3.
i.
j.
k.
4.
The instrumentality or alter ego rule. The
elements of this modality are:
a. Control, not mere majority or complete
stock control, but complete domination, not
only of finances but of policy and business
practice in respect to the transaction
attacked so that the corporate entity as to
this transaction had at the time no separate
mind, will or existence of its own;
b. Such control must have been used by the
defendant to commit fraud or wrong, to
perpetuate the violation of a statutory or
other positive legal duty, or dishonest and
unjust act in contravention of plaintiffs’
legal rights; and
c. The aforesaid control and breach of duty
must proximately cause the injury or unjust
loss complained of.
Circumstances rendering a subsidiary an
instrumentality
a. the parent corporation owns all or most of
the subsidiary’s capital stock;
b. the parent and subsidiary corporations have
common directors or officers;
c. the parent corporation finances the
subsidiary;
d. the parent corporation subscribes to all the
capital stock of the subsidiary or otherwise
causes its incorporation;
e. the subsidiary has grossly inadequate capital;
f. the parent corporation pays the salaries and
other expenses or losses of the subsidiary;
g. the subsidiary has substantially no business
except with the parent corporation or no
assets except those conveyed to or by the
parent corporation;
h. 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
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financial responsibility is referred to as the
parent corporation’s own;
the parent corporation uses the property of
the subsidiary as its own;
the directors or executives of the subsidiary
do not act independently in the interest of
the subsidiary but take their orders from the
parent corporation in the latter’s interest;
and
the formal ledger requirements of the
subsidiary are not observed. [PNB v. Ritratto
Group, G.R. No. 142616 (2001)]
Successor corporation rule. This applies in
instances where a corporation feigns dissolution
or cessation but really continues in existence
organized under another name. This application
of the rule figures prominently in labor cases
where the prior entity seeks to evade its
obligations to its laborers. Some telltale signs
exhibited in Claparols v. CIR [G.R. No. L-30822
(1975)] include: (1) consecutive date of cessation
and commencement of subsequent entity; (2)
ownership and control by former controlling
stockholder; and (3) turnover of assets. On the
other hand, in Livesey v. Binswanger [G.R. No.
177493 (2014)], the court pointed to the
following: (1) same officers; (2) same office; and
(3) continuation of the business.
Note: SME v. De Guzman, G.R. No. 184517
(2013) allows for the defense of good faith in
case of assets sales between a predecessor and
successor corporation:
“In asset sales, the rule is that the seller in good
faith is authorized to dismiss the affected
employees, but is liable for the payment of
separation pay under the law. The buyer in good
faith, on the other hand, is not obliged to absorb
the employees affected by the sale, nor is it liable
for the payment of their claims. The most that it
may do, for reasons of public policy and social
justice, is to give preference to the qualified
separated personnel of the selling firm.
In contrast with asset sales, in which the assets
of the selling corporation are transferred to
another entity, the transaction in stock sales
takes place at the shareholder level. Because the
corporation possesses a personality separate and
distinct from that of its shareholders, a shift in
the composition of its shareholders will not
affect its existence and continuity.
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Thus, notwithstanding the stock sale, the
corporation continues to be the employer of its
people and continues to be liable for the
payment of their just claims. Furthermore, the
corporation or its new majority shareholders are
not entitled to lawfully dismiss corporate
employees absent a just or authorized cause”
COMMERCIAL LAW
of the individual be levied [Guillermo v. Uson, G.R. No.
198967 (2016)].
This overturns the ruling in Manlimos v. NLRC
(1995) allowing for the defense of good faith in
stock sales.
c. Procedural Considerations
The general rule is that both the individual sought to
be held liable and the corporation must be impleaded
at the first instance. This is in consonance with the
tenets of due process and fair play. Hence, one
cannot “pierce the veil in order to acquire
jurisdiction” over a party [Pacific Rehouse Corp. v. CA ,
G.R. No. 199687 (2014)].
The principle of piercing the veil of corporate fiction,
and the resulting treatment of two related
corporations as one and the same juridical person
with respect to a given transaction, is basically applied
only to determine established liability; it is not
available to confer on the court a jurisdiction it has
not acquired, in the first place, over a party not
impleaded in a case. Elsewise put, a corporation not
impleaded in a suit cannot be subject to the courts
process of piercing the veil of its corporate fiction. In
that situation, the court has not acquired jurisdiction
over the corporation and, hence, any proceedings
taken against that corporation and its property would
infringe on its right to due process. The implication
of the above comment is twofold: (1) the court must
first acquire jurisdiction over the corporation or
corporations involved before its or their separate
personalities are disregarded; and (2) the doctrine of
piercing the veil of corporate entity can only be raised
during a full-blown trial over a cause of action duly
commenced involving parties duly brought under the
authority of the court by way of service of summons
or what passes as such service [Kukan v. Reyes, G.R.
No. 182729 (2010)].
A sheriff may not pierce the corporate veil, because
such power only belongs to the court [Cruz v. Dalisay,
A.M. No. R-181-P (1987)].
The only exception recognized by jurisprudence is
when it is a labor case involved. When an aggrieved
laborer is unable to attach the properties of the
corporation, the Labor Arbiter may thereafter
“amend” its decision by ordering that the properties
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E.Incorporation and
Organization
1. 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].
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
Liability of Corporation For Promoter’s Acts
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, G.R. No. L43350 (1937)].
COMMERCIAL LAW
Exceptions: A corporation may be bound by the
contract if it makes the contract its own by:
a. Adoption or ratification of the ENTIRE
contract after incorporation.
• Novation or the intent to novate the original
contract is required to adopt or ratify the
pre-incorporation contract [Campos].
• The Court’s ruling in Cagayan Fishing v.
Teodoro Sandiko, that “a corporation should
have a full and complete organization and
existence as an entity before it can enter into
any kind of a contract or transact any
business”, is not absolute. One of the
exceptions recognized by American courts is
that “a contract made by the promoters
of a corporation on its behalf may be
adopted, accepted or ratified by the
corporation when organized” [Rizal Light
v. PSC and Morong Electric (1968)].
b. Acceptance of benefits under the contract with
knowledge of the terms thereof.
c. Performance of its obligation under the contract.
The contract must of course be one which is within
the powers of the corporation to enter [Builders’
Duntile Co. v. Dunn Mfg. Co. (1929)].
2. Steps in Incorporation
Steps
Promotional Stage
Drafting Articles of
Incorporation (see Sec.
14)
Filing
of
Articles;
Payment of Fees
Examination of Articles;
Approval or Rejection by
SEC
Comments
Promoter:
• 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 plan 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 table under Articles of Incorporation under Incorporation and Organization]
•
•
•
AOI & the treasurer’s 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 and
will not give rise to its juridical personality. It will not even be a de facto corporation
• Under present SEC rules, the AOI once filed , will be published in the SEC Weekly
Bulletin at the expense of the corporation [SEC Circular # 4, 1982].
Process:
a. SEC shall examine them in order to determine whether they are in conformity with law
b. If it is not, the SEC must give the incorporators a reasonable time within which to
correct or modify the objectionable portions
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Grounds for rejection or disapproval of AOI:
a. AOI/amendment not substantially in accordance with the form prescribed
b. Purpose/s are patently unconstitutional, illegal, immoral, or contrary to government
rules and regulations
c. Treasurer’s Affidavit is false
d. Required percentage of ownership has not been complied with [Sec. 17]
e. Corporation’s establishment, organization or operation will not be consistent with the
declared national economic policies [to be determined by the SEC, after consultation
with BOI, NEDA or any appropriate agency [Sec. 6(k), PD 902-A, as amended by PD
1758]
Decisions of the SEC disapproving or rejecting the AOI may be appealed to the CA by
petition for review in accordance with the ROC
Certificate of Incorporation will be issued if:
a. SEC is satisfied that all legal requirements have been complied with; AND
b. There are no reasons for rejecting or disapproving the AOI.
Issuance of Certificate of
Incorporation
It is only upon such issuance that the corporation acquires juridical personality [Sec. 19].
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 and
hearing.
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3. Number and Qualifications
of Incorporators
a.
b.
c.
d.
Natural persons2
Any number from 5-153
Majority are residents of the Philippines4
Each incorporator must own or be a subscriber
to at least 1 share of the capital stock of the
corporation [Sec. 10]
4. Corporate Name —
Limitations on Use of
Corporate Name
a.
Must not be identical or deceptively or
confusingly similar to that of any existing
corporation or to any other name already
protected by law
b. Not patently deceptive, confusing or contrary to
existing laws [Sec. 18]5
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:
a. The avoidance of fraud upon the public which
would have occasion to deal with the entity
concerned;
b. The prevention of evasion of legal obligations
and duties, and
c. The reduction of difficulties of administration
and supervision over corporations [Lyceum of the
Philippines v. CA , G.R. No. 101897 (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].
2
3
4
5
COMMERCIAL LAW
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 [Sec. 16].
Amendment of a corporation’s 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,
G.R. No. 93073 (1992)].
5. Corporate Term
General rule: A corporation shall exist for a period not
exceeding 50 years from the date of incorporation
[Sec. 11].6
Exceptions:
a. The corporation is sooner dissolved
b. The period for the corporation’s existence is
extended (not exceeding 50 years in any single
instance)
An extension requires an amendment of the
Articles of Incorporation subject to the exercise of
appraisal right by the dissenting stockholder [Sec. 37].
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
Incorporators may now be juridical persons. [Sec. 10, RCC]
registered for the use of another corporation, or if such name is already
The minimum number of incorporators has been repealed. [Sec. 13, RCC]
protected by law, or when its use is contrary to existing law, rules and
The residency requirement has been repealed. [Sec. 10, RCC]
regulations. [Sec. 17, RCC]
6
A corporation shall now have perpetual existence unless its AOI provides
Under present law, no corporate name shall be allowed by the
Commission if it is not distinguishable from that already reserved or
otherwise. [Sec. 11, RCC]
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exercise of control in the interest of the public [Benguet
Consolidated Mining Co. v. Pineda, G.R. No. L-7231
(1956)].
6. Minimum Capital Stock and
Subscription Requirements
5.
6.
7.
8.
9.
Incorporators;
Trustees/Directors;
Amount paid by each subscriber;
Treasurer information; and
Other matters
1. Corporate Name
General rule: Stock corporations incorporated under
the Corporation Code shall not be required to have
a minimum authorized capital stock [Sec. 12].
See Corporate Name above.
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
a. At the time of incorporation, at least 25% of the
authorized capital stock stated in the Articles of
Incorporation should be subscribed;
b. At least 25% of the total subscription must be
paid upon subscription;
c. The balance to be payable on
1. Dates fixed in the subscription contract
without need of call OR
2. Upon call by the BOD in the absence of
fixed dates
d. The paid-up capital can in no case be lower than
P5,000.00 [Sec. 13] 7
2. Purpose Clause
•
•
•
7. Articles of Incorporation
a. 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.
The Articles of Incorporation must contain:
1. Corporate Name;
2. Purpose Clause;
3. Principal Office;
4. Corporate Term;
7
Must indicate the specific PRIMARY and
SECONDARY purposes if there are more than
one purpose, which should not contradict or
change the nature of the corporation [Sec. 14(2)].
Must not be patently unconstitutional, illegal,
immoral, and contrary to government rules and
regulations [Sec. 17 (2)].
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, B.M. No. 553
(1993)].
3. Principal Office
•
•
•
b. Contents
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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
This provision on the required amount of capital to be subscribed and paid
for purposes of incorporation has been repealed by the RCC.
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be registered [Chua Guan vs. Samahang Magsasaka, G.R.
No. L-42091 (1935)].
7. Capital/Capital Stock
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 simple expedient of closing old offices
and opening new ones in another place that they may
find well to suit their needs [Hyatt Elevators v. Goldstar
Elevators, G.R. No. 161026 (2005)].
If STOCK corporation:
• 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
4. Corporate Term
If NON-STOCK:
• amount of capital
• names, nationalities and
contributors
• amount contributed by each
See Corporate Term above.
5. Number, Names, Citizenship And
Residences Of The Incorporators
See Number and Qualifications of Incorporators
above.
6. Number, Names, Citizenship And
Residences Of The Directors/Trustees
Stock corporations: directors
Non-stock corporations: trustees
General rule: Not less than 5 but not more than 15
directors/trustees.8
Exceptions:
a. Non-stock corporations whose articles or bylaws may provide for more than 15 trustees [Sec.
92]
b. Banks may have up to 21 directors for cases of
mergers and consolidation [Sec. 17, General
Banking Act]
c. For educational non-stock corporations:
1. Trustees may not be less than 5 nor exceed
15
2. Number of trustees shall be in multiples of 5
[Sec. 108]
Nationalized
or
Partially-Nationalized
Industries:
Aliens may be directors but only in such number as
may be proportional to their allowable ownership of
shares
8
residences
of
8. AMOUNT PAID BY EACH
SUBSCRIBER
The Securities and Exchange Commission shall not
accept the articles of incorporation of any stock
corporation unless accompanied by a sworn
statement of the Treasurer elected by the subscribers
showing that at least twenty-five (25%) percent of the
authorized capital stock of the corporation has been
subscribed, and at least twenty-five (25%) of the total
subscription has been fully paid to him in actual cash
and/or in property the fair valuation of which is equal
to at least twenty-five (25%) percent of the said
subscription, such paid-up capital being not less than
five thousand (P5,000.00) pesos [Sec. 14].
9. TREASURER ELECTED [Sec.
15(10)]
10. OTHER MATTERS
a.
Classes of shares, as well as preferences or
restrictions on any such class [Sec. 6].
b. Denial or restriction of pre-emptive right
[Sec.39].
c. 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)].
The minimum number of directors/trustees has been repealed. [Sec. 13,
RCC]
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No transfer clause
If the foreign shareholdings of a landholding
corporation exceeds 40%, it is not the foreign
stockholders’ ownership of the shares which is
adversely affected but the capacity of the corporation
to own land – that is, the corporation becomes
Contents of AOI
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disqualified to own land. No law disqualifies a
person from purchasing shares in a landholding
corporation even if the latter will exceed the allowed
foreign equity, what the law disqualifies is the
corporation from owning land [J.G. Summit Holdings,
Inc. v. CA, G.R. No. 124293 (2005)]
Comments
Essential to its existence since it is through it that the corporation can sue and 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]9
Corporate name
Purpose clause
Principal office
Term of existence
Incorporators
and
Directors/Trustees
9
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.
[Lyceum of the Phils. v. CA (1993)]
A corporation can only have one (1) primary purpose. However, it can have 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.
• Must be within the Philippines
• 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
• Cannot specify term which is longer than 50 years at a time10
• May be renewed for another 50 years, but not earlier than 5 years prior to the
original or subsequent expiry date unless there are justifiable reasons for an earlier
extensioni
• Names, nationalities & residences of the incorporators;
• Names, nationalities & residences of the directors or trustees who will act as such
until the first regular directors or trustees are elected;
Under present law, no corporate name shall be allowed by the
protected by law, or when its use is contrary to existing law, rules and
Commission if it is not distinguishable from that already reserved or
regulations. [Sec. 17, RCC]
10
A corporation shall now have perpetual existence unless its AOI provides
registered for the use of another corporation, or if such name is already
otherwise. [Sec. 11. RCC]
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Contents of AOI
•
•
•
•
•
Capital stock
•
•
•
•
Other matters
•
Comments
Treasurer who has been chosen by the pre-incorporation subscribers/members
to receive on behalf of the corporation, all subscriptions /contributions paid by
them
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 P5,00011
Classes of shares into which the shares of stock have been divided; preferences
of & 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
a.
c. Amendment
1.
2.
By a majority vote of the BOD or trustees; and
The vote or written assent of
a. 2/3 of the outstanding capital stock, without
prejudice to the appraisal right of dissenting
stockholders in accordance with the
provisions of this Code,
b. 2/3 of the members if it be a non-stock
corporation [Sec. 16].
Limitations
1. Requirements imposed by the Code or by special
laws
2. Must be for a legitimate purpose
3. Must be approved by the directors/trustees and
the stockholders/members through the vote
requirement
4. Appraisal Right
5. Both the original and the amended articles
together must contain all the provisions required
by law to be set out in the articles
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
11
COMMERCIAL LAW
Upon their approval by the SEC by the
issuance of a certificate of amended articles;
OR
b. From the date of filing with the SEC if not
acted upon within 6 months from the date of
filing for a cause not attributable to the
corporation
Procedure
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
a. Duly certified under oath by the corporate
secretary and a majority of the directors or
trustees
b. Stating the fact that the amendment or
amendments have been duly approved by
the required vote of the stockholders or
members
d. Non-Amendable Items
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
The provision on minimum subscribed and paid up capital has been repealed.
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Increase or decrease in authorized capital stock
[subject to Sec. 38]
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]
8. Registration and Issuance of
Certificate of Incorporation
DOCUMENTS TO BE FILED WITH SEC:
a. Articles of Incorporation, and By-Laws (if
crafted prior to incorporation)
b. Treasurer’s 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.
c.
Letter authority authorizing the SEC to examine
the bank deposit and other corporate books and
records to determine the existence of paid-up
capital
d. Undertaking to change the corporate name in
case there is another person or entity with same
or similar name that was previously registered
e. Certificate of authority from proper government
agency whenever appropriate like BSP for banks
and Insurance Commission for insurance
corporations. [Sundiang and Aquino]
ISSUANCE
OF
CERTIFICATE
OF
INCORPORATION BY SEC
Effect: Commencement of corporate existence and
juridical personality [Sec. 19]
12
COMMERCIAL LAW
Ground for revocation of certificate of
incorporation: If incorporators are found guilty of
fraud in procuring the same after due notice and
hearing [Sec. 6(i), PD 902-A].
GROUNDS FOR DISAPPROVING
ARTICLES OF INCORPORATION:
THE
a.
Does not substantially comply with form
prescribed
b. Purpose is patently unconstitutional, illegal,
immoral, contrary to government rules and
regulations
c. Treasurer’s Affidavit concerning the amount of
capital subscribed and or paid is false
d. 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 time to
correct or modify objectionable portions of the
articles or amendment [Sec. 17].
9. 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, G.R. No. 152356 (2005)].
May be done either:
a. Prior to incorporation - approved and signed by
all the incorporators and submitted to SEC
together with Articles of Incorporation; or
b. After incorporation - within 1 month after
receipt of official notice of the issuance of its
certificate of incorporation by the SEC [Sec.
46].12
EFFECT OF FAILURE TO FILE THE BYLAWS WITHIN THE PERIOD
Does not imply the "demise" of the corporation.
By-laws may be required by law for an orderly
governance and management of corporations but
they are not essential to corporate birth. Nonetheless,
failure to file them within the period required by law
The requirement of adoption of by-laws one (1) month after receipt of the
notice of issuance of certificate of incorporation has been deleted. [Sec. 45,
RCC]
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by no means tolls the automatic dissolution of a
corporation [Loyola Grand Villas Homeowners
Association v. CA G.R. No. 117188 (1997)].
Note: Sec. 22 on the effect of failure to formally
organize within 2 years from incorporation, the
corporation’s 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].
a. Nature and Functions of ByLaws
COMMERCIAL LAW
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 G.R. No. 117604 (1997)].
d. Amendment or Revision
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]. It also
regulates the affairs and relationship between and
among stockholders, BOD and corporation [Lopez].
b. Requisites of Valid By-Laws
Approval requirement: Must be approved by the
affirmative vote of the stockholders representing
MAJORITY of the outstanding capital stock or
majority of members
If filed pre-incorporation: must be approved and
signed by all incorporators
Effected by: majority vote of the members of the
board and majority vote of owners of the
Outstanding Capital Stock or members, in a meeting
duly called for the purpose
Delegation to BOD of power to amend
By vote of stockholders representing 2/3 of the
Outstanding Capital Stock or 2/3 of the members
[Sec. 48]
Delegation to BOD may be revoked
Any power delegated to the BOD or trustees to
amend or repeal any by-laws or adopt new by-laws
shall be considered as revoked whenever stockholders
owning or representing a majority of the outstanding
capital stock or a majority of the members in nonstock corporations, shall so vote at a regular or special
meeting [Sec. 48].
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. Since the provision in question is
contrary to law, the fact that for fifteen years it has
not been questioned or challenged but, on the
contrary, appears to have been implemented by the
members of the association cannot forestall a later
challenge to its validity. Neither can it attain validity
through acquiescence because, if it is contrary to law,
it is beyond the power of the members of the
association to waive its invalidity. For that matter the
members of the association may have formally
adopted the provision in question, but their action
would be of no avail because no provision of the bylaws can be adopted if it is contrary to law [Grace
Christian High School v. CA, G.R. No. 108905 (1997)].
c. Binding Effect
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COMMERCIAL LAW
f.
F. Corporate Powers
1. General Powers; Theory of
General Capacity [Sec. 36]
a.
b.
c.
d.
e.
f.
Sue and be sued in its corporate name;
Succession;
Adopt and use a corporate seal;
Amend its Articles of Incorporation;
Adopt and amend by-laws;
For stock corporations - issue or sell stocks to
subscribers and sell treasury stocks; for nonstock corporation - admit members to the
corporation;
g. 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;
h. Enter into merger or consolidation with other
corporations as provided in the Code;
i. 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;
j. Establish pension, retirement, and other plans for
the benefit of its directors, trustees, officers and
employees; and
k. 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:
a. “Except such as are necessary or incidental to the
exercise of the powers so conferred” [Sec. 45]
b. “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)].
2. Specific Powers; Theory of
Specific Capacity [Secs. 3744]
a. Power to Extend or Shorten Corporate Term
b. Power to Increase or Decrease Capital Stock or
Incur, Create, Increase Bonded Indebtedness
c. Power to Deny Pre-Emptive Rights
d. Power to Sell or Dispose of Corporate Assets
e. Power to Acquire Own Shares
Power to Invest Corporate Funds in Another
Corporation or Business
g. Power to Declare Dividends
h. Power to Enter Into Management Contract
a. Power to Extend or Shorten the
Corporate Term [Sec. 37]
1.
2.
3.
4.
Must be approved by majority vote of the BOD/
BOT
Ratified at a meeting by shareholders
representing 2/3 of the outstanding capital
stock/ 2/3 of members of non-stock
corporations
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
Appraisal right may be exercised by the
dissenting stockholder for BOTH extension and
shortening of corporate term [See also Sec. 81]
b. Power to Increase or Decrease
Capital Stock or Incur, Create,
Increase Bonded Indebtedness
[Sec. 38]
1.
2.
Same requirements above from 1-3
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,
1. The amount of capital stock or number
of shares of no-par stock actually
subscribed
2. Names, nationalities and residences of
the persons subscribing
3. The amount of no-par stock subscribed
by each
4. 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
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e.
3.
4.
5.
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
Prior approval of SEC is required
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.
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:
1. That at least 25% of such increased
capital stock have been subscribed
and
2. 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
Bonds issued by a corporation shall be registered
with the SEC
c. Power to Deny Pre-Emptive
Rights [Sec. 39]
General Rule: All shareholders of a stock corporation
have the 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
COMMERCIAL LAW
outstanding capital stock, in exchange for
property needed for corporate purposes or in
payment of a previously contracted debt
Note: For close corporations, the pre-emptive rights
extends 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 AOI provides otherwise [Sec. 102].
d. Power to Sell or Dispose of
Substantially All Its Assets [Sec.
40]
1.
2.
3.
4.
5.
Same requirements from 1-3 as Sec. 37 above
Any dissenting shareholders may exercise his
appraisal right
Deemed to cover substantially all the corporate
property and assets. A sale or other disposition
shall be deemed to cover substantially all the
corporate property and assets if thereby the
corporation would be rendered incapable of
continuing the business or accomplishing the
purpose for which it was organized.
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
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
In enumeration no. 5 above, only the approval of a
quorum of the BOD/BOT is required.
While the Corporation Code allows the transfer of all
or substantially all the properties and assets of a
corporation, the transfer should not prejudice the
creditors of the assignor. The only way the transfer
can proceed without prejudice to the creditors is to
hold the assignee liable for the obligations of the
assignor. The acquisition by the assignee of all or
substantially all of the assets of the assignor
necessarily includes the assumption of the assignor’s
liabilities, unless the creditors who did not consent to
the transfer choose to rescind the transfer on the
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ground of fraud. To allow an assignor to transfer all
its business, properties and assets without the consent
of its creditors and without requiring the assignee to
assume the assignor’s obligations will defraud the
creditors. The assignment will place the assignor’s
assets beyond the reach of its creditors [Caltex (Phils.)
Inc. v. PNOC Shipping and Transport Corp, G.R. No.
150711 (2006)].
e. Power to Acquire Its Own Shares
[Sec. 41]
1.
2.
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
Provided there are unrestricted retained earnings
in the corporate books to cover the shares
purchased or acquired
f. Power to Invest Corporate Funds
in Another Corporation or
Business [Sec. 42]
1.
2.
3.
Same requirements from 1-3 as Sec. 37 above
Any dissenting shareholders shall have appraisal
right
Where the investment is reasonably necessary to
accomplish the corporation’s 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.
COMMERCIAL LAW
A private corporation, in order to accomplish its
purpose as stated in its articles of incorporation, and
subject to the limitations imposed by the Corporation
Law, has the power to acquire, hold, mortgage, pledge
or dispose of shares, bonds, securities, and other
evidences of indebtedness of any domestic or foreign
corporation. Such an act, if done in pursuance of the
corporate purpose, does not need the approval of the
stockholders; but when the purchase of shares of
another corporation is done solely for investment and
not to accomplish the purpose of its incorporation,
the vote of approval of the stockholders is necessary
[De La Rama v. Ma-ao Sugar Central Co., G.R. No. L17504 (1969)].
g. Power to Declare Dividends
[Sec. 43]
1.
2.
3.
4.
5.
6.
Out of unrestricted retained earnings
Payable in cash, in property, or in stock to all
shareholders on the basis of outstanding stock
held by them
Any cash dividend due on delinquent stock shall
first be applied to the unpaid balance on the
subscription plus costs and expenses
Stock dividends shall be withheld from the
delinquent stockholder until his unpaid
subscription is fully paid
Should be approved by 2/3 of shareholders
representing the outstanding capital stock at a
regular/special meeting called for that purpose
Stock corporations- prohibited from retaining
surplus profits in excess of 100% of their paid-in
capital stock, except:
a. When justified by definite corporate
expansion projects or programs approved by
the BOD
b. When the corporation is prohibited under
any loan agreement with any financial
institution or creditor from declaring
dividends without its consent, and such
consent has not yet been secured
c. When it can be clearly shown that such
retention is necessary under special
circumstances obtaining in the corporation
Stock dividends cannot be issued to a person who is
not a stockholder in payment of services rendered.
A corporation may legally issue shares of stock in
consideration of services rendered to it by a person
not a stockholder, or in payment of its indebtedness.
A share of stock issued to pay for services rendered is
equivalent to a stock issued in exchange of property,
because services is equivalent to property. It is the
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shares of stock that are originally issued by the
corporation and forming part of the capital that can
be exchanged for cash or services rendered, or
property. A share of stock coming from stock
dividends declared cannot be issued to one who is not
a stockholder of a corporation [Nielson and Co. v.
Lepanto Consolidated Mining, G.R. No. L-21601 (1968)].
Cash Dividends vs. Stock Dividends
Cash
Stock
Dividends
Dividends
Voting
Board
of
Board
of
requirements
Directors + 2/3
Directors
for issuance
of OCS
Shall
be
Shall
be
applied to the
withheld from
unpaid
Effect on
the delinquent
balance
on
delinquent
stockholder
the
stock
until his unpaid
subscription
subscription is
plus cost and
paid
expenses
No, since this
Can this be
requires
issued by
No [Sec. 35]
stockholders’
Executive
approval [Sec.
Committee?
35]
h. Power to Enter into
Management Contracts [Sec. 44]
1.
2.
3.
4.
Should be approved by the BOD and by
shareholders owning at least the majority of the
outstanding capital stock or at least a majority of
the members of both the managing and the
managed corporation at a meeting duly called for
that purpose
Should be approved by the 2/3 of stockholders
owning outstanding capital stock/members of
the managed corporation when:
a. 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
b. A majority of the members of the BOD of
the managing corporation also constitute a
majority of the BOD of the managed
corporation
No management contract shall be entered into
for a period longer than 5 years for any one term
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.
COMMERCIAL LAW
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
Note: 2 general restrictions on the power of the
corporation to acquire and hold properties:
1. The 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)
i. 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: These are 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]
APPLICABILITY OF THE 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 corporation’s 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., G.R. No. L-15092
(1962)].
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CONSEQUENCES
1. Executed contract – courts will not set aside or
interfere with such contracts;
2. Executory contracts – no enforcement even at
the suit of either party (void and unenforceable);
3. Partly executed and partly executory –
principle of “no unjust enrichment at expense of
another” shall apply;
4. Executory contracts apparently authorized
but Ultra Vires – the principle of estoppel shall
apply.
Ultra Vires vs. Illegal Acts
(1) Ultra Vires Acts
(2) Illegal Acts
(3) Not
necessarily
unlawful, but outside
the powers of the
corporation
(5) Can be ratified
(7) Can bind the parties
if wholly or partly
executed
(9) Voidable, and may be
enforced
by
performance,
ratification
or
estoppel
(4) Unlawful;
against
law, morals, public
policy, and public
order
(6) Cannot be ratified
(8) Cannot
parties
bind
the
(10) Void and cannot be
validated
REMEDIES IN CASE OF ULTRA VIRES
ACTS
1. State
a. Dissolution of the corporation thru a quo
warranto proceeding
b. Injunction
c. Suspension or revocation of the certificate of
registration by the SEC
2. Stockholders
a. Injunction
b. Derivative suit
c. Ratification (except when a 3rd party is
prejudiced or the act is illegal)
3. Creditors
a. Nullification of contract in fraud of creditors
3. How Corporate Powers are
Exercised
Exceptions [Sec. 6]:
Voting and non-voting shares shall be entitled to vote
in the following cases:
1. Amendment of Articles of Incorporation
2. Adoption, Amendment and Repeal of By-Laws
[Sec. 48]
3. Sale, Lease, Mortgage or Other Disposition of
Substantially all corporate assets [Sec. 40]
4. Incurring, Creating or Increasing Bonded
Indebtedness [Sec. 38]
5. Increase or Decrease of Capital Stock [Sec. 38]
6. Merger and Consolidation [Sec. 76-80]
7. Investment of funds in another corporation or
business or for any purpose other than the
primary purpose for which it was organized [Sec.
42]
Requisites [Sec. 42] (Asked in 1995 Bar):
a. Approval of majority of the BOD or trustees
b. Ratification by the stockholders representing at
least 2/3 of the Outstanding Capital Stock or the
members at a meeting duly called for the purpose
c. Written notice addressed to each stockholder or
member at his place of residence as shown on the
books of the corporation
d. Appraisal right available to dissenting
stockholders or members
8. Dissolution of the Corporation [Secs. 118-121]
CORPORATE ACTS REQUIRING VOTING
SHAREHOLDERS’ APPROVAL
1. Declaration of Stock Dividends [Sec. 43]
2. Management Contracts [Sec. 44]
3. Fixing the Consideration of No-Par shares [Sec.
62]
4. Fixing the Compensation of Directors [Sec. 30]
b. By the Board of Directors
See Doctrine of Centralized Management under
Board of Directors and Trustees below.
c. By the Officers
(1) Corporate Officer
a. By the Shareholders
CORPORATE ACTS REQUIRING ALL
SHAREHOLDERS’ APPROVAL
General Rule: Vote necessary to approve a particular
corporate act as provided in this Code shall be
deemed to refer only to stocks with voting rights [Sec.
6]
COMMERCIAL LAW
Position is provided for
in the by-laws or under
the Corporation Code
RTC has jurisdiction in
case of labor dispute
(2) Corporate
Employee
Employed through the
action of the managing
officer of the corporation
NLRC has jurisdiction in
case of labor disputes
Who are the corporate officers
1. President – must be a director;
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2.
3.
4.
CORPORATION CODE
Treasurer – may or may not be a director; must
be a resident
Secretary – need not be a director unless required
by the by-laws; must be a resident and citizen of
the Philippines; and
Other officers as may be provided in the by-laws.
Note: Any 2 or more positions may be held
concurrently by the same person, EXCEPT that no
one shall act as president and secretary or as president
and treasurer at the same time.
President
YES
NO
Secretary
NO
YES
Director
Filipino
Citizen
Residency NO
YES
Prohibited Secretary or President
concurrent Treasurer
positions
Treasurer
NO
NO
YES
President
Additional qualifications of officers may be provided
for in the by-laws [Sec. 47(5)]
Conformably with Sec. 25 of the Corporation Code,
a position must be expressly mentioned in the byLaws in order to be considered as a corporate office.
Thus, the creation of an office pursuant to or under a
by-Law enabling provision is not enough to make a
position a corporate office. Guerrea v. Lezama
(1958), the first ruling on the matter, held that the
only officers of a corporation were those given that
character either by the Corporation Code or by the
By-Laws; the rest of the corporate officers could be
considered only as employees or subordinate
officials [Matling Industrial and Commercial Corp. v. Coros,
G.R. No. 157802 (2010)].
A different interpretation can easily leave the way
open for the BOD to circumvent the constitutionally
guaranteed security of tenure of the employee by the
expedient inclusion in the By-Laws of an enabling
clause on the creation of just any corporate officer
position.
“An ‘office’ is created by the charter of the
corporation and the officer is elected (or appointed)
by the directors or stockholders” [Real v. Sangu
Philippines citing Easycall Communications Phils., Inc. v.
King (2005) G.R. No. 168757 (2011)]
“Corporate officers’ in the context of PD No. 902-A
are those officers of the corporation who are given
that character by the Corporation Code or by the
corporation’s by-laws. There are three specific
officers whom a corporation must have under Sec. 25
COMMERCIAL LAW
of the Corporation Code. These are the president,
secretary and the treasurer. The number of officers
is not limited to these three. A corporation may
have such other officers as may be provided for by its
by-laws like, but not limited to, the vice-president,
cashier, auditor or general manager. The number of
corporate officers is thus limited by law and by the
corporation’s
by-laws”
[Garcia
v.
Eastern
Telecommunications Philippines, Inc., G.R. No. 173115
(2009)].
Disqualifications [Sec. 27]
1. Convicted by final judgment of an offense
punishable by imprisonment for a period
exceeding 6 years
2. Convicted by final judgment of a violation of the
Corporation Code committed within 5 years
prior to the date of his election or appointment.
This includes violations of rules and regulations
issued by the SEC to implement the provisions
of the Corporation Code.
Authority of Corporate Officers
A person dealing with a corporate officer is put on
inquiry as to the scope of the latter’s authority but an
innocent person cannot be prejudiced if he had the
right to presume under the circumstances the
authority of the acting officers.
Doctrine of Apparent Authority
If a corporation knowingly permits one of its officers,
or any other agent, to act within the scope of an
apparent authority, it holds him out to the public as
possessing the power to do those acts; the
corporation will, as against anyone who has in good
faith dealt with it through such agent, be estopped
from denying the agent’s authority [Associated Bank v.
Pronstroller , G.R. No. 148444 (2008)].
4. Trust Fund Doctrine
The 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, G.R. No. 77860 (1988)].
The subscribed capital is the same amount that can
loosely be termed as the “trust fund” of the
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corporation. The “Trust Fund” doctrine considers
this subscribed capital as a trust fund for the payment
of the debts of the corporation, to which the
creditors may look for satisfaction. Until the
liquidation of the corporation, no part of the
subscribed capital may be returned or released to
the stockholder (except in the redemption of
redeemable shares) without violating this
principle. Thus, dividends must never impair the
subscribed capital; subscription commitments cannot
be condoned or remitted; nor can the corporation buy
its own shares using the subscribed capital as the
consideration therefor [NTC v. CA. G.R. No. 127937
(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, G.R. No. L-19761 (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 procedure for the
distribution of capital assets, embodied in
Corporation Code, which allows the distribution of
corporate capital only in three instances:
a. Amendment of the Articles of Incorporation to
reduce the authorized capital stock,
b. Purchase of redeemable shares by the
corporation, regardless of the existence of
unrestricted retained earnings, and
c. Dissolution and eventual liquidation of the
corporation.
COMMERCIAL LAW
The trust fund doctrine is not limited to reaching the
stockholder’s 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 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., G.R. No. 157549 (2011)].
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, G.R. No. 144476 (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, G.R. No. L-30460 (1929)].
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G.Board of Directors and
Trustees
Indisputably, one of the rights of a stockholder is the
right to participate in the control or management of
the corporation. This is exercised through his vote in
the election of directors because it is the BOD that
controls or manages the corporation [Gamboa v. Teves,
G.R. No. 176579 (2011)].
1. Doctrine of Centralized
Management
BOARD IS SEAT OF CORPORATE POWERS
General Rule: Unless otherwise provided in this Code,
the corporate powers of all corporations formed
under this Code shall be exercised, all business
conducted and all property of such corporations
controlled and held by the 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:
a.
In case of an Executive Committee duly
authorized in the by-laws; [Sec. 35]
Exception to Exception: The following may not be
delegated to the executive committee: (1)
approval of any action for which shareholders'
approval is also required; (2) the filing of
vacancies in the board; (3) the amendment or
repeal of by-laws or the adoption of new by-laws;
(4) the amendment or repeal of any resolution of
the board which by its express terms is not so
amendable or repealable; and (5) a distribution of
cash dividends to the shareholders. [Sec. 35]
b. 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.
c.
COMMERCIAL LAW
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 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 the board, whose approval will finalize the
transaction [Spouses Constantine Firme v. Bukal
Enterprises and Development Corporation, G.R. No.
146608 (2003)].
Requisites of a valid corporate act by the bod
a. The Board must act as a BODY in a meeting.
b. There must be a VALIDLY constituted meeting.
c. There act must be supported by a MAJORITY
OF THE QUORUM duly assembled
Exception: Election of officers requires a vote of
majority of ALL the members of the board
d. The act must be within the powers conferred to
the Board.
Limitations on powers of BOD/BOT
a. Limitations imposed by the Constitution,
statutes, articles of incorporation or by-laws;
b. Certain acts of the corporation that require joint
action of the stockholders and BOD:
1. Removal of director [Sec. 28]
2. Amendments of Articles of Incorporation
[Sec. 16]
3. Fundamental changes [Sec. 6]
4. Declaration of stock dividends [Sec. 43]
5. Entering into management contracts [Sec.
44]
6. Fixing of consideration of non-par shares
[Sec. 62]
7. Fixing of compensation of directors [Sec. 30]
c. Cannot exercise powers not possessed by the
corporation.
Principle on delegation of board power
Under Sec. 23, the power and the responsibility to
decide whether the corporation should enter into a
contract that will bind the corporation is lodged in the
board, subject to the articles of incorporation, bylaws, or relevant provisions of law. However, just as a
natural person may authorize another to do certain
acts for and on his behalf, the BOD may validly
delegate some of its functions and powers to officers,
committees or agents. The authority of such
individuals to bind the corporation is generally
derived from law, corporate by-laws or authorization
from the board, either expressly or impliedly by habit,
custom or acquiescence in the general course of
business [People’s Aircargo v. CA, G.R. No. 117847
(1998)].
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e.
2. Business Judgment Rule
General Rule: Directors cannot be held 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. If the contracts are so unconscionable and
oppressive as to amount to a wanton destruction
of the rights of the minority [Ingersoll v. Malabon
Sugar, G.R. No. L-27770 (1927)];
b. If they violate their duties under Sec. 31 (director
willfully and knowingly assents to patently
unlawful acts of the corporation, or are guilty of
gross negligence or bad faith); and
c. If they violate Sec. 34 (disloyalty of a director
who acquires for himself a business opportunity
that should have belonged to the corporation,
unless his act is ratified by a 2/3 vote of
stockholders).
CONSEQUENCES OF THE BUSINESS
JUDGMENT RULE
a. The resolution, contracts and transactions of the
board cannot be overturned or set aside by the
stockholders or members and not even by the
courts under the principle that the business of the
corporation has been left to the hands of the
board
b. Directors and duly authorized officers cannot be
held personally liable for acts or contracts done
with the exercise of their business judgment.
Exceptions:
a. When the Corporation Code expressly provides
otherwise
b. When the Directors or officers acted with fraud,
gross negligence or in bad faith [Sec. 31]
c. When Directors or officers act against the
corporation in conflict of interest situation
[VILLANUEVA]
REMEDIES
IN
CASE
OF
MISMANAGEMENT
a. Removal of directors pursuant to Sec. 28
b. Derivative suit or complaint filed with the RTC
[Sec. 5.2, R.A. 8799, Securities Regulation Code;
A.M. No. 01-2-04 SC, Interim Rules of
Procedure
Governing
Intra-corporate
Controversies]
c. Receivership
d. Injunction if the act has not yet been done
COMMERCIAL LAW
Dissolution if abuse amounts to a ground for quo
warranto but Solicitor General refuses to act
Note: Dean Villanueva opined that a derivative suit
may be an exception to such Rule: this occurs when it
is apparent that the Board is not in a position to
validly exercise its business judgment for the
protection of the corporation, e.g., when the Board
itself has committed an act causing damage to the
corporation or when the Board is placed in a conflict
of interests scenario whereby it is unlikely that it
would use such business discretion to file such suit for
the best interest of the corporation.
3. Tenure, Qualifications, and
Disqualifications of
Directors or Trustees
a. Tenure
Directors shall hold office for 1 year until their
successors are elected and qualified [Sec. 23]
Term v. Tenure
Term
Tenure
Time during which the
officer may claim to The period within
hold the office as of which the director
right, and fixes the actually holds office,
interval after which the including the holdover
several
incumbents period after the end of
shall
succeed one his term
another.
Not affected by the
Includes holdover
holdover
Fixed by statute and it
does not change simply
because the office may
May be shorter or
have become vacant,
longer (in case of a
nor
because
the
holdover) than the term
incumbent holds over
for reasons within or
in office beyond the end
beyond the power of
of the term due to the
the incumbent
fact that a successor has
not been elected and
has failed to qualify.
1 Year
[Valle Verde Country Club v. Africa, G.R. No. 151969
(2009)]
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COMMERCIAL LAW
b. Qualifications
4. Elections [Sec. 24]
1.
a. Cumulative Voting
If STOCK, director must own at least 1 share of
the capital stock, which stock shall stand in his
own name [Sec. 23]
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, G.R. No. 93695 (1992)].
c. Disqualifications [Sec. 27]
1.
2.
Convicted by final judgment of an offense
punishable by imprisonment for a period
exceeding 6 years; or
A violation of the Corporation Code, committed
within 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 corporation’s 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, G.R. No. L-45911 (1979)]
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.
Cumulative Voting By Distribution
A stockholder may cumulate his shares by multiplying
the number of his shares by the number of directors
to be elected and distribute the same among as many
candidates as he shall see fit.
Illustration:
In the illustration above, Pedro instead may choose to
give 100 votes to candidate 1, 100 votes to candidate
2, 100 votes to candidate 3, 150 votes to candidate 4,
and 50 votes to candidate 5.
Straight Voting
Every stockholder may vote such number of shares
for as many persons as there are directors to be
elected.
b. 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.
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.
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Cause of
Removal
5. 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:
a. 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
b. At a regular or special meeting after proper notice
is given
6. Filling of Vacancies [Sec. 29]
Cause of
Removal
Procedure
Vacancy/ies must be filled by
the stockholders in a regular
or special meeting called for
that purpose.
a.
Removal
under Sec. 28
b. Expiration of
term
c. Increase in
the number
of
BOD/BOT
Other causes
COMMERCIAL LAW
For removal, a director or
trustee elected to fill a vacancy
shall be elected only for the
unexpired term of his
predecessor in office.
For increase in number of
seats, the election may be
made
same
meeting
authorizing the increase of
directors or trustees if so
stated in the notice of the
meeting.
Vacancy/ies may be filled by
the vote of at least a majority
of the remaining directors or
trustees, if still constituting a
quorum.
Otherwise, said vacancies
must be filled by the
stockholders in a regular or
Procedure
special meeting called for that
purpose.
7. Compensation [Sec. 30]
General Rule: Directors are only entitled to reasonable
per diems. They are not entitled to compensation as
directors.
Exceptions:
a. When Articles of Incorporation, by-laws, or an
advance contract provides for compensation.
b. 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.
Note: 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 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,
G.R. No. 113032 (1997)].
8. Fiduciary Duties and
Liability Rules
a. 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
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CORPORATION CODE
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., G.R.
No. 178158 (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 (1) willfully and knowingly
vote for or assent to patently unlawful acts of the
corporation or (2) who are guilty of gross negligence
or bad faith in directing the affairs of the corporation
or (3) acquire any personal or pecuniary interest in
conflict with their duty as such directors or trustees
shall be liable jointly and severally for all damages
resulting therefrom suffered by the corporation, its
stockholders or members and other persons [Sec. 31].
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
competent
evidence
thereon would be unwarranted and unreasonable
[Republic of the Philippines v. Sandiganbayan (First Division)
e.t al., G.R. No. 166859 (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.
3.
COMMERCIAL LAW
From its nature, is in line with corporation’s
business and is of practical advantage to it; and
One in which the corporation has an interest or
a reasonable expectancy.
The rule shall be applied notwithstanding the fact that
the director risked his own funds in the venture [Sec.
34].
By embracing the opportunity, the self-interest of the
officer or director will be brought into conflict with
that of his corporation. Hence, the law does not
permit him to seize the opportunity even if he will use
his own funds in the venture [SUNDIANG and
AQUINO].
Note: Differences between 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]
b. Liabilities
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
LIABILITY FOR WATERED STOCKS
Watered Stocks – stocks issued for a consideration
less than its par or issued value or for a consideration
in any form other than cash, valued in excess of its
fair value.
Any director or officer of a corporation consenting to
the issuance of watered stocks or who, having
knowledge thereof, does not forthwith express his
objection in writing and file the same with the
corporate secretary shall be solidarily liable with the
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stockholder concerned to the corporation and its
creditors for the difference in value [Sec. 65].
PERSONAL LIABILITIES
General rule: Members of the Board, who purport to
act in good faith for and on 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., G.R. No.
178505 (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
Liability
Shields the incorporators
from corporate liability
beyond
their
agreed
contribution to the capital
or shareholding in the
corporation
Doctrine of Immunity
Protects a person acting
for and in behalf of the
corporation from being
himself personally liable
for his authorized actions
LIABILITY OF DIRECTOR, TRUSTEE OR
OFFICER [Note: 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:
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
[Atrium Management Corp. v. CA, G.R. No. 109491
(2001)].
COMMERCIAL LAW
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 latter’s 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, such as concealment of the
defendant-purchaser's identity (the corporate officer
had used an agent go-between to avoid detection of
his actions by the seller here) and a failure to disclose
significant facts that materially affected the price of
the stock [Strong v. Repide, 213 U.S. 419 (1909)].
9. 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 [Time Inc. v. Reyes, G.R.
No. L-28882 (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,
G.R. No. 119858 (2003)] [see also Sec. 13, P.D. 115].
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2.
10. Inside Information
3.
See also Securities Regulation Code below.
4.
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.
An INSIDER means:
a. The issuer;
b. A director or officer (or any person performing
similar functions) of, or a person controlling the
issuer; gives or gave him access to material
information about the issuer or the security that
is not generally available to the public;
c. A government employee, director, or officer of
an exchange, clearing agency and/or selfregulatory organization who has access to
material information about an issuer or a security
that is not generally available to the public; or
d. A person who learns such information by a
communication from any foregoing insiders [Sec.
3.8, Security Regulations Code]
11. Contracts
a. 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:
1. 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;
COMMERCIAL LAW
That the vote of such director or trustee was not
necessary for the approval of the contract;
That the contract is fair and reasonable under the
circumstances; and
That in case of an officer, the contract has been
previously authorized by the BOD.
Ratification
In case of absence of the first two conditions above,
contract may be ratified if:
1. 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.
2. Full disclosure of the adverse interest of the
directors or trustees involved is made at such
meeting.
3. Contract is fair and reasonable under the
circumstances
b. Between Corporations with
Interlocking Directors
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
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]
Interlocking director with nominal and
substantial interest
If the interest of the interlocking director in one of
the corporations is nominal (stockholdings 20% or
less) while substantial in the other, the contract shall
be VALID, if the following conditions are met
1. The presence of such director or trustee in the
board meeting in which the contract was
approved was NOT necessary to constitute a
quorum for such meeting
2. That the vote of such director or trustee was not
necessary for the approval of the contract
3. That the contract is fair and reasonable under the
circumstances.
Where (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 in a meeting called for the
purpose voted to ratify the contract, provided that:
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1.
2.
CORPORATION CODE
Full disclosure of the adverse interest of the
directors/trustees involved is made on such
meeting;
The contract is fair and reasonable under the
circumstances.
12. Executive Committee [Sec.
35]
which are within the competency of the board to
create at anytime and whose actions require
ratification and confirmation by the board.
Another reason is that the BOD has the power
to create positions not provided for in the bylaws since the board is the corporation’s
governing body [Filipinas Port Services Inc. v. Go,
G.R. No. 161886 (2007)].
13. Meetings
a. 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].
b. Limitations on Its Power
It 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 in this case are silent as to
the creation by its BOD of an executive committee.
Notwithstanding the silence of the by-laws on the
matter, the SC did not rule that the BOD’s creation
of the executive committee is illegal or unlawful.
1. 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
13
2.
COMMERCIAL LAW
a. Regular or Special
WHO 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, G.R. No.
152392 (2005)].
WHEN AND WHERE
When? [Sec.53]
a. Regular meetings of directors or trustees shall
be held monthly, unless the by-laws provide
otherwise.
b. Special meetings of the BOD or trustees may
be held at any time upon the call of the president
or as provided in the by-laws.
Where? [Sec. 53]
Meetings of directors or trustees of corporations may
be held anywhere in or outside of the Philippines,
unless the by-laws provide otherwise.
NOTICE
Notice of regular or special meetings stating the date,
time and place of the meeting must be sent to every
director or trustee at least 1 day prior to the
scheduled meeting, unless otherwise provided by
the by-laws.13
A director or trustee may waive this requirement,
either expressly or impliedly [Sec. 50].
Notice of regular or special meetings must now be sent 2 days prior to
the schedules meeting, unless a longer time is provided in the bylaws. [Sec.
52, RCC]
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b. Who Presides
The president presides, unless the by-laws provide
otherwise [Sec. 54].14
COMMERCIAL LAW
c. 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 bylaws 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.
For stock corporations, 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. For nonstock
corporations, only those who are actual, living
members with voting rights shall be counted in
determining the existence of a quorum during
members meetings. Dead members shall not be
counted [Tan v. Sycip, G.R. No. 153468 (2006)].
The quorum in a members’ meeting is to be reckoned
as the actual number of members of the corporation.
What happens in the event of the death of one of
them?
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 bylaws. [Tan v. Sycip, G.R. No. 153468 (2006)]
d. Rule on Abstention
A vote of abstention is considered to be a vote in
itself. Abstentions will not be counted towards the
14
It is now the chairman, or in his absence, the president who shall preside
at all meetings of the directors or trustees, unless the bylaws provide
otherwise. [Sec. 53, RCC]
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affirmative and such refusal to vote does not by itself
indicate acquiescence in the action of those who vote.
A presumption of intent behind the abstention is only
prima facie. Thus, an inquiry into the facts and
circumstances attending the voting is necessary.
[Lopez v. Ericta, G.R. No. L-32991 (1972)]
Regular
When
Held monthly, unless
the by-laws provide
otherwise
Special
COMMERCIAL LAW
H. Stockholders and
Members
1. Rights of Stockholders and
Members
a.
At any time upon the
call of the president or
as provided in the bylaws [Sec. 53]
Where
Anywhere in or outside of the Philippines, unless
the by-laws provide otherwise [Sec. 53]
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. [Sec. 53]
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 bylaws 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.
Direct or indirect participation in management
[Sec. 6]
b. Voting rights [Sec. 6]
c. Right to remove directors [Sec. 28]
d. Proprietary rights
1. Right to dividends [Secs. 43 and 71]
2. Appraisal right [Sec. 81]
3. Right to issuance of stock certificate for fully
paid shares [Sec. 64]
4. Proportionate
participation
in
the
distribution of assets in liquidation [Sec. 122]
5. Right to transfer of stocks in corporate
books [Sec. 63]
6. Pre-emptive right [Sec. 39]
e. Right to inspect books and records [Sec. 74]
f. Right to be furnished with the most recent
financial statements/reports [Sec. 75]
g. Right to recover stocks unlawfully sold for
delinquent payment of subscription [Sec. 69]
h. Right to file individual suit, representative suit
and derivative suits
a. 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, G.R. No. 108576 (1999)].
Doctrine of Equality of Shares provides that where
the Articles of Incorporation do not provide for any
distinction of the shares of stock, all shares issued by
the corporation are presumed to be equal and enjoy
the same rights and privileges and are also subject to
the same liabilities [Sundiang and Aquino].
The default rule is that all stockholders have equal
right and obligations, expressed in the last paragraph
of 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
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“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 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].
2. Participation in
Management
a. Proxy
Stockholders and members may vote in person or by
proxy in all meetings of stockholders or members
[Sec. 58].
The word “proxy” may be understood in two ways.
First, it may refer to the person duly authorized by a
stockholder to vote in his behalf in a stockholder’s
meeting. Secondly, it may refer to the document
which evidences this authority [CAMPOS].
COMMERCIAL LAW
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 bylaws of a non-stock corporation [Sec. 89]. It is in most
cases useful only in widely-held corporations
[CAMPOS].
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].
Procedural Matters Relating to Proxies:
1. “Proxy solicitation” involves the securing and
submission of proxies, while “proxy validation”
concerns the validation of such secured and
submitted proxies;
2. The SEC’s power to pass upon the validity of
proxies in relation to election controversies has
effectively been withdrawn, tied as it is to its
abrogated quasi-judicial powers, and has been
transferred to the RTC Special Commercial
Courts pursuant to the terms of Sec. 5.2 of the
Securities Regulation Code;
3. Nevertheless, although an intra-corporate
controversy may animate a disgruntled
shareholder to complain to the SEC a
corporation’s violations of SEC rules and
regulations, that motive alone should not be
sufficient to deprive the SEC of its investigatory
and regulatory powers, especially so since such
powers are exercisable on a motu proprio basis.
The fact that the jurisdiction of the RTC Special
Commercial Courts is confined to the voting on
election of officers, and not all matter which may be
voted upon by stockholders, elucidates that the power
of the SEC to regulate proxies remains extant and
could very well be exercised when stockholders vote
on matters other than the election of directors [GSIS
v. CA, G.R. No. 183905 (2009)].
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COMMERCIAL LAW
b. Voting Trust
c. Cases When Stockholders’
Action is Required
An arrangement created by one or more stockholders
for the purpose of conferring upon a trustee or
trustees the right to vote and other rights pertaining
to the shares for a period not exceeding 5 years at any
time [Sec. 59].
Under Sec. 6 of the Corporation Code, each share of
stock is entitled to vote, unless otherwise provided in
the articles of incorporation or declared
delinquent under Sec. 67 of the Code [Tan v. Sycip,
G.R. No. 153468 (2006)].
Under a voting trust arrangement, a stockholder of a
stock corporation parts with the naked or legal title,
including the power to vote, of the shares and only
retains the 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.
In non-stock corporations, the voting rights attach to
membership. Members vote as persons, in
accordance with the law and the by-laws of the
corporation. Each member shall be entitled to one
vote unless so limited, broadened, or denied in the
articles of incorporation or by-laws. When the
principle for determining the quorum for stock
corporations is applied by analogy to non-stock
corporations, only those who are actual members
with voting rights should be counted.
A voting trust agreement shall be ineffective and
unenforceable unless:
1. It is in writing and notarized;
2. Specify the terms and conditions thereof; and
3. A certified copy of such agreement shall be filed
with the corporation and with the SEC.
Proxy
Principal–agent
Proxy cannot exceed
delegated authority.
Must be in writing
Copy must be filed with
the corporation.
No transfer.
Proxy exercises voting
rights only for a specific
meeting
(unless
otherwise provided)
Proxy
cannot
director
be
Trustee
Trustee-beneficiary
The only limit to
authority is that the act
must be for the benefit
of trustee. (fiduciary
obligation)
Must be in writing and
notarized
Copy must be filed with
SEC
and
the
corporation.
Transfer of legal title to
trustee.
Trustee
exercises
absolute voting rights
continuously, subject
only to fiduciary duty.
Trustee can be director
because he holds legal
title over the shares
Revocable at will in any
manner, EXCEPT if
coupled
with
an
interest.
Irrevocable, as long as
no misconduct or
fraud.
Max of 5 years at a time
Max of 5 years at a time
(unless the voting trust
is specifically required
as a condition in a loan
agreement)
SEC can pass on validity
Note: “Outstanding capital stock” means stocks
entitled to VOTE. It is in only those matters
enumerated under Sec. 6 where non-voting stocks (or
members) are entitled to vote:
1. Amendment of the articles of incorporation;
2. Adoption and amendment of by-laws;
3. Sale, lease, exchange, mortgage, pledge or other
disposition of all or substantially all of the
corporate property;
4. Incurring, creating or increasing bonded
indebtedness;
5. Increase or decrease of capital stock;
6. Merger or consolidation of the corporation with
another corporation or other corporations;
7. Investment of corporate funds in another
corporation or business in accordance with this
Code; and
8. Dissolution of the corporation. [Sec. 6]
BY A MAJORITY VOTE
1. Power to enter into management
contracts [Sec. 44]
General Rule: Requires approval by majority of the
BOD/BOT and approval by stockholders owning at
least the majority of the outstanding capital
stock/majority of members of both the managing and
the managed corporation
Exceptions
a. Where a stockholder/s representing the same
interest of both the managing and the managed
corporations own or control more than one-third
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(1/3) of the total outstanding capital stock
entitled to vote of the managing corporation; or
b. Where a majority of the members of the
managing corporation’s BOD also constitute a
majority of the managed corporation’s BOD.
Requires at least 2/3 votes of the outstanding capital
stock/membership of the managed corporation.
BUT only majority vote is required for the managing
corporation.
2. Amendments to by-laws [Sec. 48]
Requires approval by majority of the BOD/BOT and
approval by stockholders owning at least the majority
of the outstanding capital stock/majority of
members.
Includes all stockholders with or without voting
rights.
3. Revocation of delegation to the BOD
of the power to amend or repeal or
adopt by-laws [Sec. 48]
Requires approval by stockholders owning at least the
majority of the outstanding capital stock/majority of
members.
4. Calling a meeting to remove directors
[Sec. 28]
Meeting for the removal of directors or trustees, or
any of them, must be called by the secretary on order
of the president or on the written demand of the
stockholders representing or holding at least a
majority of the outstanding capital stock/majority of
members.
5. Granting compensation other than per
diems to directors [Sec. 30]
COMMERCIAL LAW
BY A TWO-THIRDS VOTE
1. Amendment of Articles of
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]
Compensation other than per diems may be granted
to directors by the vote of the stockholders
representing at least a majority of the outstanding
capital stock.
Requires approval by a majority vote of the
BOD/BOT and approval by at least 2/3 of the
outstanding capital stock/membership.
6. Consideration for no-par shares [Sec.
62]
Includes all stockholders with or without voting
rights.
When the Articles of Incorporation or the BOD does
not provide for the value of no-par shares, the value
of such shares shall be determined by the
stockholders representing at least a majority of the
outstanding capital stock.
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COMMERCIAL LAW
4. Increasing/decreasing capital stock
[Sec. 38]
for any sale or disposition of all or substantially all of
corporate assets [Sec. 40].
Requires approval by a majority vote of the BOD and
approval by at least 2/3 of the outstanding capital
stock.
8. Investment of funds in another
business [Sec. 42]
Includes all stockholders with or without voting
rights.
Requires approval by a majority vote of the
BOD/BOT and approval by at least 2/3 of the
outstanding capital stock/membership.
5. Incurring, creating, increasing bonded
indebtedness [Sec. 38]
Includes all stockholders with or without voting
rights.
Requires approval by a majority vote of the BOD and
approval by at least 2/3 of the outstanding capital
stock.
9. Dividend declaration [Sec. 43]
Includes all stockholders with or without voting
rights.
6. Issuance of shares not subject to preemptive 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 preemptive 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.
A sale or other disposition shall be deemed to cover
substantially all the corporate property and assets if
thereby the corporation would be rendered incapable
of continuing the business or accomplishing the
purpose for which it was incorporated.
If the same is necessary in the usual and regular course
of business of said corporation or if the proceeds of
the sale or other disposition of such property and
assets be appropriated for the conduct of its
remaining business, authorization of stockholders no
longer needed.
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
No stock dividend shall be issued without the
approval of stockholders representing not less than
2/3 of the outstanding capital stock.
However, where the investment by the corporation is
reasonably necessary to accomplish its primary
purpose as stated in the articles of incorporation, the
approval of the stockholders or members shall not be
necessary.
10. Power to enter into management
contracts [Sec. 44]
See discussion under By a Majority Vote
11. Removal of directors or trustees [Sec.
28]
Any director or trustee may be removed from office
by a vote of the stockholders holding or representing
at least 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:
a. The director’s presence in the BOD meeting in
which the contract was approved was not
necessary to constitute a quorum
b. The vote of such director was not necessary for
the approval of the contract
c. The contract is fair and reasonable under the
circumstances
d. In case of an officer, the contract has been
previously authorized by the BOD.
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Where any of the first two conditions is absent, in the
case of a contract with a director, such contract may
be ratified by the vote of the stockholders
representing at least 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
merger or consolidation [Sec. 77]
Requires approval by majority of each of the
BOD/BOT of the constituent corporations of the
plan of merger or consolidation and approval by at
least
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. Plan of distribution of assets in nonstock 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.
15
COMMERCIAL LAW
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 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.15
BY PLURALITY VOTE
1.
Election of Directors or Trustees
[Sec. 24]
A stockholder may:
a. Vote such number of shares for as many persons
as there are directors to be elected [Straight
Voting] or
b. 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 [Cumulative Voting for 1
candidate], or
c. He may distribute them on the same principle
among as many candidates as he shall see fit
[Cumulative Voting by Distribution]
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.
The voting requirement for voluntary dissolution where no creditors are
affected is now only a majority vote of the outstanding capital
stock/membership. [Sec.134-135, RCC]
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COMMERCIAL LAW
VOTE REQUIREMENTS FOR ACTS REQUIRING APPROVAL OF STOCKHOLDERS/MEMBERS
Corporate Act
Amendment of AOI [Sec.
16]
Board of Directors/Trustees
Majority vote of the BOD/BOT
Election of
directors/trustees to fill
vacancies due to
expiration of term,
removal, or increase in the
number of seats [Sec. 24]
-
Call a meeting to remove
directors/trustees [Sec. 28]
-
Removal of
directors/trustees [Sec. 28]
Grant of compensation to
directors [Sec. 30]
Approval of contracts with
respect to dealings with
directors/trustees [Sec. 32]
Ratifying acts of disloyalty
of a director [Sec. 34]
Extending or shortening
the corporate term [Sec.
37]
Increase or decrease of
capital stock [Sec. 38]
Incur, create, or increase
bonded indebtedness [Sec.
-
Entering into a
management contract
[Sec. 44]
Plurality vote of the outstanding
capital stock or members
Written demand of a majority of
the outstanding capital stock or
members
2/3 of the outstanding capital
stock or members
Majority vote of the outstanding
capital stock
Majority of the quorum of the
BOD/BOT
2/3 of the outstanding capital
stock or members
-
2/3 of the outstanding capital
stock
Majority vote of the BOD/BOT
2/3 of the outstanding capital
stock or members
Majority vote of the BOD
2/3 of the outstanding capital
stock
Majority vote of the BOD
2/3 of the outstanding capital
stock
Majority vote of the BOD
2/3 of the outstanding capital
stock
Majority vote of the BOD/BOT
2/3 of the outstanding capital
stock or members
Majority vote of the BOD/BOT
2/3 of the outstanding capital
stock or members
38]
Issuance of shares not
subject to pre-emptive
right [Sec. 39]
Sale or disposition of all or
substantially all corporate
assets [Sec. 40]
Investment of funds in
another corporation or
business [Sec. 42]
Issuance of stock
dividends [Sec. 43]
Stockholders/Members
2/3 of the outstanding capital
stock or members
Majority of the quorum of the BOD
Majority of the quorum of the
BOD/BOT
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2/3 of the outstanding capital
stock
General rule: Majority of the
outstanding capital stock or
members of both the managing and
managed corporation
Exception: 2/3 of the outstanding
capital stock or members is
required
for
the managed
corporation:
(a) where a stockholder or
stockholders representing the
same interest of both the
managing and the managed
corporations own or control
U.P. LAW BOC
Corporate Act
CORPORATION CODE
Board of Directors/Trustees
Adopt by-laws [Sec. 46]
Amendment or repeal of
by-laws [Sec. 48]
Delegate to the BOD the
power to amend, repeal or
adopt by-laws [Sec. 48]
Revoke the power
delegated to the BOD to
amend, repeal or adopt bylaws [Sec. 48]
Fix the issued price of nopar value shares [Sec. 62]
Merger or consolidation
[Sec. 77]
Adopt a plan of
distribution of assets for a
non-stock corporation
Majority vote of the BOD/BOT
COMMERCIAL LAW
Stockholders/Members
more than one-third (1/3) of
the total outstanding capital
stock entitled to vote of the
managing corporation; or
(b) where a majority of the
members of the board of
directors of the managing
corporation also constitute a
majority of the members of the
board of directors of the
managed corporation
Majority vote of the outstanding
capital stock or members
Majority vote of the outstanding
capital stock or members
-
2/3 of the outstanding capital
stock or members
-
Majority vote of the outstanding
capital stock or members
General Rule: Fixed in the AOI or by
majority of the quorum of the BOD
pursuant to authority under the AOI
Majority vote of the BOD/BOT
Exception: Majority of the
outstanding capital stock in the
absence of provision in the AOI
2/3 of the outstanding capital
stock or members
Majority vote of the BOT
2/3 of the members
Majority vote of the BOD/BOT
2/3 of the outstanding capital
stock or members
Note: This is now a majority vote
of outstanding capital stock or
members where no creditors are
affected by the voluntary
dissolution. [Sec. 134-135, RCC]
[Sec. 95]
Voluntary dissolution
[Sec. 118]
2.
3. Proprietary Rights
a. Right to Dividends
Stock dividends, even if already declared, may be
revoked prior to actual issuance since these are
not distributions but merely representations of
changes in the capital structure.
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.
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.
Exceptions:
1. Dividends are revocable if NOT yet announced
or communicated to the stockholders.
b. Right of Appraisal
Right to withdraw from the corporation and demand
payment of the fair value of the shares after dissenting
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from certain corporate acts involving fundamental
changes in corporate structure [Sec. 81]. The amount
paid to the stockholder is the fair value of his shares
as of the day prior to the date on which the vote was
taken, excluding any appreciation or depreciation in
anticipation of the corporate action [Sec. 82].
Instances of appraisal right
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]
4. Sale or disposal of all or substantially all assets of
the corporation [Sec. 81]
5. Merger or consolidation [Sec. 81]
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.
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.
Note: The award shall be: (1) agreed upon by the
dissenting stockholder and corporation; or (2) if they
fail to agree within 60 days from the date when the
corporate action was approved, it shall be determined
and appraised by three disinterested persons, one of
whom shall be named by the stockholder, another by
the corporation, and the third by the two thus chosen.
The findings of the majority of the appraisers shall be
final [Sec. 81].
COMMERCIAL LAW
Extinguishment of appraisal right [Sec. 84,
generally]
The right may be extinguished in the following
instances:
1. Withdrawal of demand by the stockholder WITH
CONSENT of the corporation
2. Abandonment of the proposed corporate action
3. Disapproval by SEC of the proposed corporate
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 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. Right to Inspect
Basis of Right
As the beneficial owners of the business, the
stockholders have the right to know the financial
condition and management of corporate affairs.
A stockholder’s 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, G.R. No. L-45911 (1979)].
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;
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2.
3.
4.
CORPORATION CODE
Minute book for meetings of the
stockholders/members;
Minute book for meetings of the board/trustees;
Stock and transfer book
Stock transfer agent - One engaged principally in the
business of registering transfers of stocks in behalf of
a stock corporation (licensed by the SEC).
The corporate secretary is the one duly authorized to
make entries in the stock and transfer book.
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, G.R. No. 120138 (1997)].
Financial Statements [Sec. 75]
Within 10 days from written request, the corporation
shall furnish its most recent financial statement
(balance sheet and profit or loss statement as of last
taxable year)
At a regular meeting, the Board shall present a
financial report of the operations of the corporation
for the preceding year, which shall include financial
statements duly signed and certified by an
independent CPA.
Exception
If the paid-up capital is less than P50,000 – the
financial statements may be certified under oath by
the treasurer or any responsible officer of the
corporation (instead of an independent CPA).
Requirements for the exercise of the right of
inspection [Sec. 74]
1. It must be exercised at reasonable hours on
business days and in the place where the
corporation keeps all its records (i.e., principal
office).
2. The stockholder has not improperly used any
information he secured through any previous
examination.
3. Demand is made in good faith or for a legitimate
purpose. If the corporation or its officers contest
such purpose or contend that there is evil motive
behind the inspection, the burden of proof is
with the corporation or such officer to show the
same.
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
COMMERCIAL LAW
to the interests of the corporation [Gokongwei Jr. v.
SEC, G.R. No. L-45911 (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, G.R. No. L-33320 (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 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, G.R. No. L-37064 (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, G.R. No. 83831 (1992)].
Remedies when 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
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Under the Rules of Court, the writ of mandamus
should be granted only if the court is satisfied that
justice so requires [Sec.8, Rule 65].
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, G.R. No. 180416 (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.
d. Pre-Emptive Right
DEFINITION
AND
DISTINGUISHED
FROM RIGHT OF FIRST REFUSAL
Pre-emptive right is an option privilege of an existing
stockholder to subscribe to a proportionate part of
shares subsequently issued by the corporation before
the same can be disposed of in favor of others; this
right includes all issues and disposition of shares of
any class. It is a common law right and may be
exercised by stockholders even without legal
provision. On the other hand, a right of first refusal
arises only by virtue of contract stipulations, by which
the right is strictly construed against the right of
person to dispose or deal with their property.
Stockholders of a corporation shall enjoy pre-emptive
right to subscribe to ALL ISSUES OR
DISPOSITIONS OF SHARES OF ANY CLASS, in
proportion to their respective shareholdings. The
purpose is to enable the shareholder to retain his
proportionate control in the corporation and to retain
his equity in the surplus.
Note: The broad phrase “all issues or disposition of
shares of any class” is construed to include not only
new shares issued in pursuance of an increase in
capital stock or from the unissued shares which form
part of the ACS, but also 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,
COMMERCIAL LAW
and likewise on treasury shares held by the
corporation; while the right of first refusal is a right
exercisable against another stockholder on his shares
of stock [Villanueva].
Basis of Preemptive Right: to preserve the existing
proportional rights of the stockholders [Campos]
Limitations to exercise of pre-emptive right [Sec.
39]
1. 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;
2. 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
3. It shall not take effect if denied in the Articles of
Incorporation or an amendment thereto.
4. 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 reissued the shares, the pre-emptive right applies
[Sundiang and Aquino].
Remedies in case of unwarranted denial
1. Injunction
2. Mandamus
3. The suit should be individual and not derivative
because the wrong done is to the stockholders
individually
4. SEC can cancel shares if the 3rd party is not
innocent
Waiver/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
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financing plans of the corporation. Some new
investors may be willing to invest only if all the new
shares will be issued to them [Campos].
COMMERCIAL LAW
4. Remedial Rights
a. Individual Suit
e. Right to Vote
Non-voting shares are not entitled to vote except as
provided for in the last paragraph of Sec. 6.
A suit brought by the shareholder in his own name
against the corporation when a wrong is directly
inflicted against him.
Preferred or redeemable shares may be deprived of
the right to vote.
b. Representative Suit
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.
f. 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 G.R. No.
L-7991 (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, G.R. No. 82188
(1988)].
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.
c. Derivative Suit
A suit 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. It is a condition sine qua non that the
corporation be impleaded as a party because not only
is the corporation an indispensable party, but it is also
the present rule that it must be served with process.
The judgment must be made binding upon the
corporation in order that the corporation may get the
benefit of the suit and may not bring subsequent suit
against the same defendants for the same cause of
action [Chua v. CA, G.R. No. 150793 (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;
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
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3.
4.
CORPORATION CODE
Incorporation, by-laws, laws or rules governing
the corporation or partnership to obtain the relief
he desires.
That there is no appraisal right available for the
act(s) complained of;
That the suit is not a nuisance or harassment suit.
[Rule 8, Interim Rules of Procedure for IntraCorporate Controversies]
Note: Fifth requisite is that the action brought by the
stockholder or member must be "in the name of [the]
corporation or association.” [implied from first
paragraph of Rule 8, Section 1; see also Florete v.
Florete, GR. No. 174909 (2016)]
The action brought by the shareholder or member
must be in the name of the corporation or association
[Villamor v. Umale, G.R. No. 172843 (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, G.R. No. 85339 (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., G.R. No. 143264 (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].
The reliefs sought pertain to the corporation [Symaco
Trading Corp. v. Santos, G.R. No. 142474 (2005)].
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
COMMERCIAL LAW
erring corporate officers [Gochan v. Young, G.R. No.
131889 (2001)].
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, G.R. No. 165744
(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, G.R. No. 177549
(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 guilty of a breach of trust, not of mere
error of judgment or abuse of discretion, and intracorporate 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, G.R. No. 123553
(1998)].
Jurisdiction over derivative suits lies with the RTC
[Sec. 5.2, Securities Regulation Code].
5. Obligations of a Stockholder
a. 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
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the corporation rising from any other transaction
[China Banking Corp. v. CA G.R. No. 117604 (1997)].
b. Liability to the Corporation for
Interest on Unpaid Subscription
if so Required By the By-Laws
[Sec 66]
General Rule: Subscribers for stock are NOT liable to
pay interest on his unpaid subscription.
Exception: If so required in the by-laws at the rate fixed
in the by-laws. If no rate is fixed in the by-laws, such
rate shall be deemed to be the legal rate [Sec. 66].
Notes:
Transfer for consideration of treasury shares is a sale
(or disposition) by the corporation (not subscription).
A transfer of previously issued shares by a
stockholder to a third person is a sale (or disposition).
Transfer of unissued shares is subscription.
Shareholders are not creditors of the corporation with
respect to their shareholdings thereto and the
principle of compensation or set-off has no
application.
Subscription contract is NOT required to be in
writing.
c. Liability for Watered Stocks [Sec.
65]
Definition
These are shares issued as fully paid when in truth no
consideration is paid, or the consideration received is
known to be less than the par value or issued value of
the shares [Sec. 65].
These include the following:
• Issued without consideration (bonus share)
• 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.
COMMERCIAL LAW
the defect in issuance. The existence of watered
stocks is determined at the time of issuance of the
stock.
Liability of directors or officers
Any director or officer of a corporation consenting to
the issuance of watered stocks or who, having
knowledge thereof, does not forthwith express his
objection in writing and file the same with the
corporate secretary shall be SOLIDARILY liable with
the stockholder concerned to the corporation and its
creditors for the difference in value [Sec. 65].
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, G.R.
No. 191154 (2014)].
d. 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].
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
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e. Liability for Assuming to Act as a
Corporation Knowing It to be
Without Authority
All persons who assume to act as a corporation
knowing it to be without authority to do so shall be
liable as general partners for all debts, liabilities and
damages incurred or arising as a result thereof.
When any such ostensible corporation is sued on any
transaction entered or on any tort committed by it as
a corporation, it shall not be allowed to use as a
defense its lack of corporate personality.
One who assumes an obligation to an ostensible
corporation cannot resist performance thereof on the
ground that there was in fact no corporation [Sec. 21].
6. 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].
COMMERCIAL LAW
When? [Sec. 50]
Regular meetings of stockholders or members shall be
held annually on a date fixed in the by-laws, or if not
so fixed, on any date in April of every year as
determined by the BOD or trustees.
Special meetings of stockholders or members shall be
held at any time deemed necessary or as provided in
the by-laws.
Where?
• Stock: City or municipality where the
principal office of the corporation is located,
or, if practicable, in the principal office of the
corporation: Provided, Metro Manila shall be
considered a city or municipality [Sec. 51]
• Non-stock: Any place even outside the
place where the principal office is located,
within the Philippines [Sec. 93]
Notice [Sec. 50]
• Regular Meeting—written 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 Meeting—written 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)
Who May Attend and Vote?
• Stockholders, either in person or by proxy
• Pledgors or mortgagors [Sec. 55]
• Pledgee or mortgagee, IF expressly given such
right by the pledgor or mortgagor in writing
which is recorded on the corporate books [Sec.
55]
• Executors, administrators, receivers, and other
legal representatives duly appointed by the court,
without need of any written proxy [Sec. 55]
• ALL joint owners of stocks, or any one of them
with the consent of ALL the co-owners, unless
there is a written proxy, signed by all the coowners [Sec. 56]
• Any one of the joint owners of shares owned in
an "and/or" capacity or a proxy thereof [Sec. 56]
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 of Directors of the SMB
Workers v. Tan, G.R. No. L-12282 (1959)].
a. Regular or Special
When there is no person authorized to call a meeting,
the petitioning stockholder or member shall preside
thereat until at least a majority of the stockholders or
When and Where
16
b. Who Calls the Meeting
Any petitioning stockholder or member upon order
of the SEC when there is no person authorized to call
a meeting [Sec. 50].
c. Who Presides at the Meeting
The president, unless the by-laws provide otherwise
[Sec. 54].16
It is now the chairman, or in his absence, the president who shall preside
at all meetings of the stockholders or members, unless the bylaws provide
otherwise. [Sec. 53, RCC]
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members present have chosen one of them as
presiding officer [Sec. 50].
COMMERCIAL LAW
d. Quorum
General Rule: Stockholders representing majority of
the Outstanding Capital Stock or majority of the
members.
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
When
Held annually on a date
fixed in the by-laws, or
if not so fixed, on any
date in April of every
year as determined by
the BOD or trustees
Special
At any time deemed
necessary
or
as
provided in the by-laws
[Sec. 50]
Where
STOCK: City or municipality where the principal
office of the corporation is located, or, if
practicable, in the principal office of the
corporation: Provided, Metro Manila shall be
considered a city or municipality [Sec. 51]
NON-STOCK: Any place even outside the place
where the principal office is located, within the
Philippines [Sec. 93]
Notice
Notice sent to all
shareholders
or
members at least 2
weeks prior to the
meeting,
unless
a
different period is
required by the bylaws17
Notice sent to all
shareholders
or
members at least 1
week prior to the
meeting,
unless
otherwise provided in
the by-laws [Sec. 50]
Quorum
General Rule: Stockholders representing majority of
the Outstanding Capital Stock or majority of the
members
Exception: The Code or the by-laws provide
otherwise [Sec. 52]
17
Notice of regular meetings must now be sent at least 21 days prior to the
meeting [Sec. 49, RCC]
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COMMERCIAL LAW
I. Capital Structure
e. Minutes of the Meetings [Sec.
74]
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:
• Time and place of holding the meeting;
• How the meeting was authorized;
• The notice given;
• Whether the meeting was regular or special, if
special its object;
• Those present and absent; and
• Every act done or ordered done at the meeting.
Upon demand by any director/trustee or
shareholders/member, the following shall also
be noted in the minutes:
• The time when any director, trustee, stockholder
or member entered or left the meeting;
• The yeas and nays on any motion or proposition;
• The protest of any director/trustee or
stockholder/member on any action or proposed
action.
Notes:
The minutes of any meetings shall be open to
inspection
by
any
director/trustee
or
stockholder/member at reasonable hours on business
days.
The director/trustee or stockholder/member may
demand, in writing, for a copy of excerpts from said
records or minutes, at his expense.
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
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.
1. 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. This
is notwithstanding the fact that the parties may refer
to it as a purchase or some other contract [Sec. 60].
a. 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]
b. 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).
Note: 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, or
b. acquisition of shares from existing
shareholders by SALE OR ANY OTHER
CONTRACT [Sundiang and Aquino].
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Notes:
• Transfer
of
unissued
shares
=
SUBSCRIPTION
• Transfer of already issued shares = NOT
SUBSCRIPTION; can either be:
o SALE/DISPOSITION
BY
CORPORATION of treasury shares
o SALE/DISPOSITION
BY
STOCKHOLDER TO A THIRD
PERSON
c. Types of Subscription Contracts
principle of compensation or set-off has no
application.
Subscription contract is NOT required to be in
writing.
2. Consideration for Stocks
a. Forms of Consideration [Sec 62]
1.
2.
1. Pre-Incorporation Subscription [Sec.
61]
It is a subscription for shares of stock of a corporation
still to be formed.
When
pre-incorporation
subscription
is
IRREVOCABLE:
a. For a period of at least 6 months from the date
of subscription
UNLESS, (1) all of the other subscribers consent
to the revocation, or (2) the incorporation fails to
materialize within 6 months or within a longer
period as may be stipulated in the contract of
subscription; or
b. After the submission of the Articles of
Incorporation to the SEC.
2. Post-Incorporation Subscription
It is entered into after incorporation.
d. Interest on Unpaid Subscription
General Rule: Stockholder is NOT liable to pay interest
on his unpaid subscription.
Exception: If so required by the by-laws
Rate: that fixed in the by-laws, otherwise, the legal
rate [Sec. 66]
Note: Hence, the first question to ask is whether or
not the BL actually provide for the payment of
interest. If so, the next question is the rate of such
interest (a.k.a the “stipulated interest”).
COMMERCIAL LAW
3.
4.
5.
6.
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
a. Property should NOT be encumbered.
Otherwise,
it
would
impair
the
consideration.
b. 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;
Amounts transferred from unrestricted retained
earnings to stated capital (declaration of stock
dividends); and
Outstanding shares exchanged for stocks in the
event of reclassification or conversion;
Previously incurred indebtedness of the
corporation;
b. Limitations on Consideration
Stocks shall NOT be issued:
1. for a consideration less than the par or issued
price thereof
2. in exchange for promissory notes or future
service
Notes:
Promissory notes and future service may be used as
consideration provided that certificates of stock will
be issued ONLY AFTER actual encashment of
promissory note or performance of such services.
Where the consideration is other than actual cash,
or consists of intangible property such as patents of
copyrights, the valuation thereof shall initially be
determined by the incorporators or the board of
directors, subject to approval by the Securities and
Exchange Commission.
Shareholders are NOT creditors of the corporation
with respect to their shareholdings thereto and the
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•
3. Shares of Stock
a. Nature of Shares of Stock
•
Shares of stock are units into which the capital stock
is divided. A share of stock represents interest of the
holder thereof to participate in the management of
the corporation, to share proportionally in the profits
of the business and, upon liquidation, to obtain an
aliquot part of corporate assets after all corporate
debts have been paid. [Campos]
A stockholder may own the share even if he is not
holding a certificate of stock.
Share of Stock
Unit of interest in a
corporation
An incorporeal or
intangible property
May be issued by the
corporation even if
the subscription is
not fully paid
Certificate of Stock
Evidence
of
the
holder’s ownership of
the stock and of his
right as a shareholder
and up to the extent
specified therein.
Concrete and tangible
May be issued only if
the subscription is fully
paid
A share of stock only typifies an aliquot part of the
corporation's property, or the right to share in its
proceeds to that extent when distributed according to
law and equity, but its holder is not the owner of any
part of the capital of the corporation. Nor is the
shareholder entitled to the possession of any definite
portion of its property or assets. The stockholder is
not a co-owner or tenant in common of the corporate
property [Stockholders of F. Guanzon and Sons, Inc. v
Register of Deeds of Manila, G.R. No. L-18216 (1962)].
b. Consideration for Shares of Stock
See Considerations for Shares of Stock above.
c. Watered Stock
DEFINITION
These are shares issued as fully paid when in truth no
consideration is paid in any form, or the consideration
received is known to be less than the par value or
issued value of the shares [Sec. 65].
These include the following:
• Issued without consideration (bonus share)
•
COMMERCIAL LAW
Issued as fully paid when the corporation has
received less sum of money than its par or issued
value (discounted share)
Issued for consideration other than actual cash
(i.e., property or services), the fair valuation of
which is less than its par or issued value
Issue stock dividend when there are no sufficient
retained earnings or surplus profit to justify it.
Note: Subsequent increase in the value of the property
used in paying the stock does not do away with the
watered stocks. Subsequent increase in the value of
the property used in paying the stock does not cure
the defect in issuance. The existence of watered
stocks is determined at the time of issuance of the
stock.
LIABILITY OF DIRECTORS FOR WATERED
STOCKS
Any director or officer of a corporation consenting to
the issuance of watered stocks or who, having
knowledge thereof, does not forthwith express his
objection in writing and file the same with the
corporate secretary shall be solidarily liable with the
stockholder concerned to the corporation and its
creditors for the difference in value [Sec. 65].
TRUST FUND DOCTRINE FOR LIABILITY
FOR WATERED STOCKS
Where the corporation issues watered stock and
thereby assumes an ostensible capitalization in excess
of its real assets, the transaction necessarily involves
the misleading of subsequent creditors, and whether
done with that purpose actually in mind or not, is at
least a constructive fraud upon creditors. Hence, it is
held that recovery may be had by a creditor in such
case, even though the corporation itself has no cause
of action against the stockholders. Some of the earlier
decisions put the right of recovery in such a case upon
the so-called “trust fund doctrine.” In any view of the
matter, however, the creditors’ right of action to
compel the making good of the representation as to
the corporation’s capital is based on fraud, and the
trust fund doctrine is only another way of expressing
the same underlying idea [DE LEON].
Despite the view of foreign authors that the fraud
theory is the prevailing view, it would seem that in the
Philippine jurisdiction, the trust fund doctrine on
watered stock prevails.
It is established doctrine that subscription to the
capital of a corporation constitute a fund to which
creditors have a right to look for satisfaction of their
claims and that the assignee in insolvency can
maintain an action upon any unpaid stock
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subscription in order to realize assets for the payment
of its debts (citing Velasco v. Poizat, 1918). A
corporation has no power to release an original
subscriber to its capital stock from the obligation of
paying for his shares, without a valuable consideration
for such release; and as against creditors a reduction
of the capital stock can take place only in the manner
and under the conditions prescribed by the statute or
the charter or the articles of incorporation. Moreover,
strict compliance with the statutory regulations is
necessary [Philippine Trust Corp. v. Rivera, G.R. No. L19761 (1923)].
d. Situs of the Shares of Stock
It is a general rule that for purposes of execution,
attachment and garnishment, it is not the domicile of
the owner of a certificate but the domicile of the
corporation which is decisive [Chua Guan v. Samahang
Magsasaka, Inc., G.R. No. L-42091 (1935)].
e. Classes of Shares of Stock
Shares of stock of stock corporations may be divided
into classes or series of shares or both. Each class or
series of shares may have rights, privileges or
restrictions, as stated in the Articles of Incorporation.
Classification of shares:
1. Common shares
2. Preferred shares
3. Par value shares
4. No-par value shares
5. Founder’s shares
6. Redeemable shares
7. Treasury shares
8. Convertible shares
9. Non-voting shares
General Rule: No share may be deprived of voting
rights [Sec. 6]
Exceptions
• Preferred non-voting or
• Redeemable shares,
• Provided by the Code (e.g. Treasury shares)
There shall always be a class/series of shares which
have COMPLETE VOTING RIGHTS [Sec. 6].
Doctrine of Equality of Shares
Each share shall be EQUAL in ALL respects to every
other share, except as otherwise provided in the
Articles of Incorporation and stated in the certificate
of stock [Sec. 6].
COMMERCIAL LAW
COMMON SHARES
The most common type of shares, which enjoy no
preference, but the owners thereof are entitled to
management (via exclusive right to vote) of the
corporation and to equal pro-rata division of profits
after preference. It represents a residual ownership
interest in the corporation.
PREFERRED SHARES
Stocks which are given preference by the issuing
corporation in dividends, or in the distribution of
assets of the corporation in case of liquidation, or
both, or such other preferences as may be stated in
the Articles of Incorporation which do not violate the
Corporation Code.
Unless the right to vote is clearly withheld, a preferred
stockholder would have such right as it is an incident
to stock ownership.
Limitations:
• Preferred shares can only be issued with par
value.
• Preferred shares must be stated in the Articles of
Incorporation and in the certificate of stock.
• The BOD may fix the terms and conditions only
when so authorized by the Articles of
Incorporation and such terms and conditions
shall be effective upon filing a certificate thereof
with the SEC.
Preference as to dividends:
1. Participating and Non-participating
a. Participating - those which, after getting
their fixed dividend preference, share with
common stocks the rest of the dividends.
b. Non-participating - those which, after
getting their fixed dividend preference, have
no more right to share in the remaining
dividends with the common stocks.
Unless otherwise provided, preferred stocks are
non-participating.
2. Cumulative and Non-cumulative
a. Cumulative - regardless of lack of profits in
any given year, and lack of declaration of
dividends, the arrears for such year have to
be paid to the preferred stocks in a
subsequent year (once profits are made)
before any dividends can be paid to the
common stocks.
b. Non-Cumulative – entitlement to receipt
of dividends essentially depends on
declaration of such; types:
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1.
Discretionary – right to dividends in a
particular year depends on the discretion
of the board, even if the corporation has
profits.
2. Mandatory – a positive duty is imposed
to declare preferred dividends every year
that profits are earned.
3. Earned cumulative or dividend
credit – board with discretion not to
declare dividends even if there were
profits in a certain year; however, once
the board decides that dividends will be
declared, the preferred stockholders
have a right to arrears in dividends for
the years when there were profits but no
dividend was declared.
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].
Exception: As otherwise provided in the Corporation
Code.
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.
NO-PAR VALUE SHARES
These are shares without a stated value.
“A no par share does not purport to represent any
stated proportionate interest in the capital stock
measured by value, but only an aliquot part of the
whole number of such shares of the issuing
corporation” [Agbayani].
Limitations:
• 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]
•
•
•
•
•
COMMERCIAL LAW
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
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].
FOUNDER’S 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.
REDEEMABLE SHARES [SEC 8]
These are shares which permit the issuing corporation
to redeem or purchase its shares.
Limitations:
• Redeemable shares may be issued only when
expressly provided for in the 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].
• 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
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•
CORPORATION CODE
answer for operations [Republic Planters Banks v.
Agana, G.R. No. 51765 (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].
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].
COMMERCIAL LAW
CONVERTIBLE SHARES
A type of preferred stock that the holder can
exchange for a predetermined number of common
shares at a specified time.
NON-VOTING SHARES [SEC 6]
General Rule: Non-Voting Shares are not entitled to
vote.
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
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 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, G.R. No. L-28398
(1975)].
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].
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Common
Definition
Value
CORPORATION CODE
Preferred
Par
No Par
Stock
which
Stock
entitles the
which
holder to
entitles
some
the owner preference
of such either in the
stocks to dividends
an equal or
pro rata distribution
division of of
assets
profits
upon
liquidation,
or in both
Depends
if it’s par
or no par
Voting
Rights
Usually
vested
with the
exclusive
right to
vote
Preference
Upon
Liquidation
No
advantage,
priority, or
preference
over any
other SH
in
the
same class
Fixed in
the AOI,
and
indicated
in
the
stock
certificate
Stated par
value
Can vote
only under
certain
circumstances
May be
sold at a
value
higher,
but not
lower,
than that
fixed in
the AOI.
Depends
if
it’s
common
or
preferred.
COMMERCIAL LAW
Treasury
Redeemable
Founder’s
Shares issued
by
the
corporation
Shares that that may be
have been taken up by
issued and the
fully
paid corporation
but
upon
subsequently expiration of
reacquired
a
fixed
by
the period,
issuing corp. regardless of
by
lawful the existence
means.
of
unrestricted
retained
earnings
Special
shares
whose
exclusive
rights and
privileges
are
determined
by
the
AOI.
Value not
fixed in the
AOI, and
therefore
not
indicated in
the stock
certificate.
Price may
be set by
BOD, SH’s
or fixed in
the AOI
eventually.
No voting
rights for as
Depends if long as such
it’s
stock
common or remains in
preferred.
the treasury
[Sec. 57]
First crack
at
dividends/
profits/
distribution
of assets
Page 190 of 330
Usually
denied voting
rights.
U.P. LAW BOC
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4. Payment of Balance of
COMMERCIAL LAW
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].
Subscription [Secs. 66 and
67]
a. 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; [Sec.
67] 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].
EFFECT OF DELINQUENCY [SEC. 71]
No delinquent stock shall be voted for or be entitled
to vote or to representation at any stockholders’
meeting.
The holder thereof shall NOT be entitled to any of
the rights of a stockholder except the right to
dividends. But the dividends it will receive will be
subject to Sec. 43, that is, cash dividends shall first be
applied to the unpaid balance on the subscription plus
costs and expenses, and stock dividends shall be
withheld until the unpaid subscription is fully paid.
Such shares shall be subject to delinquency sale.
CALL BY RESOLUTION OF THE 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.
b. 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 an action for the call [Lingayen Gulf
Electric Power Co., Inc. v. Baltazar, G.R. No. L-4824
(1965)].
The right to notice of call, however, may be waived
by the subscriber [De Leon].
c. Sale of Delinquent Shares [Sec.
68]
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NOTICE OF SALE [SEC. 68]
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.
AUCTION SALE AND THE HIGHEST
BIDDER
Procedure for delinquency sale [Sec. 68]
1. Call for payment made by the BOD.
2. Notice of call served on each stockholder.
3. Notice of delinquency issued by the BOD upon
failure of the stockholder to pay within 30 days
from date specified.
4. Service of notice of delinquency on the nonpaying 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.
COMMERCIAL LAW
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.
INTEREST RATE
Note that, taken together, Secs. 66 and 67
contemplate the imposition of two types of interest:
(1) the stipulated interest, or moratory interest; and (2)
the interest by default, or compensatory interest. The
interest rate provided for in Sec. 66 must be stipulated
in the BL and is imposed from the date of
subscription. On the other hand, the “legal rate”
being spoken of in Sec. 67 is compensatory and is only
imposed when the balance becomes due and payable.
Such compensatory interest appears to be imposable
whether or not the same is provided for in the BL, the
only thing subject to change is the rate thereof.
5. Certificate of Stock
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.
a. Nature of the Certificate
The delinquent stockholder may stop the auction by
paying to the corporation on or before the date
specified for the sale the balance due on his
subscription, plus accrued interest, costs of
advertisement and expenses of the sale.
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 holder’s
interest and status in the corporation, his ownership
of the share represented thereby. It is not in law the
equivalent of such ownership. It expresses the
contract between the corporation and the
stockholder, but is not essential to the existence of a
share of stock or the nature of the relation of
shareholder to the corporation [Makati Sports Club v.
Cheng, G.R. No. 178523 (2010)].
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
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).
Shares of stock issued pursuant to requisites in
Section 63 are personal property and may be
transferred by delivery of the certificate or certificates
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indorsed by the owner, attorney in fact, or other
person legally authorized to make the transfer [Sec.
63].
b. Uncertified 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:
1. If so resolved by the BOD and agreed by a
shareholder,
investor
or
securities
intermediary, issue shares to, or record the
transfer of some or all its shares into the name of
such shareholders, investors or, securities
intermediary in the form of uncertified securities.
The use of uncertified securities in these
circumstances shall be without prejudice to the
rights of the securities intermediary subsequently
to require the corporation to issue a certificate in
respect of any shares recorded in its name; and
2.
If so provided in its articles of incorporation
and by-laws, issue all of the shares of a particular
class in the form of uncertificated securities and
subject to a condition that investors may not
require the corporation to issue a certificate in
respect of any shares recorded in their name.
TRANSFERS
OF
UNCERTIFICATED
SECURITIES, HOW MADE
1. 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.
2.
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].
COMMERCIAL LAW
c. 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
instrument is non-negotiable, because the holder
thereof takes it without prejudice to such rights or
defenses as the registered owner or creditor may have
under the law, except insofar as such rights or
defenses are subject to the limitations imposed by the
principles governing estoppel. Certificates of stock
are not negotiable instruments. Consequently, a
transferee under a forged assignment acquires no title
which can be asserted against the true owner, unless
the latter’s 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, G.R. No. L-4818 (1955)].
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, G.R.
No. 123553 (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 per Sec. 63:
1. Between the parties:
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2.
CORPORATION CODE
a. Delivery
b. Indorsement
To be valid as to third persons:
a. Recorded in the books of the corporation
[Republic v. Estate of Hans Menzi, G.R. No.
152578 (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 execution
of a deed of assignment [Rural Bank of Lipa City v. CA,
G.R. No. 124535 (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 transferee’s name [Ponce v.
Alsons Cement Corp., G.R. NO. 139802 (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, G.R. No. 137934
(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 in the corporate books. Until
the transfer is registered, the transferee is not a
stockholder but an outsider.
COMMERCIAL LAW
d. Issuance
FULL PAYMENT
General Rule: No certificate of stock shall be issued to
a subscriber until the full amount of his subscription
together with interest and expenses (in case of
delinquent shares), if any is due, has been paid [Sec.
64].
Exception: 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, G.R. No. L-16236
(1965)].
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 v Peers Mktg. Corp., G.R. No. L28120 (1976)].
e. 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 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.
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6. Stock and Transfer Book
a. Contents
1.
2.
3.
4.
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.
b. Who May Make Valid Entries
1.
2.
An SEC-licensed stock transfer agent; or
The Corporate Secretary of the stock corporation
provided all rules and regulations imposed on
stock transfer agents shall be applicable, except
payment of license fee.
7. Disposition and
Encumbrance of Shares
a. Allowable Restrictions on the
Sale of Shares
COMMERCIAL LAW
pledged shares purchased at public auction. The term
“unpaid claims” refers to “any unpaid claims arising
from unpaid subscription, and not to any
indebtedness which a subscriber or stockholder may
owe the corporation arising from any other
transactions. Obligations arising from unpaid
monthly dues do not fall within the coverage of Sec.
63.”
c. Sale of a Portion of Shares Not
Fully Paid
The SEC has opined on several occasions that a
stockholder who has not paid the full amount of his
subscription cannot transfer part of his subscription
in view of the indivisible nature of a subscription
contract. The reason behind the principle of
disallowing transfer of not fully paid subscription to
several transferee is that it would be difficult to
determine whether or not the partial payments made
should be applied as full payment for the
corresponding number of shares which can only be
covered by such payment or as proportional payment
to each and all of the entire number of subscribed
shares, and it would be difficult to determine the
unpaid balance to be assumed by each transferee
[Villanueva].
d. Sale of All Shares Not Fully Paid
Exception: In CLOSE corporations, restrictions on the
right to transfer shares may be provided in the
Articles of Incorporation, by-laws and certificates
[Sec. 98].
On the other hand, the SEC has opined that the entire
subscription, although not yet fully paid, may be
transferred to a single transferee, who as a result of
the transfer must assume the unpaid balance. It is
necessary, however, to secure the consent of the
corporation since the transfer of subscription rights
and obligations contemplates a novation of contract
which under Article 1293 of the Civil Code cannot be
made without the consent if the creditor [Villanueva].
b. Sale of Partially Paid Shares
e. Sale of Fully Paid Shares
Under Sec. 63 of the Corporation Code, no shares of
stock against which the corporation holds any unpaid
claim shall be transferable in the books of the
corporation. Therefore, a corporation may refuse to
acknowledge and register a sale or assignment of
shares which are not fully paid, and may continue to
hold the original subscriber liable on the payment of
the subscription.
Shares of stock so issued are personal property and
may be transferred by delivery of the certificate or
certificates indorsed by the owner or his attorney-infact or other person legally authorized to make the
transfer. No transfer however shall be valid except as
between the parties until the transfer is recorded in
the books of the corporation showing the names of
the parties to the transaction, the date of the transfer,
the number of the certificate or certificates and the
number of shares transferred [Sec. 63].
General Rule: Free Transferability of Shares
Shares of stock so issued are personal property and
may be transferred [Sec. 63].
However, in China Banking Corp. v. CA [G.R. No.
117604 (1997)], the Court said that the above
principle in Section 63 cannot be utilized by the
corporation to refuse to recognize ownership over
f. Requisites of a Valid Transfer
Same as requirements for valid transfer of stocks.
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g. Involuntary Dealings with Shares
The right of a stockholder to pledge, mortgage or
otherwise encumber his shares is recognized under
Sec. 55 of the Corporation Code, which regulates the
manner of voting on pledged or mortgaged shares.
If the restriction on the right to pledge or mortgage
shares of stock absolutely prohibits the stockholders
from pledging or mortgaging their shares without the
consent of the BOD, it would be violative of the
statutory right of the stockholders to 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-à-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].
COMMERCIAL LAW
J. 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].
1. 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. Voluntary
WHERE NO CREDITORS ARE AFFECTED
[SEC 118]
1. 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.
2. 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.
3. The resolution to dissolve must be approved by
the majority of the BOD/BOT and approved by
the stockholders representing at least 2/3 of the
Outstanding Capital Stock or 2/3 of members.
Non-voting shares are entitled to vote in this
matter [Sec. 6. Par 6(8)]
4. A copy of the resolution shall be certified by the
majority of the BOD/BOT and countersigned by
the secretary.
5. The signed and countersigned copy will be filed
with the SEC and the latter will issue the
certificate of dissolution.
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Note: Thus, except for the expiration of its term, no
dissolution can be effective without some act of the
State [Daguhoy Enterprises v. Ponce, G.R. No. L-6515
(1954)].
WHERE CREDITORS ARE AFFECTED [SEC
119]
1. A petition shall be filed with the SEC containing
the following:
a. signature by a majority of its BOD or BOT
or other officers having management of its
affairs;
b. verified by its president, or secretary or one
of its director or trustees;
c. all claims and demands against the
corporation; and
d. resolved upon by affirmative vote of the
stockholders representing at least 2/3 of the
Outstanding Capital Stock or 2/3 of
members;
2. 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.
3. 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, posting for 3 consecutive weeks
in 3 public places is sufficient.
4. A hearing shall be conducted 5 days after the
lapse of the expiration of the time to file
objections.
5. 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.
a. 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].
b. 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].
BY SHORTENING OF CORPORATE TERM
18
COMMERCIAL LAW
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, March 13, 2006:
• If the shortened term expires before the SEC
approval – the corporation will be dissolved upon
the SEC approval
• If the shortened term expires after the SEC
approval – the corporation will be dissolved upon
the expiration of the shortened term
• If SEC fails to act within 6 months from filing of
the amended 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]
Note: This is among the corporate acts where appraisal
right is available [see Sec. 81]
b. Involuntary
BY EXPIRATION OF CORPORATE TERM
Once the period expires, the corporation is
automatically dissolved without any other proceeding
and it cannot thereafter be considered a de facto
corporation.
FAILURE
TO
ORGANIZE
AND
COMMENCE BUSINESS WITHIN 2 YEARS
FROM INCORPORATION
Failure to formally organize and commence the
transaction of its business or construction of its works
within 2 years - its corporate powers shall cease and
the corporation shall be deemed dissolved [Sec. 22]. 18
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
This 2-year period has been increased to 5 years. [Sec. 21, RCC]
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beyond the control of the corporation as may be
determined by the SEC, therefore, the
dissolution is not automatic.
Formal organization includes not only the adoption
of the by-laws but also the establishment of the body
which will administer the affairs of the corporation
and exercise its powers
• By-laws should be adopted within one month of
receipt of official notice of the issuance of the
certificate of incorporation, otherwise the
certificate may be suspended or revoked [PD
902-A, Sec. 6 (i)(5)].
Failure to operate for at least 5 consecutive years after
commencement of business - ground for suspension
or revocation of its corporate franchise or certificate
of incorporation. However, 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].
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 impair the obligation
of existing contracts between the corporation
and third persons, or take away the vested rights
of its creditors. [De Leon]
DISSOLUTION BY THE SEC ON GROUNDS
UNDER EXISTING LAWS
COMMERCIAL LAW
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, such as:
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]
2. 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.
a. 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
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implication to complete the corporate liquidation
[Pepsi-Cola Products Philippines, Inc. v. CA, G.R. No.
145855 (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, G.R. No. L-23606
(1968)]
b. 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.
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, G.R. No. L-16779 (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, G.R. No. 102965 (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, G.R. No. L-18805 (1967)].
c. By Management Committee or
Rehabilitation Receiver
COMMERCIAL LAW
In SEC’s 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, G.R. No. 9755 (1928)].
d. Liquidation after Three Years
What is the difference between Liquidation and
Rehabilitation?
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, G.R. No. 105364
(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, G.R.
No. 102965 (1999)].
A corporation’s 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., G.R. No.
170770 (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
corporation’s assets, would be to circumvent the
provisions of Sec. 122 of the Corporation Code
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COMMERCIAL LAW
[Alabang Development Corporation v. Alabang Hills Village
Association and Rafael Tinio, G.R. No. 187456 (2014)].
A narrow distribution of ownership does not, by
itself, make a close corporation.
K. Other Corporations
When a corporation’s 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, G.R. No. 129459 (1998)].
1. 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:
a. 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;
b. All the issued stock of all classes shall be subject
to one or more specified restrictions on transfer
permitted by this Title; and
c. 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, G.R. No. 129459
(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.
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.
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 the Articles of Incorporation.
Limit: 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.
a. Characteristics of a Close
Corporation
DIRECT
MANAGEMENT
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
STOCKHOLDERS [Sec. 96]
1. Stockholders of record not more than 20
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2.
3.
CORPORATION CODE
Stocks not publicly listed
Restricted transfer of ownership
b. Validity of Restrictions on
Transfer of Shares
VALIDITY OF RESTRICTIONS [Sec. 98]
Restrictions must appear in the articles of
incorporation and in the by-laws as well as in the
certificate of stock; otherwise, the same shall not be
binding on any purchaser thereof in good faith.
Restrictions shall not be more onerous than granting
the existing stockholders or the corporation the
option to purchase the shares 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.
c. 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 presumed to have notice of the fact
that he has acquired stock in violation of the
restriction, if such acquisition violates the
restriction.
Whenever any person to whom stock of a close
corporation has been issued or transferred has, or is
conclusively presumed under this section to have,
notice either (a) that he is a person not eligible to be a
COMMERCIAL LAW
holder of stock of the corporation, or (b) that transfer
of stock to him would cause the stock of the
corporation to be held by more than the number of
persons permitted by its articles of incorporation to
hold stock of the corporation, or (c) that the transfer
of stock is in violation of a restriction on transfer of
stock, the corporation may, at its option, refuse to
register the transfer of stock in the name of the
transferee.
The provisions of subsection (4) shall not be
applicable if the transfer of stock, though contrary to
subsections (1), (2) of (3), has been consented to by
all the stockholders of the close corporation, or if the
close corporation has amended its articles of
incorporation in accordance with this Title.
The term "transfer", as used in this section, is not
limited to a transfer for value.
The provisions of this section shall not impair any
right which the transferee may have to rescind the
transfer or to recover under any applicable warranty,
express or implied [Sec. 99].
SUMMARY
• 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
d. When Board Meeting is
Unnecessary or Improperly Held
When Unnecessary –
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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 [G.R. No. 91889
(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.
When Improperly Held –
When 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 [Sec. 101]
e. 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].
COMMERCIAL LAW
f. 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 [Sec. 103].
g. Deadlocks [Sec. 104]
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.
Close Corporation
Regular Corporations
Management / Board Authority
There can be classification of directors into one or
more classes, each of whom may be voted for and
elected solely by a particular class of stock; and
There is no such classification as in the case of close
corporations.
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Close Corporation
COMMERCIAL LAW
Regular Corporations
The articles of incorporation of a close corporation
may provide that the business of the corporation shall
be managed by the stockholders of the corporation
rather than by a BOD. So long as this provision
continues in effect:
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.
Corporate Powers devolved upon BOD whose powers
are executed by officers. Cannot provide that it be
managed by stockholders
BOD must be elected in a stockholders meeting
Stockholders of a corporation are separate and distinct
from directors
The stockholders of the corporation shall be subject
to all liabilities of directors.
The articles of incorporation may likewise provide
that all officers or employees or that specified officers
or employees shall be elected or appointed by the
stockholders, instead of by the BOD.
Officers must be elected by the BOD
Meetings
Unless the by-laws provide otherwise, any action by
the directors of a close corporation without a meeting
shall nevertheless be deemed valid if:
1. Before or after such action is taken, written
consent thereto is signed by all the directors; or
2. All the stockholders have actual or implied
knowledge of the action and make no prompt
objection thereto in writing; or
3. The directors are accustomed to take informal
action with the express or implied acquiescence of
all the stockholders; or
4. All the directors have express or implied
knowledge of the action in question and none of
them makes prompt objection thereto in writing.
If a director's meeting is held without proper call or
notice, an action taken therein within the corporate
powers is deemed ratified by a director who failed to
attend, unless he promptly files his written objection
with the secretary of the corporation after having
knowledge thereof.
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
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].
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Close Corporation
COMMERCIAL LAW
Regular Corporations
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.
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
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.
Limitations on the exercise of pre-emptive right:
1. 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
2. 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
3. Shall not take effect if denied in the Articles of
Incorporation or an amendment thereto.
Transferability
Restrictions on the right to transfer shares must
appear in the Articles of Incorporation and in the bylaws as well as in the certificate of stock otherwise the
same shall not be binding on any purchaser thereof in
good faith
Restrictions on the right to transfer not allowed
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:
1. 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
2. Corporate assets are being misapplied or wasted.
Stockholders may require the corporation to buy-back
their shares at fair value when the Corporation has
Unrestricted Retained Earnings:
1. In case of any amendment to the articles of
incorporation which has the effect of:
a. changing or restricting the rights of any
stockholder or class of shares, or
b. authorizing preferences in any respect superior
to those of outstanding shares of any class, or
c. extending or shortening the term of corporate
existence
2. 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
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Close Corporation
COMMERCIAL LAW
Regular Corporations
3.
4.
In case of merger or consolidation
Investment of corporate funds in another
corporation or business
5. 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):
1. There must be unrestricted retained earning
2. Must be for a legitimate purpose
Election of Officers
By directors but AOI can direct that voting be done
by SHs
By directors where all directors need to be in attendance
2. Non-Stock Corporations
Stock
Definition
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]
Non-stock
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].
Primarily to make profits for its shareholders
Distribution of profits
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].
Profit is distributed to shareholders
Scope of Voting Rights
Each stockholder votes according to the proportion
of his shares in the corporation. No shares may be
deprived of voting rights except those classified and
issued as "preferred" or "redeemable" shares, and as
otherwise provided by the Code [Sec. 6].
Each member, regardless of class, is entitled to one (1) vote
UNLESS such right to vote has been limited, broadened, or
denied in the AOI or by-laws [Sec. 89].
Voting by proxy
Cannot be denied [Sec. 58]
May be denied by the AOI or the by-laws [Sec. 89]
Who Exercises Corporate Power
Board of Directors or Trustees, consisting of 5-15
directors / trustees [Sec. 23, 92]
Board of Trustees, which may consist of more than 15
trustees unless otherwise provided by the AOI or by-laws
[Sec. 23, 92]
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Stock
COMMERCIAL LAW
Non-stock
Term of Directors of Trustees
Directors / trustees shall hold office for 1 year and
until their successors are elected and qualified [Sec.
23].
Board classified in such a way that the term of office of 1/3
of their number shall expire every year. 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 [Sec.
25], except in close corporations where the
stockholders themselves may elect the officers [Sec.
97].
Officers may directly elected by the members UNLESS the
AOI or by-laws provide otherwise [Sec. 92].
Transferability of interest or membership
Generally non-transferable since membership and all rights
arising therefrom are personal. However, the AOI or bylaws can provide otherwise [Sec. 90].
Transferable.
a. 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].
b. 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]
c. 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].
d. 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
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].
3. Religious Corporations
CORPORATION SOLE [SEC. 110]
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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, etc v. Register of Deeds
of Davao City, G.R. No. L-8451 (1957)].
RELIGIOUS SOCIETIES
Non-stock corporation formed by a religious society,
group, diocese, synod, or district of any religious
denomination, sect, or church after getting the
approval of 2/3 of its members [Sec. 116].
The Corporation Code provides no specific
mechanism for amending the articles of incorporation
of a corporation sole. But Sec. 109 allows the
application to religious corporations of the general
provisions governing non-stock corporations.
• For non-stock corporations, the power to amend
its Articles of Incorporation lies in its
members. The code requires two-thirds of their
votes for the approval of such an
amendment. So how will this requirement apply
to a corporation sole that has technically but one
member (the head of the religious organization)
who holds in his hands its broad corporate
powers over the properties, rights, and interests
of his religious organization?
• Although a non-stock corporation has a
personality that is distinct from those of its
members who established it, its Articles of
Incorporation cannot be amended solely through
the action of its BOT. The amendment needs
the concurrence of at least two-thirds of its
membership. If such approval mechanism is
made to operate in a corporation sole, its one
member in whom all the powers of the
corporation technically belongs, needs to get
the concurrence of two-thirds of its
•
COMMERCIAL LAW
membership. The one member is but a trustee
of its membership.
There is no point to dissolving the corporation
sole of one member to enable the corporation
aggregate to emerge from it. The one member,
with the concurrence of two-thirds of the
membership of the organization for whom he
acts as trustee, can self-will the amendment. He
can, with membership concurrence, increase the
technical number of the members of the
corporation from “sole” or one to the greater
number authorized by its amended articles.
[Iglesia Evangelica Metodista En Las Filipinas
(Corporation Sole) Inc., et al v. Bishop Nathanael
Lazaro, et al, G.R. No. 184088 (2010)]
4. Foreign Corporations
Foreign Corporation are those formed, organized, or
existing under any laws other than those of the
Philippines and whose laws allow Filipino citizens and
corporations to do business in its own country or state
[Sec. 123].
a. Bases of Authority over Foreign
Corporations
CONSENT
As a rule, a foreign corporation can have no legal
existence or status beyond the bounds of the State or
sovereignty by which it is created or incorporated and
organized. It exists only in contemplation of law and
by force of the law and where that law ceases to
operate, the corporation can have no existence. This
principle, however, does not prevent a corporation
from acting in another State or country with the
latter’s express or implied consent. This is the
“consent doctrine” which is provided in Sections 125
and 126. But every power which a corporation
exercises as such in another State depends for its
validity upon the laws of the sovereignty in which it is
exercised. A corporation can exercise none of the
functions and privileges conferred by its charter in
another State or country except by the comity and
consent of such State or country. [DE LEON] Under
Philippine law, the condition is that it must pbtain a
license to do business in the Philippines [CAMPOS].
DOCTRINE OF “DOING BUSINESS”
(RELATED TO DEFINITION UNDER THE
FOREIGN INVESTMENTS ACT, R.A. NO.
7042)
Jurisprudential Tests of “Doing Business In The
Philippines”
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1.
2.
CORPORATION CODE
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 [Agilent Technologies v Integrated
Silicon Technology, G.R. No. 154618 (2004)]
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, G.R.
No. L-7917 (1955)].
Note: Asked in 1998 and 2002
Statutory Definition of “Doing Business” [Sec.
3(d), Foreign Investment Act of 1991 (RA 7042)]
1. Soliciting orders, service contracts, or opening
offices;
2. Appointing
representatives,
distributors
domiciled in the Philippines or who stay for a
period or periods totaling 180 days or more;
3. Participating in the management, supervision, or
control of any domestic business, firm, entity, or
corporation in the Philippines;
4. 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.
Note: Asked in 1998 and 2002
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, G.R. No. 168266
(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,
G.R. No. 159586 (2004)].
COMMERCIAL LAW
NOT DOING BUSINESS
1. Statutory: Sec. 3(d) FIA and Sec. 1 FIA IRR
a. Mere investment as shareholder and exercise
of rights as investor;
b. Having a nominee director or officer to
represent its interest in the corporation;
c. Appointing a representative or distributor
which transacts business in its own name and
for its own account;
d. The publication of a general advertisement
through any print or broadcast media;
e. Maintaining a stock of goods in the PH
solely for the purpose of having the same
processed by another entity in the PH;
f. Consignment by a foreign entity of
equipment with a local company to be used
in the processing of products for export;
g. Collecting information in the Philippines;
h. 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.
2. Jurisprudential
• Agent’s activities were confined to
maintaining a stock of goods in the PH and
consignment
of
equipmen
[Agilent
Technologies v Integrated Silicon Technology, G.R.
No. 154618 (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
distributor’s independence, then there is
nothing wrong with placing reasonable
expectations [Steelcase v Design Int’l, G.R. No.
171995 (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, Inc. v. CA, G.R. No. L61523 (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,
G.R. No. L-63796-97 (1984)].
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legal proceedings against the foreign corporation [Sec.
127-128].
b. Necessity of a License To Do
Business
REQUISITES FOR ISSUANCE OF A
LICENSE
The foreign corporation should file a copy of its
articles of incorporation and by-laws, and a verified
application [See Sec. 125] accompanied by the
following:
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
corporation’s country allows Filipino citizens and
corporations to do business in said country
Within 60 days from issuance of license, the
corporation should deposit at least P100,000 (cash,
property, bond) for the benefit of creditors subject to
further deposit every six months [See Sec. 126].
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 State’s regulation [Avon
Insurance PLC v. CA, G.R. No. 97642 (1997)].
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
c. Personality to Sue
A foreign corporation transacting business in the
Philippines is required to secure a license to have the
personality to sue before, or intervene in, any court or
administrative proceeding. [Sec. 133; CAMPOS]
d. 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 may 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, G.R. No. L-38649
(1979)].
e. Instances When Unlicensed
Foreign Corporations May be
Allowed to Sue
1.
2.
When the corporation is considered “not doing
business” in the PH
When the Philippine citizen or entity is estopped
from challenging the foreign corporation’s
personality to sue [Merrill Lynch Futures v. Court of
Appeals, G.R. No. 97816 (1992)]
Summary of Rules on Capacity to Sue [Agilent
Technologies v Integrated Silicon Technology, G.R. No.
154618 (2004)]
Status
Consequence
Doing Business in the
Can sue and be sued
PH, WITH a license
General Rule: Cannot
Doing Business in the sue, but may be sued in
PH, WITHOUT a the PH
license
Exception: Capacity to
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sue
may
not
be
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NOT doing business
in the PH, on isolated
transactions
CORPORATION CODE
questioned if the other
party is estopped
May sue;
may be sued
d. 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]
2. GENERAL BANKING ACT
f. Grounds for Revocation of
License
UNDER THE CORPORATION CODE
1. Failure to file its annual report or pay any fees as
required by this Code;
2. Failure to appoint and maintain a resident agent
in the Philippines as required by this Title;
3. 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;
4. 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;
5. A misrepresentation of any material matter in any
application, report, affidavit or other document
submitted by such corporation pursuant to this
Title;
6. 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;
7. Transacting business in the Philippines outside of
the purpose or purposes for which such
corporation is authorized under its license;
8. Transacting business in the Philippines as agent
of or acting for and in behalf of any foreign
corporation or entity not duly licensed to do
business in the Philippines; or
9. Any other ground as would render it unfit to
transact business in the Philippines [Sec. 134]
The Monetary Board may revoke the license to
transact business in the Philippines of any foreign
bank, if it finds that:
a. the foreign bank is insolvent; or
b. in imminent danger thereof; or
c. its continuance in business will involve probable
loss to those transacting business with it. [Sec. 78,
GBA]
UNDER SPECIAL LAWS
1.
COMMERCIAL LAW
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:
a. it is in unsound condition; or
b. it has failed to comply with the provisions of law
or regulations obligatory upon it; or
c. its condition or method of business is such as to
render its proceedings hazardous to the public or
to its policyholders; or
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L. Mergers and
Consolidations
COMMERCIAL LAW
4. Articles of Merger or
Consolidation
1. 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.
2. 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
3. Plan of Merger or
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:
a. Plan of merger or consolidation;
b. For stock corporation, the number of shares
outstanding; for non-stock, the number of
members;
c. As to each corporation, number of shares or
members voting for and against such plan
respectively.
The Articles of Merger or Consolidation:
a. take the place of the Articles of Incorporation of
the consolidated corporation; or
b. amend the Articles of Incorporation of the
surviving corporation.
5. Procedure
a. 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)].
Consolidation [Sec. 76]
Each of the constituent corporations must draw up a
Plan of Merger or Consolidation which shall set forth:
a. Names of the corporation involved;
b. Terms and mode of carrying it;
c. 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
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.
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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.
b. Execution of Articles of Merger
or Consolidation
Articles of Merger or Articles of Consolidation shall
be executed by each of the constituent corporations.
c. Submission to SEC of the
Articles
Submission of Four (4) copies of the Articles of
Merger or Articles of Consolidation to the SEC for
approval.
Mergers and consolidations of corporations governed
by special laws requires a recommendation from the
appropriate government agency [Sec. 79 (1)].
d. Action by SEC
Conduct hearing or issue certificate If necessary, the
SEC shall set a hearing, notifying all corporations
concerned at least 2 weeks before.
Issuance of certificate of merger or consolidation.
e. Effectivity
Upon issuance of the certificate of merger or
consolidation, such merger or consolidation shall
become effective [Sec. 79].
Merger or consolidation does not become effective by
mere agreement of the constituent corporations. The
approval of the SEC is required [PNB v. Andrada
Electric and Engr. Co., Inc. (2002)].
COMMERCIAL LAW
Notwithstanding Sec. 79, parties may stipulate a
specific effective date of merger (or consolidation)
where no 3rd party will be prejudiced [SEC Opinion
No. 09-13, July 1, 2009].
6. Limitations
Consent of appropriate government agency:
In the case of merger or consolidation of banks or
banking institutions, building and loan associations,
trust companies, insurance companies, public utilities,
educational institutions and other special
corporations governed by special laws, the favorable
recommendation of the appropriate government
agency shall first be obtained [Sec. 79].
7. Effects [Sec. 80]
AS
TO
THE
CORPORATIONS
CONSTITUENT
Corporate existence
The constituent corporations shall become a single
corporation.
The separate existence of the constituents shall cease,
except that of the surviving or the consolidated
corporation.
The absorbed or constituent corporations are ipso
facto dissolved by operation of law [SEC Opinion,
July 16, 1981].
Assets and liabilities
There is no liquidation of the assets of the dissolved
corporations [CAMPOS].
The surviving or the consolidated corporation shall
possess all the rights, privileges, immunities, powers,
and franchises of each constituent corporation and
the properties shall be deemed transferred to and
vested in the surviving or consolidated corporation
without further act or deed.
The surviving or the consolidated corporation shall
be subject to all the duties and liabilities of the
dissolving corporation(s).
AS TO CREDITORS
The creditors of a corporation cannot prevent its
merger or consolidation with another even if the
surviving or new corporation is not as acceptable a
debtor as the absorbed corporation [CAMPOS].
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Any claim, action or proceeding pending by or against
any of the constituent corporations may be
prosecuted by or against the surviving or consolidated
corporation; and
The rights of the creditors or lien upon the property
of any of each constituent corporation shall not be
impaired by such merger or consolidation.
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COMMERCIAL LAW
SECURITIES
REGULATION CODE
Commercial Law
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COMMERCIAL LAW
B. Definition of Securities
VI. SECURITIES
REGULATION
CODE
Sec. 3. Definition of Terms. – 3.1. "Securities"
A. State Policy
R.A. No. 8799 - The Securities Regulation Code
Sec. 2. Declaration of State Policy
The State shall:
1. Establish a socially conscious, free market that
regulates itself;
2. Encourage the widest participation of
ownership in enterprises;
3. Enhance the democratization of wealth;
4. Promote the development of the capital
market;
5. Protect investors;
6. Ensure full and fair disclosure about
securities;
7. Minimize if not totally eliminate insider
trading and other fraudulent or manipulative
devices and practices which create distortions
in the free market.
The Securities Regulation Code (SRC) regulates
public offering within the Philippines.
are shares, participation or interests in a
corporation or in a commercial enterprise or
profit-making venture and evidenced by a
certificate, contract, instruments, whether written
or electronic in character. It includes:
i.
Shares of stocks, bonds, debentures, notes
evidences of indebtedness, asset-backed
securities;
ii.
Investment contracts, certificates of interest
or participation in a profit sharing
agreement, certifies of deposit for a future
subscription;
iii.
Fractional undivided interests in oil, gas or
other mineral rights;
iv.
Derivatives like option and warrants;
v.
Certificates of assignments, certificates of
participation, trust certificates, voting trust
certificates or similar instruments
vi.
Proprietary or nonproprietary membership
certificates in corporations; and
vii.
Other instruments as may in the future be
determined by the Commission.
Additional Definitions under the 2015
Implementing Rules and Regulations of the SRC
1. Debt securities/instruments – include any evidence of
indebtedness such as bonds, notes, debentures,
commercial papers, treasury bills, treasury bonds,
and other similar instruments as determined by
the SEC. [Rule 3.1.20]
2. Equity securities – include shares of stock in a
corporation [Rule 3.1.20]
3. Commercial paper – means an evidence of
indebtedness of any person with a maturity of
365 days or less. [Rule 3.1.6]
4. Derivative – a financial instrument whose value
changes in response to changes in a specified
interest rate, security price, commodity price,
foreign exchange rate, index of prices or rates,
credit rating or credit index, or similar variable or
underlying factor. It is settled at a future date.
[Rule 3.1.9]
5. Options – contracts that give the buyer the right,
but not the obligation, to buy or sell an
underlying security at a predetermined price on
or before a predetermined date. [Rule 3.1.9.1]
6. Warrants – rights to subscribe or purchase new or
existing shares in a company on or before a
predetermined date. [Rule 3.1.9.2]
7. Investment contract – means a contract, transaction
or scheme whereby a person invests his money in
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8.
9.
SECURITIES REGULATION CODE
a common enterprise and is led to expect profits
primarily from the efforts of others. An
investment contract is presumed to exist
whenever a person seeks to use the money or
property of others on the promise of profits.
[Rule 26.3.5]
Proprietary share or certificate – an evidence of
interest, participation or privilege in a
corporation which gives the holder of the share
or certificate the right to use the facilities covered
by such certificate and to receive dividends or
earnings from the corporation. Upon liquidation
of the corporation, the holder shall have
proportionate ownership rights over its assets.
[Rule 3.1.15]
Non-proprietary share or certificate – is an evidence of
interest, participation or privilege over a specific
property of a corporation that allows the holder
of the share or certificate to use such property
under certain terms and conditions. The holder,
however, shall not be entitled to dividends from
the corporation or to its assets upon its
liquidation. [Rule 3.1.13]
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C. Kinds of Securities
KINDS of Securities (Based on registration
requirement)
1. Exempt Securities – can be issued or sold
without being registered because they are either
guaranteed by the government or are already
regulated by another government body other
than the SEC.
2. Non-Exempt Securities– cannot be issued or
sold without registration.
3. Securities Sold at Exempt Transactions –
must still be registered, but the sale or issue is
exempt from registration because it is not
necessary for the protection of the investors
involved in such transactions.
GENERAL RULE: Securities shall not be sold or
offered for sale or distribution to the public within the
Philippines unless:
1. A registration statement is duly filed with and
approved by the SEC; and
2. Prior to such sale, information on the securities,
in such form and with such substance as SEC
may prescribe, is made available to each
prospective purchaser [Sec. 8.1].
EXCEPTIONS:
1. Exempt Securities [Sec. 9]
The requirement of registration shall not, as a general
rule, apply to any of the following classes of securities:
a.
Any security issued or guaranteed by the
Government of the Philippines/ its political
subdivision or agency/ its instrumentality/ or any
person controlled or supervised thereby;
• Rationale for the exception: The public does not
need protection from the government itself.
The government will always be solvent to
pay its obligations because of its ability to
raise revenues through taxation.
b. Any security issued or guaranteed by the
government of any country with which the
Philippines maintains diplomatic relations,
or by any state, province or political subdivision
thereof on the basis of reciprocity: Provided,
That the Commission may require compliance
with the form and content for disclosures the
Commission may prescribe;
• Rationale: This is rooted in comity among
nations.
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c.
Certificates issued by a receiver or by a trustee
in bankruptcy duly approved by the proper
adjudicatory body;
• Rationale: This is not a public offering.
Besides, protection is already afforded by
that “proper adjudicatory body” and
additional SEC protection is not necessary.
d. Any security or its derivatives the sale or transfer
of which, by law, is under the supervision and
regulation of the Office of the Insurance
Commission, Housing and Land Use Rule
Regulatory Board, or the Bureau of Internal
Revenue.
• Rationale: The issuers are governmental
agencies covered by exception (a) above.
SEC protection would be a duplication.
e. Any security issued by a bank except its own
shares of stock [Sec. 9.1]
• Rationale: Banks are under the supervision of
the Bangko Sentral. SEC protection is a
duplication. Shares of stock were taken out
of the exemption in the SRC. The previous
laws (the original Securities Act and the
Revised Securities Act) did not have this
exception to the exemption.
f. Any class of security with respect to which the
SEC finds that registration is not necessary in the
public interest and for the protection of investors
[Sec. 9.2]
• Note: The exemption of securities by the
SEC must be made through the issuance of
a rule or regulation [Sec. 9.2]
g. Under Rule 9.1 of the 2015 SRC-IRR, the
following shall also be considered exempt
securities:
1. Any evidence of indebtedness issued by a
financial institution itself that has been
duly licensed by the BSP to engage in
banking or quasi-banking activity. [Rule
9.1.1]
2. Evidence of indebtedness issued to the
BSP under its open market and/or
rediscounting operations. [Rule 9.1.2.1]
3. Bills of exchange arising from a bona
fide sale of goods and services that are
distributed and/or traded by banks or
investment houses duly licensed by SEC and
BSP through an organized market that is
operated under the rules approved by the
SEC. [Rule 9.1.2.2]
4. Any security issued or guaranteed by
multilateral financial entities established
through a treaty or any other binding
agreement to which the Philippines is a party
or subsequently becomes a member. [Rule
9.1.2.3]
5.
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Evidence of indebtedness that meet the
following conditions: (19-Lender Rule)
a. Issued to not more than 19 noninstitutional lenders;
b. Payable to a specific person;
c. Neither negotiable nor assignable
and held on to maturity; and
d. In an amount not exceeding P150
million or such higher amount as the
SEC may prescribe [Rule 9.1.2.4].
Note: This provision exempts from registration
only the securities issued by banking or financial
institutions mentioned in the law. Being an issuer of
an exempt security does not exempt such issuer from
the requirement of submission of reports. These
regulations are meant to assure full, fair and accurate
information for the protection of investors. Imposing
such regulations is a function within the jurisdiction
of the SEC [Union Bank v SEC, G.R. No. 138949,
(2001)].
Securities exempt under this section are still subject to
the anti-fraud and civil liability provisions contained
in the Code, trading regulations where they are traded
on an exchange, and the persons who sell these
securities are subject to SEC regulation [DECASA at
40].
2. Exempt Transactions [Sec.
10]
The requirement of registration shall not apply to the
sale of any security in any of the following
transactions:
a.
At any judicial sale, or sale by an executor,
administrator, guardian or receiver or trustee in
insolvency or bankruptcy.
• Rationale: A court will presumably not order
the sale if the public will be prejudiced
thereby.
b. By or for the account of a pledge holder, or
mortgagee or any of a pledge lien holder selling
or offering for sale or delivery in the ordinary
course of business and not for the purpose of
avoiding the provision of this Code, to liquidate
a bona fide debt, a security pledged in good
faith as security for such debt.
• Rationale: This is not a voluntary sale
contemplated by the SRC.
c.
An isolated transaction in which any security is
sold, offered for sale, subscription or delivery by
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the owner thereof, or by his representative for the
owner’s account, such sale or offer for sale,
subscription or delivery not being made in the
course of repeated and successive transaction of
a like character by such owner, or on his account
by such representative and such owner or
representative not being the underwriter of such
security.
• Rationale: Isolated and not meant to be an
ongoing public offering.
d. The distribution by a corporation actively
engaged in the business authorized by its articles
of incorporation, of securities to its stockholders
or other security holders as a stock dividend or
other distribution out of surplus.
• Rationale: The offerees are not the public but
shareholders already familiar with their
company.
e.
The sale of capital stock of a corporation to
its own stockholders exclusively, where no
commission or other remuneration is paid or
given directly or indirectly in connection with the
sale of such capital stock.
• Rationale: Same as d. above.
• Note the condition for such exemption
f.
The issuance of bonds or notes secured by
mortgage upon real estate or tangible personal
property, when the entire mortgage together with
all the bonds or notes secured thereby are sold to
a single purchaser at a single sale.
• Rationale: This is not a public sale.
g.
The issue and delivery of any security in
exchange for any other security of the same
issuer pursuant to a right of conversion
entitling the holder of the security surrendered in
exchange to make such conversion: Provided,
That the security so surrendered has been
registered under this Code or was, when sold,
exempt from the provision of this Code, and that
the security issued and delivered in exchange, if
sold at the conversion price, would at the time of
such conversion fall within the class of securities
entitled to registration under this Code. Upon
such conversion the par value of the security
surrendered in such exchange shall be deemed
the price at which the securities issued and
delivered in such exchange are sold.
• Rationale: The SEC has already registered
the convertible security and presumably
also passed upon the security to be issued
upon conversion.
COMMERCIAL LAW
h. Broker’s transaction, executed upon
customer’s orders, on any registered Exchange
or other trading market.
• Rationale: If broker’s transactions are
registered each time, the transactions on the
exchange will be unduly hampered. Besides,
the brokers are subject to a “code of
conduct” protective of the interest of the
investors.
i.
Subscriptions for shares of the capitals stock
of a corporation prior to the incorporation
thereof or in pursuance of an increase in its
authorized capital stocks, when no expense is
incurred, or no commission, compensation or
remuneration is paid or given in connection with
the sale or disposition of such securities, and only
when the purpose for soliciting, giving or taking
of such subscription is to comply with the
requirements of such law as to the percentage of
the capital stock of a corporation which should
be subscribed before it can be registered and duly
incorporated, or its authorized capital increased.
• Rationale: This is not a public offering.
Besides, the SEC is involved in the
subscription process, as a regulator.
• Note the condition that the exemption
applies only in respect of issuance for
compliance with the percentage needed for
an increase in authorized capital stock, and
the similar condition in f. where no
compensation is paid or given.
j.
The exchange of securities by the issuer with
the existing security holders exclusively,
where no commission or other remuneration is
paid or given directly or indirectly for soliciting
such exchange.
• Rationale: This is not a public offering.
• Note the condition for exemption.
k.
The sale of securities by an issuer to fewer
than twenty (20) persons in the Philippines
during any twelve-month period.
• Rationale: This is not a public offering but a
private placement.
• If the original purchaser shall resell said
securities resulting in more than 19 holders,
the registration requirement shall apply,
notwithstanding the exemption of their
issuances [Rule 10.1.2.2].
l.
The sale of securities to any number of the
following qualified buyers:
1. Bank;
2. Registered investment house;
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3.
4.
5.
6.
•
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Insurance company;
Pension fund or retirement plan maintained
by the Government of the Philippines or any
political subdivision thereof or managed by
a bank or other persons authorized by the
Bangko Sentral to engage in trust functions;
Investment company or;
Such other person as the Commission may
by rule determine as qualified buyers, on the
basis of such factors as financial
sophistication, net worth, knowledge, and
experience in financial and business matters,
or amount of assets under management. [Sec.
10.1]
Rationale: These are sophisticated investors
who are presumed to know the risks of
investing in the securities market.
m. Any transaction with respect to which the SEC
finds that registration is not necessary in the
public interest and protection of investors such
as by the reason of the small amount involved or
the limited character of the public offering [Sec.
10.2]
Note: Any person applying for an exemption under
Section 10 shall file with the SEC:
a. A notice identifying the exemption relied upon;
b. Payment of fee equivalent to 1/10 of 1% of the
maximum value aggregate price or issued value of
the securities.
SEC v. PROSPERITY.COM, INC. [G.R. No.
164197 (2012)]
This case involves the application of the Howey test in
order to determine if a particular transaction is an
investment contract that requires registration.
The SRC treats investment contracts as “securities”
that have to be registered with the SEC before they
can be distributed and sold. An investment contract
is a contract, transaction, or scheme where a person
invests his money in a common enterprise and is led
to expect profits primarily from the efforts of others.
Apart from the definition which the IRR provides,
Philippine jurisprudence has so far not done more to
add to the same. American jurisprudence, while not
binding in the Philippines, enjoys some degree of
persuasiveness insofar as they are logical and
consistent with the country’s best interests.
The US Supreme Court held in Securities and Exchange
Commission v. W.J. Howey Co. (1946) that, for an
COMMERCIAL LAW
investment contract to exist, the following elements,
referred to as the HOWEY TEST must concur:
1. a contract, transaction, or scheme;
2. an investment of money;
3. investment is made in a common enterprise;
4. expectation of profits; and
5. profits arising primarily from the efforts of
others.
Here, PCI devised a scheme in which, for a certain
price, a buyer could acquire from it an internet
website. At the same time, by referring to PCI his
own down-line buyers, a first-time buyer could earn
commissions, interest, and insurance coverage.
PCI’s clients do not make investments. The buyers of
the website do not invest money in PCI that it could
use for running some business that would generate
profits for the investors. The price is what the buyer
pays for the use of the website, a tangible asset that
PCI creates. Under PCI’s network marketing scheme,
the buyer can become a down-line seller. The latter
earns commissions from purchases made by new
buyers whom he refers to the person who sold the
product to him.
The commissions, interest in real estate, and
insurance coverage are incentives to down-line sellers
to bring in other customers. These can hardly be
regarded as profits from investment of money under
the Howey test. Moreover, it is PCI that expects profit
from the network marketing of its products.
POWER
HOMES
UNLIMITED
CORPORATION v. SEC and MANERO [G.R.
No. 164182 (2008)]
Although the proponents must establish all four
elements, the US Supreme Court stressed that
the Howey Test “embodies a flexible rather than a
static principle, one that is capable of adaptation to
meet the countless and variable schemes devised by
those who seek the use of the money of others on the
promise of profits.”
After Howey came the 1973 US case of SEC v. Glenn
W. Turner Enterprises, Inc. et al. In this case, the
9th Circuit of the US Court of Appeals ruled that the
element that profits must come “solely” from the
efforts of others should not be given a strict
interpretation. It held that a literal reading of the
requirement “solely” would lead to unrealistic results.
It reasoned out that its flexible reading is in accord
with the statutory policy of affording broad
protection to the public. Our SRC (RA 8799)
appears to follow this flexible concept for it
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defines an investment contract as a contract,
transaction or scheme whereby a person invests his
money in a common enterprise and is led to
expect profits not solely but primarily from the
efforts of others.
Thus, to be a security subject to regulation by the
SEC, an investment contract in our jurisdiction must
be proved to be:
1. an investment of money,
2. in a common enterprise,
3. with expectation of profits,
4. primarily from efforts of others.
Under the business scheme of petitioner, an investor
enrolls in its program by paying US$234. This entitles
him to recruit two investors who pay US$234 each
and out of which amount he receives US$92. A
minimum recruitment of four investors by these two
recruits, who then recruit at least two each, entitles
the principal investor to US$184 and the pyramid
goes on.
COMMERCIAL LAW
D. Procedure for
Registration of Securities
1. Registration of Securities
[Secs. 12 and 13]
a. Filing by the issuer of a sworn registration
statement with the SEC in the form
prescribed [Sec. 12.1]
1. Shall include any prospectus required or
permitted to be delivered under Subsections
8.2, 8.3, and 8.4 [Sec. 12.1]
Sec. 8. Requirement of Registration of
Securities. –
xxx
8.2 The Commission may conditionally
approve the registration statement under such
terms as it may deem necessary.
In other words, an investor enrolls under said scheme
to be entitled to recruit other investors and to receive
commissions from the investments of those directly
recruited by him. Under the scheme, the accumulated
amount received by the investor comes primarily
from the efforts of his recruits. The Court held that
such a scheme constitutes an investment contract,
which is a security under RA 8799.
8.3 The Commission may specify the terms
and conditions under which any written
communication, including any summary
prospectus, shall be deemed not to constitute
an offer for sale under this Section.
8.4. A record of the registration of securities
shall be kept in Register of Securities in which
shall be recorded orders entered by the
Commission with respect to such securities.
Such register and all documents or
information with respect to the securities
registered therein shall be open to public
inspection at reasonable hours on business
days.
2.
3.
4.
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Shall include the effect of the securities issue
on ownership, on the mix of ownership,
especially foreign and local ownership [Sec.
12.3]
Shall be signed by the issuer’s executive
officer, its principal operating officer, its
principal financial officer, its comptroller, its
principal accounting officer, its corporate
secretary, or persons performing similar
functions accompanied by a duly verified
resolution of the board of directors of the
issuer corporation [Sec. 12.4]
Shall be accompanied by:
a. Written consent of the expert named as
having certified any part of the
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registration statement or any document
used in connection therewith; and
b. Where the registration statement
includes shares to be sold by selling
shareholders - a written certification by
such selling shareholders as to the
accuracy of any part of the registration
statement contributed to by such selling
shareholders [Sec. 12.4].
b. Payment to the SEC of a fee of not more than
one-tenth of one per centum (1/10 of 1%) of
the maximum aggregate price at which such
securities are proposed to be offered [Sec.
12.5a]
The Commission shall prescribe, by rule,
diminishing fees in inverse proportion to the
value of the aggregate price of the offering. This
fee paid to the SEC is called a diminishing fee.
c. Publication of the notice of the filing of
registration statement. [Sec. 12.5b]
The notice must be published by the issuer, at its
own expense, in two (2) newspapers of general
circulation in the Philippines, once a week for
two (2) consecutive weeks, or in such other
manner as the SEC shall prescribe.
d. Declaration by the SEC whether the
registration statement is effective or rejected.
Declaration is made within 45 days from filing of
the registration statement or on such later date to
which the issuer has consented unless applicant
has been allowed to amend the registration
statement under Sec. 14 [Sec. 12.6].
e. Statement under oath by the issuer in all
prospectus that:
1.
2.
Registration requirements have been met and
All information are true and correct as
represented by the issuer or the one making the
statement.
Statement under oath must be made upon effectivity
of the registration statement. [Sec. 12.7]
Grounds for Rejection and/or Revocation of the
Registration of Securities
The SEC may reject a registration statement and reuse
registration of the security thereunder, or revoke the
effectivity of a registration statement and the
COMMERCIAL LAW
registration of the security thereunder after due notice
and hearing, if it finds that:
a.
The issuer:
1. Has been judicially declared insolvent;
2. Has violated any of the provision of this
Code, the rules promulgated pursuant
thereto, or any order of the Commission of
which the issuer has notice in connection
with the offering for which a registration
statement has been filed;
3. Has been or is engaged or is about to engage
in fraudulent transactions;
4. Has made any false or misleading
representation of material facts in any
prospects concerning the issuer or its
securities;
5. Has failed to comply with any
requirements that the Commission may
impose as a condition for registration of the
security for which the registration statement
has been filed [Sec. 13.1.a]
b. The registration statement is on its face
incomplete or inaccurate in any material
respect or includes any untrue statements of a
material fact required to be stated therein or
necessary to make the statement therein not
misleading [Sec. 13.1.b]
c. The issuer, any officer, director or controlling
person performing similar functions, or any
under writer has been convicted, by a
competent judicial or administrative body,
upon plea of guilty, or otherwise, of an offense
involving moral turpitude and /or fraud or is
enjoined or restrained by the Commission or
other competent or administrative body for
violations of securities, commodities, and other
related laws [Sec. 13.1.c]
• The term “competent judicial or
administrative body” shall include a foreign
court of competent jurisdiction.
d. If any issuer shall refuse to permit an
examination to be made by the SEC [Sec.
13.3]
Note: A registration statement may be withdrawn by
the issuer only with the consent of the Commission
[Sec. 13.6].
Grounds for suspension of registration [Sec. 15]
a. If, at any time, the information contained in the
registration statement filed is or has become
misleading, incorrect, inadequate or incomplete
in any material respect;
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b.
c.
d.
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If the sale or offering for sale of the security
registered thereunder may work or tend to work
a fraud;
If the security registered is pending further
investigation to ascertain whether the
registration of such security should be revoked
on any ground specified in the SRC;
If there is refusal to furnish information
required by the SEC.
Note: Upon the issuance of such order of suspension
and notification to the issuer, underwriter, dealer or
broker known as participating in such offering, no
further offer or sale of such security shall be made
until the order is lifted by the SEC. Otherwise, such
sale shall be void [Sec 15.2].
2. Powers of the SEC During
Registration
a.
SEC may dispense with any such
requirements, or may require additional
information or documents. [Sec. 12.2]
b. The Commission may compel the production
of all the books and papers of such issuer, and
may administer oaths to, and examine the
officers. [Sec. 13.2]
c. If the Commission deems it necessary, it may
issue an order suspending the offer and sale
of the securities pending any investigation.
Upon the issuance of the suspension order, no
further offer or sale of such security shall be
made until the same is lifted or set aside by the
Commission. Otherwise, such sale shall be void.
[Sec. 13.4]
COMMERCIAL LAW
E.Prohibitions on Fraud,
Manipulation and Insider
Trading
1. Manipulation of Security
Prices [Sec. 24]
a.
It shall be unlawful for any person acting for
himself or through a dealer or broker, directly
or indirectly:
1. To create a false or misleading
appearance of active trading in any listed
security traded in an Exchange or any other
trading market ("Exchange"):
• Wash sales - By effecting any
transaction in such security which
involves no change in the beneficial
ownership thereof;
• Matched orders - By entering an order
or orders for the purchase or sale of
such security with the knowledge that a
simultaneous order or orders of
substantially the same size, time and
price, for the sale or purchase of any
such security, has or will be entered by
or for the same or different parties; or
• Market rigging or jiggling - By
performing similar act where there is no
change in beneficial ownership.
2. To effect, alone or with others, a series of
transactions in securities that:
• Raises their price to induce the
purchase of a security, whether of the
same or a different class of the same
issuer;
• Depresses their price to induce the
sale of a security, whether of the same
or a different class of the same issuer; or
• Creates active trading to induce such
a purchase or sale through
manipulative devices such as marking
the close, painting the tape, squeezing
the float, hype and dump, boiler room
operations and such other similar
devices.
Examples of Prohibited Conduct under
the 2015 SRC Rules for a.1 and a.2
• Painting the tape - Engaging in a series
of transactions in securities that are
reported publicly to give the impression
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•
•
•
•
•
•
•
•
3.
4.
SECURITIES REGULATION CODE
of activity or price movement in a
security
Marking the close - Buying and selling
securities at the close of the market in an
effort to alter the closing price of the
security
Improper matched orders - Engaging
in transactions where both the buy and
sell orders are entered at the same time
with the same price and quantity by
different but colluding parties
Hype and dump - Engaging in buying
activity at increasingly higher prices and
then selling securities in the market at the
higher prices or vice versa (i.e., selling
activity at lower prices and then buying at
such lower prices).
Wash sales - Engaging in transactions in
which there is no change in beneficial
ownership of a security
Squeezing the float - Taking advantage
of a shortage of securities in the market
by controlling the demand side and
exploiting market congestion during
such shortages in a way as to create
artificial prices
Boiler room operations – use of high
pressure sales tactics to sell securities to
clients who are called randomly
Disseminating false or misleading market
information through media, including
the internet, or any other means to move
the price of a security in a direction that
is favorable to a position held or a
transaction;
Other types of prohibited conduct
and/or manipulative practices which
include, among others, the creation of
temporary funds for the purpose of
engaging in other manipulative practices.
[Sec. 24.1, 2015 SRC-IRR]
To circulate or disseminate information
that the price of any security listed in an
Exchange will or is likely to rise or fall
because of manipulative market
operations of any one or more persons
conducted for the purpose of raising or
depressing the price of the security for the
purpose of inducing the purchase or sale of
such security.
To make false or misleading statement
with respect to any material fact, which he
knew or had reasonable ground to believe
was so false or misleading, for the purpose
5.
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of inducing the purchase or sale of any
security listed or traded in an Exchange.
To effect, either alone or others, any
series of transactions for the purchase
and/or sale of any security traded in an
Exchange for the purpose of pegging,
fixing or stabilizing the price of such
security; unless otherwise allowed by this
Code or by rules of the Commission [Sec.
24.1]
b. No person shall use or employ, in connection
with the purchase or sale of any security any
manipulative or deceptive device or
contrivance. [Sec. 24.2]
c.
Neither shall any short sale be effected nor
any stop-loss order be executed in connection
with the purchase or sale of any security except
in accordance with such rules and regulations as
the Commission may prescribe as necessary or
appropriate in the public interest for the
protection of investors. [Sec. 24.2]
‘Short Sale’ means:
a. Any sale of a security which the seller does not
own; or
b. Any sale which is consummated by the delivery
of a security borrowed by, or for the account of
the seller with the commitment of the seller or
securities borrower to return or deliver said
securities or their equivalent to the lender on a
determined or determinable future date. [Sec.
24.2-2, 2015 SRC-IRR]
‘Stop Loss Order’ means:
An order made by the customer to a broker to sell a
security when it reaches a certain price. Stop loss
orders are designed to limit an investor's loss on a
position in a security.
Prohibition on Short Sales under the 2015 SRCIRR
1. No broker or dealer shall use any facility of a
securities exchange to effect a short sale of any
security unless:
a. at a price higher than the last sale; or
b. at the price of the sale if that price is above
the next preceding different sale price on
such day. (Uptick Rule)
• Note: Unless otherwise provided by
the
Commission,
this
price
requirement shall not apply to a sale
due to a bona fide market-making or
arbitrage activity executed by a broker
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dealer authorized to engage in such
activities.
2. No person shall, directly or indirectly, by the
use of any facility of any securities exchange,
effect a short sale in a security registered or
listed on any securities exchange, where the
seller does not intend or is unable to make
delivery of the securities within the prescribed
settlement period.
3. No director, officer or principal stockholder of
a corporation shall make a short sale in
securities of the corporation in which he is a
director, officer or principal stockholder.
4. The SEC may, motu proprio or upon
recommendation of the Exchange, prohibit
short selling indefinitely or for such period as
it may deem proper for the protection of the
investors or as an emergency measure or
whenever such short selling is necessary or
appropriate in the public interest [Sec. 24.2-2]
MARGIN TRADING [Sec. 48]
This is a form of trading whereby the customer
purchases stocks by advancing only a portion of the
purchase price, with the broker extending credit or
making loan for the balance due [Sundiang, 2017].
Purpose
To prevent the excessive use of credit for the
purchase or carrying of securities [Sec. 48.1]
Margin Requirements
The credit extended must be for an amount not
greater than whichever is the higher of—
a. Sixty-five per centum (65%) of the current
market price of the security, or
b. One hundred per centum (100%) of the lowest
market price of the security during the preceding
thirty-six (36) calendar months, but not more
than seventy-five per centum (75%) of the
current market price.
Note: However, the Monetary Board may increase or
decrease the above percentages, in order to achieve
the objectives of the Government with due regard for
promotion of the economy and prevention of the use
of excessive credit. [Sec. 48.1]
PROHIBITIONS [Rule 48, 2015 SRC-IRR]
a. A Broker Dealer shall not extend credit to a
customer in an amount that exceeds fifty percent
(50%) of the current market value of the security
at the time of the transaction. In no event shall
new or additional credit be extended to an
account in which the equity is less than Fifty
Thousand Pesos (PhP 50,000.00).
COMMERCIAL LAW
b. The margin maintained in a margin account of a
customer shall be no less than twenty five percent
(25%) of the current market value of all securities
"long" in the account and thirty percent (30%) of
the current market value of securities "short" in
the account.
c. When there is an insufficiency of margin, a call
for additional margin shall be issued promptly by
the Broker Dealer to the customer. A call for
initial margin shall be satisfied within 5 business
days from receipt of the call. A call for
maintenance margin shall be satisfied within 24
hours after the call is received. No purchase or
sell order from the customer on the margin
account shall be executed by the Broker Dealer
from the time of insufficiency up to the
satisfaction of the call. (Mandatory Close-Out Rule).
2. Fraudulent Transactions
[Sec. 26]
Fraudulent Transactions
It shall be unlawful for any person, directly or
indirectly, in connection with the purchase or sale of
any securities to:
a. Employ any device, scheme, or artifice to
defraud; [Sec. 26.1]
b. Obtain money or property by means of any
untrue statement of a material fact or any
omission to state a material fact necessary in
order to make the statements made, in the light
of the circumstances under which they were
made, not misleading [Sec. 26.2]
c. Engage in any act, transaction, practice or course
of business which operates or would operate as a
fraud or deceit upon any person [Sec. 26.3]
‘Material fact or information’ means:
Any fact or information that may result in a change in
the market price or value of any of the issuer’s
securities, or may potentially affect the investment
decision of an investor [Sec. 3.1.12., 2015 SRC-IRR].
PROHIBITED
REPRESENTATIONS,
DEALINGS AND SOLICITATIONS [Rule 26.3,
2015 SRC-IRR]
It shall be unlawful for any:
a. Person to represent that he has been
registered as a securities intermediary with
the SEC, unless such person is registered under
the Code;
b. Broker Dealer to represent that the registration
of the Broker Dealer under the Code, or the
failure of the SEC to deny, suspend or revoke
such registration, indicates in any way that the
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SEC has passed upon or approved the
financial standing, business or conduct of
such Broker Dealer, or the merits of any
security or any transaction/s conducted thereby;
c. Person to represent that a security is a
particular type of security when such
representation is inconsistent with a stated
definition under the Code or rules or
regulations adopted thereunder;
d. Person to represent that a security to be sold,
transferred, pledged, mortgaged, encumbered,
used for delivery, or any other purpose to another
entity or itself has been legally authorized by
the
registered
owner
when
such
representation is not true and documented in
writing at the time and date it was used;
e. Person, whether as principal or agent, to buy,
sell or deal in securities or solicit investments
in securities and other investment contracts,
unless he is a registered broker, dealer or
licensed salesman of a broker dealer and the
securities are registered under the Code or
exempt from registration.
3. Insider Trading [Sec. 27]
An ‘Insider’ means:
a. The issuer;
b. A director or officer (or any 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, director, or officer of
an exchange, clearing agency and/or selfregulatory 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]
‘Issuer’ means:
Any entity authorized by the SEC to offer to sell, sell
or promote the sale to the public of its equity, bonds,
instruments of indebtedness and other forms of
securities [Sec. 3.1.11., 2015 SRC-IRR].
‘Material non-public information’ means:
a. It has not been generally disclosed to the public
and would likely affect the market price of the
security after being disseminated to the public
COMMERCIAL LAW
and the lapse of a reasonable time for the market
to absorb the information; or
b. It would be considered by a reasonable person
important under the circumstances in
determining his course of action whether to buy,
sell or hold a security [Sec. 27.2]
PRINCIPLES ON INSIDER TRADING
a. What is sought to be addressed is the asymmetry
in information about a “public company” (such
as a company listed on the Philippine Stock
Exchange) between insiders and outsiders.
b. Insiders could have material information not yet
known to the public about the company, and they
might use this information to benefit themselves
at the expense of the outsiders or the public.
Therefore, they must not trade in the shares
of the company pending the disclosure of
such information to the public.
UNLAWFUL ACTS OF AN INSIDER
a. To sell or buy a security of the issuer, while in
possession of material information with
respect to the issuer or the security that is not
generally available to the public, unless:
a. The insider proves that the information was
not gained from such relationship; or
b. If the other party selling to or buying from
the insider (or his agent) is identified, the
insider proves:
• That he disclosed the information to the
other party, or
• That he had reason to believe that the
other party otherwise is also in
possession of the information [Sec. 27.1]
Note: Presumption that purchase or sale made by
an insider, or such insider’s spouse or relatives by
affinity or consanguinity within the second
degree, legitimate or common-law, is effected
while in possession of material non-public
information arises:
1. If the purchase or sale is transacted after such
information came into existence but prior to
dissemination of such information to the
public; and
2. The lapse of a reasonable time for market to
absorb such information.
Presumption may be rebutted by showing of
purchaser’s or seller’s lack of awareness of the
material non-public information at the time of
purchase or sale [Sec. 27.1]
b. To communicate material non-public
information about the issuer or the security
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to any person who, by virtue of the
communication, becomes an insider, where the
insider communicating the information knows or
has reason to believe that such person will
likely buy or sell a security of the issuer while
in possession of such information [Sec. 27.3]
UNLAWFUL ACTS INVOLVING INSIDERS
IN CONNECTION WITH TENDER OFFER
Where a tender offer has commenced, or is about to
commence, it shall be unlawful for:
a. Any person (other than the tender offeror) who
is in possession of material nonpublic
information relating to such tender offer — to
buy or sell the securities of the issuer that are
sought or to be sought by such tender offer, if
such person (1) knows or has reason to believe
that the information is nonpublic and (2) has
been acquired directly or indirectly from the
tender offeror, those acting on its behalf, the
issuer, or any insider of such issuer; and
b. Any tender offeror, those acting on its behalf, the
issuer, and any insider of such issuer — to
communicate material nonpublic information
relating to the tender offer to any other person
where such is likely to result in a violation of a
[Sec 27.4].
COMMERCIAL LAW
F. Protection of Investors
1. Tender Offer Rule [Sec. 19]
DEFINITION
Tender Offer is a publicly announced intention by a
person acting alone or in concert with other persons
to acquire outstanding equity securities of a public
company, or outstanding equity securities of an
associate or related company of such public company
which controls the said public company. Stated
differently, it is an offer by the acquiring person to
stockholders of a public company for them to tender
their shares therein on the terms specified in the offer
[Cemco Holdings, Inc. v. National Life Insurance Company of
the Philippines, G.R. No. 171815 (2007)].
A public company means any corporation:
a. with a class of equity securities listed on an
Exchange, or
b. with assets in excess of Fifty million pesos and
having 200 or more holders each holding at least
100 shares of a class of its equity securities. [Sec.
3.1, 2015 SRC-IRR]
Purpose of Tender Offer
Tender offer is in place to protect minority
shareholders against any scheme that dilutes the share
value of their investments. It gives the minority
shareholders the chance to exit the company under
reasonable terms, giving them the opportunity to sell
their shares at the same price as those of the majority
shareholders [Cemco Holdings, Inc. v. National Life
Insurance Company of the Philippines, supra].
The rules aim to protect minority owners who may be
left out, if the buyers extend the offer only to strategic
partners or majority owners of a company [DECASA,
77].
MANNER OF MAKING TENDER OFFER
No tender offer shall be made unless:
a. It is open to all security holders of the class of
securities subject to the tender offer; and
b. The consideration paid to any security holder
pursuant to the tender offer shall be the highest
consideration paid to any other security holder
during such tender offer [Sec 19.9.8, 2015 SRCIRR].
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MANDATORY TENDER OFFER [Rule 19.2,
2015 SRC-IRR]
Tender offer is mandatory whenever any person or
group of persons acting in concert intends to:
When Mandatory
a. Acquire fifteen percent
(15%) of equity securities
in a public company in
one
or
more
transactions within a
period of 12 months.
b.
Acquire
thirty
five percent (35%) or
more of the outstanding
voting shares or such
outstanding voting shares
that are sufficient to gain
control of the board in a
public company in one or
more
transactions
within a period of 12
months;
c.
Acquire
thirty
five percent (35%) or
more of the outstanding
voting shares or such
outstanding voting shares
that are sufficient to gain
control of the board in a
public company directly
from one or more
stockholders;
How Effected
They shall file a
declaration to that effect
with the SEC.
They shall disclose such
intention and make a
tender offer for the
percentage sought to all
holders
of
such
securities.
3.
4.
5.
COMMERCIAL LAW
Hand deliver a copy of the SEC Form 19-1,
including all its exhibits, to the target company at
its principal executive office and to each
Exchange where such class of the target
company's securities is listed for trading. [Rule
19.6.1.2]
File with the SEC copies of any additional tender
offer materials as exhibit to SEC Form 19-1 and,
if a material change occurs in the information set
forth in such SEC Form, copies of an
amendment to such form. Copies shall be hand
delivered to the target company and to any
Exchange as required above. [Rule 19.6.2]
Report the results of the tender offer to the SEC
by filing, not later than ten (10) business days
after the termination of the tender offer, copies
of the final amendments to SEC Form 19-1.
[Rule 19.6.3]
CEMCO HOLDINGS, INC. v. NATIONAL
LIFE INSURANCE COMPANY OF THE
PHILIPPINES, INC. [G.R. No. 171815 (2007)]
They shall make a tender
offer for all the
outstanding
voting
shares.
Note: If the tender offer
is oversubscribed, the
aggregate amount of
securities to be acquired
at the close of the tender
offer
shall
be
proportionately
distributed [Sundiang,
2017].
d.
Acquire
any They shall make a tender
number of shares that offer for all outstanding
would result in ownership equity securities to all
of over fifty percent remaining stockholders
(50%) of the total of the company. The
outstanding
equity acquirer shall be required
securities of a public to accept all securities
company.
tendered.
Obligations of a person making a tender offer
[Rule 19, 2015 SRC-IRR]
1. Make an announcement of his intention in a
national newspaper of general circulation, prior
to the commencement of the offer. A copy of the
said notice shall be submitted to the Commission
on the date of its publication. [Rule 19.5]
2. File with the Commission SEC Form 19-1,
including all its exhibits. [Rule 19.6.1.1]
UCC, a publicly-listed company, has two principal
stockholders: (a) UCHC with shares amounting to
60% and (b) Cemco with 17%. Majority of UCHC’s
stocks were owned by BCI and ACC, with Cemco
being a minority shareholder of UCHC.
BCI and ACC later sold their stocks in UCHC to
Cemco. As a result of Cemco’s acquisition of BCI
and ACC’s shares, its total stocks in UCHC
amounted to 60%. Consequently, Cemco’s total
beneficial ownership, direct (17%) and indirect
(36%) in UCC amounted to at least 53% of the
shares of UCC.
Respondent, a minority stockholder of UCC, filed a
complaint against Cemco, praying that the
mandatory tender offer rule be applied to its UCC
shares. Cemco argued that the tender offer rule
applied only to a direct acquisition of the shares of
a listed company, not an indirect acquisition.
Held: The coverage of the mandatory tender
offer rule covers not only direct acquisition but
also indirect acquisition or “any type of
acquisition.”
The legislative intent of Section 19 of the Securities
Regulation Code is to regulate activities relating to
acquisition of control of the listed company and for
the purpose of protecting the minority stockholders
of a listed corporation. Whatever may be the
method by which control of a public company
is obtained, either through the direct purchase
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of its stocks or through an INDIRECT means,
mandatory tender offer applies.
What is decisive is the determination of the
power of control. The legislative intent behind the
tender offer rule makes clear that the type of activity
intended to be regulated is the acquisition of control
of the listed company through the purchase of
shares. Control may [be] effected through a direct
and indirect acquisition of stock, and when this
takes place, irrespective of the means, a tender offer
must occur. The bottom line of the law is to give
the shareholder of the listed company the
opportunity to decide whether or not to sell in
connection with a transfer of control.
In conclusion, the indirect acquisition by Cemco of
thirty six percent (36%) of UCC shares through the
acquisition of the non-listed UCHC shares is
covered by the mandatory tender offer rule.
Exemptions from the mandatory tender offer
requirement [Rule 19.3, 2015 SRC-IRR]
a. Any purchase of securities from the unissued
capital stock,
Provided, the acquisition will not result to a fifty
percent (50%) or more ownership of securities by
the purchaser, or such percentage that is
sufficient to gain control of the board;
b. Any purchase of securities from an increase in
authorized capital stock;
c. Purchase in connection with foreclosure
proceedings involving a duly constituted pledge
or security arrangement where the acquisition is
made by the debtor or creditor;
d. Purchases in connection with a privatization
undertaken by the government of the
Philippines;
e. Purchases in connection with corporate
rehabilitation under court supervision;
f. Purchases in the open market at the prevailing
market price; and
g. Merger or consolidation.
Note: Purchasers of securities in the foregoing
transactions shall, however, comply with the
disclosure and other obligations under SRC-IRR 18.1
and 23.
When not required to make a tender offer
Any person or group of persons acting in concert,
who intends to acquire thirty five percent (35%) of
the outstanding voting shares or such outstanding
voting shares that are sufficient to gain control of the
board in a public company through the Exchange
shall not be required to make a tender offer even
COMMERCIAL LAW
if they acquire the remainder through a block sale if,
after acquisition through the Exchange, they fail to
acquire their target of thirty five percent (35%) or
such outstanding voting shares that is sufficient to
gain control of the board [Sec 19.2.3, 2015 SRC-IRR].
ISSUER TENDER OFFER
“Issuer Tender Offer” means a publicly announced
intention by an issuer to acquire any of its own class
of equity securities, or by an associate of such issuer
to acquire such securities [Sec 19.1.5, 2015 SRC-IRR].
A reacquisition or repurchase by an issuer of its own
securities shall only be made if such issuer has
unrestricted retained earnings in its books to cover the
amount of shares to be purchased, and is undertaken
for any of the following purposes:
a. To implement a stock option or stock purchase
plan;
b. To meet short-term obligations which can be
settled by the reissuance of the repurchased
shares;
c. To pay dissenting or withdrawing stockholders
entitled to payment for their securities; and
d. Such other legitimate corporate purpose/s [Sec.
19.4, 2015 SRC-IRR].
PROHIBITED ACTS
It shall be unlawful when a tender offer has
commenced or about to commence for:
a. Any person (other than the tender offeror) who
is in possession of material nonpublic
information relating to such tender offer, to buy
or sell the securities of the issuer that are sought
or to be sought by such tender offer; and
b. Any tender offeror, those acting on its behalf, the
issuer of the securities sought or to be sought by
such tender offer, and any insider of such issuer
to communicate material nonpublic information
relating to the tender offer to any other person
where such communication is likely to result in a
violation of (1). [Sec. 27.4]
2. Rules on Proxy Solicitation
[Sec. 20]
DEFINITION
Proxy Solicitation involves the securing and
submission of proxies. It is where the corporation
obtains proxies of the stockholders to vote on
corporate matters. [GSIS v. CA, G.R. No. 183905
(2009)]
The terms solicit and solicitation shall include:
a. Any request for proxy or authorization;
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b. Any request to execute or not to execute, or to
revoke, a proxy or authorization; or
c. The furnishing of a form of proxy or other
communication to security holders under
circumstances reasonably calculated to result in
the procurement, withholding or revocation of a
proxy [Rule 20.2.2, 2015 SRC-IRR].
The terms shall not apply to:
a. The performance by any person of ministerial
acts on behalf of a person soliciting a proxy; or
b. Any solicitation made otherwise than on behalf
of the issuer where the total number of persons
solicited is not more than 19 [Rule 20.2.2, 2015
SRC-IRR].
COMMERCIAL LAW
a report identifying the beneficial owner of ten
days after such acquisition, for its own account or
customer, to the issuer of security, to the
exchange where the security is traded and to the
Commission. [Sec. 20.5]
Note: For proxy or consent solicitation, the SEC
may require that the person making such filing
pay a fee of not more than one-tenth of one percent
(1/10 of 1%) of the proposed payment in cash, and
the value of any security or property to be transferred
in the acquisition, merger or consolidation, or the
cash and value of any securities proposed to be
received upon sale or disposition of such assets in
case of a solicitation. [Sec. 21]
The SRC regulates proxy solicitation by requiring the
issuer to transmit
a. an information statement,
b. proxy form, and
c. management report to every security holder of
the class entitled to vote at least 15 days prior to
the conduct of annual or other stockholders’
meetings [Rule 20.3.1, 2015 SRC-IRR].
3. Disclosure Rule
Preliminary copies of the information statement and
the proxy form shall be submitted to the SEC before
sending the same to security holders [Rule 20.3.3.1,
2015 SRC-IRR].
1.
To the SEC
a. Annual Report filed within one hundred
thirty-five (135) days, after the end of the
issuer’s fiscal year, or such other time as the
Commission may prescribe
b. Such other periodical reports for interim
fiscal periods and current reports on
significant developments of the issuer as the
Commission may prescribe as necessary to
keep current information on the operation of
the business and financial condition of the
issuer [Sec. 17.1]
2.
Note: No proxy shall be valid and effective for a period
longer than five (5) years at one time [Sec. 20.3]
To the equity holders
a. An annual report shall be furnished, by every
issuer which has a class of equity securities
satisfying any of the requirements in
Subsection 17.2, to each holder of such
equity security [Sec. 17.5].
RULES WITH REGARD TO BROKERS OR
DEALERS
a. No broker/dealer shall give any proxy, consent
or any authorization, in respect of any security
carried for the account of the customer, to a
person other than the customer, without written
authorization of such customer [Sec. 20.4]
b. A broker or dealer who holds or acquire the
proxy for at least ten percent (10%) or such
percentage as the commission may prescribe of
the outstanding share of such issuer, shall submit
Types of issuers subject to the reportorial
requirements [Sec. 17.2]
1. An issuer which has sold a class of its securities
pursuant to a registration statement,
• Provided however, That the requirement
shall be suspended for any fiscal year after
the year such registration became effective if
such issuer, as of the first day of any such
fiscal year, has less than one hundred (100)
holder of such class of securities or such
other number as the Commission shall
REQUIREMENTS
Proxies must be:
a. Issued and solicited in accordance with SEC rules
and regulations [Sec. 20.1]
b. In writing [Sec. 20.2]
c. Signed by the stockholder or his duly authorized
representative [Sec. 20.2]
d. Filed before the scheduled meeting with the
corporate secretary [Sec. 20.2]
e. Valid only for the meeting for which it is intended
unless otherwise provided in the proxy [Sec. 20.3]
Issuers, equity holders, and insiders are subject to
certain reportorial requirements under the SRC.
a. Disclosure by The Issuer [Sec.
17]
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2.
3.
SECURITIES REGULATION CODE
prescribe and it notifies the Commission of
such;
An issuer with a class of securities listed for
trading on an Exchange; and
An issuer with assets of at least 50 million pesos
or such other amount as the Commission shall
prescribe, and having 200 or more holders each
holding at least 100 shares of a class of its equity
securities.
• The obligation of such issuer to file reports
shall be terminated ninety (90) days after
notification to the Commission by the issuer
that the number of its holders holding at
least one hundred (100) shares is reduced to
less than one hundred (100) [Sec. 17.2]
PHILIPPINE VETERANS BANK
CALLANGAN [G.R. No. 191995 (2011)]
v.
The issue in this case is whether the Philippine
Veterans Bank qualifies as a “public company”
under Section 17.2 of the Securities Regulation
Code (SRC) in relation to Rule 3(1)(m) of the
Amended SRC-IRR, required to comply with the
reportorial requirements set forth in Section 17.1
of the SRC.
Under Rule 3(1)(m), a “public company” is
defined as “any corporation with a class of equity
securities listed on an Exchange or with assets in
excess of Fifty Million Pesos (P50,000,000.00) and
having 200 or more holders, at least 200 of which
are holding at least 100 shares of a class of its
equity securities.”
It is clear that a “public company,” as
contemplated by the SRC, is not limited to a
company whose shares of stock are publicly listed;
even companies like the Bank, whose shares are
offered ONLY to a specific group of people, are
considered a public company, PROVIDED they
meet the requirements enumerated [under Sections
17.1 and 17.2 of the SRC and/or under the
Amended IRR of the SRC].
b. Disclosure by Equity Holders
[Sec. 18]
Reports by Five per centum Holders of Equity
Securities [Sec. 18]
In every case in which an issuer is subject to the
reportorial requirements, any person who acquires
directly or indirectly the beneficial ownership of more
than five of per centum (5%) of such class or in excess
of such lesser per centum as the Commission by rule
may prescribe, shall, within 10 days after such
COMMERCIAL LAW
acquisition or such reasonable time as fixed by the
Commission, submit to:
• the issuer of the securities;
• to the Exchange where the security is traded; and
• to the Commission,
a sworn statement containing the following
information:
1. The personal background, identity, residence,
and citizenship of, and the nature of such
beneficial ownership by, such person and all
other persons by whom or on whose behalf the
purchases are effected; in the event the beneficial
owner is a juridical person, the line of business of
the beneficial owner shall also be reported;
2. If the purpose of the purchases or prospective
purchases is to acquire control of the business of
the issuer of the securities, any plans or proposals
which such persons may have that will effect a
major change in its business or corporate
structure;
3. The number of shares of such security which are
beneficially owned, and the number of shares
concerning which there is a right to acquire,
directly or indirectly, by; (1) such person, and (2)
each associate of such person, giving the
background, identity, residence, and citizenship
of each such associate; and
4. Information as to any contracts, arrangements, or
understanding with any person with respect to
any securities of the issuer including but not
limited to transfer, joint ventures, loan or option
arrangements, puts or call guarantees or division
of losses or profits, or proxies naming the
persons
with
whom
such
contracts,
arrangements, or understanding have been
entered into, and giving the details thereof.
5. Such other information as the Commission may
require in the public interest or for the protection
of investors
Note: If it appears to the SEC that securities were
acquired by person in the ordinary course of his
business and were not acquired for the purpose of and
do not have the effect of changing or influencing the
control of the issuer nor in connection with any
transaction having such purpose or effect it may
permit any person to file in lieu of the statement
required by subsection 17.1, a notice stating:
1. The name of such person;
2. The shares of any equity securities subject to
Subsection 17.1 which are owned by him;
3. The date of their acquisition; and
4. Such other information as the commission may
specify [Sec. 18.3]
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Transactions of Directors, Officers and
Beneficial Owners of more than ten per centum
[Sec. 23]
Every person who is
1. the beneficial owner of more than 10% of any
class of any equity security, or
2. a director or any officer of the issuer of such
security,
shall file a statement of (1) the amount of all the
equity security of such issuer of which he is the
beneficial owner, and, (2) such changes in his
ownership as may have occurred within 10 days after
the close of each calendar month thereafter; to be
filed with the SEC and, if the security is listed for
trading on an exchange, also with the exchange.
COMMERCIAL LAW
G.Civil Liability
Grounds for Civil Liability
a. False Registration Statement [Sec. 56]
b. Fraud in connection with prospectus,
communications, and reports [Sec. 57]
c. Fraud in connection with securities transactions
[Sec. 58]
d. Manipulation of security prices [Sec. 59]
e. With Respect to Commodity Futures Contracts
and Pre-Need Plants [Sec. 60]
f. Insider Trading [Sec. 61]
1. Civil Liabilities on Account
of False Registration
Statement [Sec. 56]
c. Disclosure by Insider
An insider has the duty to disclose material
information with respect to the issuer or the security
that is not generally available to the public when
selling or buying securities of the issuer [Sec. 27.1].
What is required to be disclosed is a fact of special
significance, which may be
1. a material fact which would be likely, on being
made generally available, to affect the market
price of a security to a significant extent, or
2. one which a reasonable person would consider
especially important in determining his course of
action with regard to the shares of stock [SEC vs.
Interport Resources Corporation, G.R. No. 135808
(2008)].
See also Insider and Material non-public
information under Insider Trading above.
When the registration statement or any part thereof
contains on its effectivity:
a. An untrue statement of a material fact; or
b. Omission to state a material fact required to be
stated therein or necessary to make such
statements not misleading
WHO MAY BE LIABLE
a. Issuer and every person who signed the
registration statement;
b. Director of/partner in the issuer at the time of
the filing of the registration statement or any part,
supplement or amendment thereof;
c. One who is named in the registration statement
as being or about to become and whose written
consent thereto is filed with the registration
statement;
d. Auditor/auditing firm named as having certified
any financial statements used in connection with
the registration statement or prospectus;
e. One who, with his written consent filed with the
registration statement, has been named as having
prepared or certified any part of the registration
statement/any report or valuation which is used
in connection with the registration statement;
f. Selling shareholder who contributed to and
certified as to the accuracy of a portion of the
registration statement;
g. Underwriter with respect to such security [Sec.
56.1]
WHO MAY SUE
Any person who acquires the security AND who
suffers damage UNLESS it is proved that at the time
of such acquisition he knew of such untrue statement
or omission [Sec. 56.1]
Page 231 of 330
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Note: When the security is acquired AFTER the issuer
has made generally available to its security holders an
INCOME STATEMENT covering a period of at
least twelve (12) months beginning from the effective
date of the registration statement, the right of
recovery under Section 56 shall be conditioned on
proof that such person acquired the security
RELYING UPON such untrue statement in the
registration statement or relying upon the registration
statement AND NOT KNOWING of such income
statement [Sec. 56.2]
2. Civil Liabilities Arising in
Connection With
Prospectus,
Communications and
Reports [Sec. 57]
COMMERCIAL LAW
to this Code or any rule or regulation thereunder,
which statement as at the time and in the light of the
circumstances under which it was made false or
misleading with respect to any material fact [Sec. 57.2]
Defense
Good faith and lack of knowledge of the false and
misleading statement [Sec. 57.2].
Who May Sue
Purchaser or seller of security who purchased or sold
at a price which was affected by such statement, NOT
KNOWING that such statement was false or
misleading, and RELYING UPON such statement
Sue For: Damages caused by such reliance [Sec.
57.2]
3. Civil Liability of Fraud in
Connection with Securities
Transactions [Sec. 58]
a. Liability of Sellers/Offerors
Who May Be Liable
1. Offeror or seller of a security in violation of
Chapter on Registration of Securities;
2. Offeror or seller of a security, whether or not
exempted by the provisions of this Code, by
means of a prospectus or other written or oral
communication which includes an:
a. untrue statement of a material fact OR
b. omits to state a material fact necessary in
order to make the statements, in the light of
the circumstances under which they were
made, not misleading (the purchaser not
knowing of such untruth or omission)
Defense
No knowledge of untruth or omission, despite the
exercise of reasonable care. [Sec. 57.1]
Who May Sue
Purchaser of the security may sue to recover:
1. Consideration paid for such security with interest
thereon, LESS the amount of any income
received thereon, upon the tender of such
security; or
2. For damages if he no longer owns the security
[Sec. 57.1].
b. Liability of Makers of
False/Misleading Statements
Who May Be Liable
Any person who shall make or cause to be made any
statement in any report, or document filed pursuant
Who May Be Liable
Any person who engages in any act or transaction in
violation of Sections 19.2 (Fraudulent, deceptive, or
manipulative acts or practices in connection with
tender offers), 20 (Proxy Solicitations) or 26
(Fraudulent Transactions), or any rule or regulation
of the Commission thereunder.
Who May Sue
Any person who:
a. Purchases or sells any security,
b. Grants or refuses to grant any proxy, consent or
authorization, or
c. Accepts or declines an invitation for tender of a
security
Sue For: Damages as a result of the act or
transaction.
4. Civil Liability for
Manipulation of Security
Prices [Sec. 59]
Who May Be Liable
Any person who WILLFULLY participates in any act
or transaction in Section 24 (Manipulation of Security
Prices).
Who May Sue
Any person who shall purchase or sell any security at
a price which was affected by such act or transaction
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Sue For: Damages as a result of the act or
transaction.
5. Civil Liability With Respect
to Commodity Futures
Contracts and Pre-Need
Plans [Sec. 60]
Who May Be Liable
Any person who engages in any act or transactions in
WILLFUL violation of any rule or regulation
promulgated by the Commission under Section 11 or
16 [Sec. 60.1]
Section 11. Commodity Futures Contracts. No person shall offer, sell or enter into commodity
futures contracts except in accordance with the
rules, regulations and orders the Commission may
prescribe in the public interest. The Commission
shall promulgate rules and regulations involving
commodity futures contracts to protect investors
to ensure the development of a fair and
transparent commodities market.
Section 16. Pre-Need Plans. – No person shall
sell or offer for sale to the public any pre-need plan
except in accordance with rules and regulations
which the Commission shall prescribe. Such rules
shall regulate the sale of pre-need plans by, among
other things, requiring the registration of pre-need
plans, licensing persons involved in the sale of preneed plans, requiring disclosures to prospective
plan holders, prescribing advertising guidelines,
providing for uniform accounting system, reports
and recording keeping with respect to such plans,
imposing capital, bonding and other financial
responsibility, and establishing trust funds for the
payment of benefits under such plans.
Who May Sue?
Any person sustaining damages as a result of such act
or transaction [Sec. 60.1]
6. Civil Liability on Account of
Insider Trading [Sec. 61]
a. Liability For Non-Disclosure
Who May Be Liable
a. Any insider who violates Subsection 27.1; and
COMMERCIAL LAW
b. Any person in the case of a tender offer who
violates Subsection 27.4 (a)(I), or any rule or
regulation thereunder, by purchasing or selling
a security while in possession of material
information not generally available to the
public [Sec. 61.1]
Who May Sue
Any investor who, contemporaneously with the
purchase or sale of securities that is the subject of the
violation, purchased or sold securities of the same
class
UNLESS such insider, or such person in the case of
a tender offer, proves that such investor KNEW the
information or would have purchased or sold at the
same price REGARDLESS of disclosure of the
information to him [Sec. 61.1]
b. Liability For Communicating
Non-Public Information About
Issuer
Who May Be Liable
a. An insider who violates Subsection 27.3; or
b. Any person in the case of a tender offer who
violates Subsection 27.4 (a), or any rule or
regulation thereunder by communicating
material nonpublic information shall be jointly
and severally liable under Subsection 61.1 with,
and to the same extent as, the insider, or person
in the case of a tender offer, to whom the
communication was directed and who is liable
under Subsection 61.1 by reason of his purchase
or sale of a security [Sec. 61.2]
7. Liabilities of Controlling
Persons, Aider and Abettor
and Other Secondary
Liability [Sec. 51]
a. Liability of Controlling Persons
Who May Be Liable
Every person who controls any person liable under
this Code or the rules or regulations of the
Commission thereunder, shall ALSO be liable jointly
and severally with and to the same extent as such
controlled persons to any person to whom such
controlled person is liable [Sec. 51.1]
Note: ‘CONTROL’ may be:
Page 233 of 330
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1.
2.
SECURITIES REGULATION CODE
By or through stock ownership, agency, or
otherwise, or
In connection with an agreement or
understanding with one or more other persons
[Sec. 51.1]
1.
2.
Defense: Lack of knowledge of the existence of facts
by reason of which the liability of the controlled
person is alleged to exist [Sec. 51.1]
b. Liability of Director/Officer for
Delay in the Filing of Required
Documents
Who May Be Liable
Any director or officer of, or any owner of any
securities issued by, any issuer required to file any
document, report or other information under this
Code or any rule or regulation of the Commission
thereunder, who, without just cause, hinders, delays
or obstructs the making or filing of any such
document, report, or information [Sec. 51.3]
c. Liability of Aider/Abettor
3.
COMMERCIAL LAW
Any person who aids, abets, counsels,
commands, induces or procures any violation of
this Code, or any rule, regulation or order of the
Commission thereunder [Sec. 51.4]
Every person who substantially assists the act or
omission of any person primarily liable under
Sections 57, 58, 59 and 60 of this Code, with
knowledge or in reckless disregard that such act
or omission is wrongful
• Jointly and severally liable as an aider and
abettor for damages resulting from the
conduct of the person primarily liable [Sec.
51.5]
Any
person
who,
DIRECTLY
or
INDIRECTLY, do ANY act or thing which
would be unlawful for such person to do under
the provisions of this Code or any rule or
regulation thereunder [Sec. 51.2]
Note: An aider and abettor shall be LIABLE ONLY:
1. To the extent of his relative contribution in
causing such damages in comparison to that of
the person primarily liable, or
2. To the extent to which the aider and abettor was
unjustly enriched thereby, whichever is
GREATER [Sec. 51.5]
Who May Be Liable
Ground for Civil
Liability
Persons Liable
1.
2.
3.
4.
False
Registration
Statement
[Sec. 56]
5.
6.
7.
Issuer and every person who signed
the registration statement;
Director of/partner in the issuer at the
time of the filing of the registration
statement or any part, supplement or
amendment thereof;
One who is named in the registration
statement as being or about to become
(b);
Auditor/auditing firm named as
having certified any financial
statements used in connection with
the registration statement or
prospectus;
One who, with his written consent
filed with the registration statement,
has been named as having prepared or
certified any part of the registration
statement/any report or valuation
which is used in connection with the
registration statement;
Selling shareholder who contributed
to and certified as to the accuracy of a
portion of the registration statement;
Underwriter with respect to such
security [Sec. 56.1]
Page 234 of 330
Who May Sue
Any person who acquires the security
and who suffers damage unless it is
proved that at the time of such
acquisition he knew of such untrue
statement or omission [Sec. 56.1]
Note: When the security is acquired
after the issuer has made generally
available to its security holders an
income statement covering a period of
at least twelve (12) months beginning
from the effective date of the
registration statement, the right of
recovery under this subsection shall be
conditioned on proof that such person
acquired the security relying upon such
untrue statement in the registration
statement or relying upon the
registration statement and not knowing
of such income statement [Sec. 56.2]
U.P. LAW BOC
Ground for Civil
Liability
SECURITIES REGULATION CODE
Persons Liable
Any person who:
1. Offers to sell or sells a security in
violation of the provisions on the
Registration of Securities;
2. Offers to sell or sells a security,
whether or not exempted by the
Fraud in Connection
provisions of this Code, by means of
with
Prospectus,
a prospectus or other written or oral
Communications and
communication which includes (a) an
Reports
untrue statement of a material fact or
[Sec. 57]
(b) omits to state a material fact
necessary, in order to make the
Liability
of
statements, in the light of the
Sellers/Offerors
circumstances under which they were
made, not misleading (the purchaser
not knowing of such untruth or
omission).
Fraud in Connection
with
Prospectus,
Communications and
Reports
[Sec. 57]
Liability of Makers of
False
Misleading
Statements
Fraud in Connection
with
Securities
Transactions [Sec. 58]
Manipulation
of
Security Prices
[Sec. 59]
With
Respect
to
Commodity
Futures
Contracts and Pre-need
Plans
[Sec. 60]
Defense: No knowledge of such untruth
or omission, despite the exercise of
reasonable care [Sec. 57.1].
Any person who shall make or cause to be
made any statement in any report, or
document filed pursuant to this Code or
any rule or regulation thereunder, which
statement as at the time and in the light of
the circumstances under which it was
made false or misleading with respect to
any material fact
Defense: Good faith and lack of
knowledge of the false and misleading
statement [Sec. 57.2].
Any person who engages in any act or
transaction in violation of Sections 19.2,
20 or 26, or any rule or regulation of the
Commission thereunder
Any person who willfully participates in
any act or transaction in Section 24
(Manipulation of Security Prices).
Any person who engages in any act or
transactions in willful violation of any rule
or regulation promulgated by the
Commission under Section 11 (on
Commodity Future Contracts) or 16 (on
Pre-Need Plans) [Sec. 60.1]
Page 235 of 330
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Who May Sue
Purchaser of the security may sue to
recover:
1. consideration paid for such
security with interest thereon, less
the amount of any income received
thereon, upon the tender of such
security; or
2. for damages if he no longer owns
the security [Sec. 57.1].
Purchaser or seller of security who
purchased or sold at a price which was
affected by such statement knowing that
such statement was false or misleading,
and relying upon such statement may
sue for damages caused by such reliance
[Sec. 57.2].
Any other person who purchases or sells
any security, grants or refuses to grant
any proxy, consent or authorization, or
accepts or declines an invitation for
tender of a security who sustained
damages as a result of the transaction.
Any person who shall purchase or sell
any security at a price which was
affected by such act or transaction
Any person sustaining damages as a
result of such act or transaction [Sec.
60.1]
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SECURITIES REGULATION CODE
Ground for Civil
Liability
Persons Liable
Who May Sue
Any insider who violates Subsection
27.1; and
2. Any person in the case of a tender
offer who violates Subsection 27.4
(a)(I), or any rule or regulation
thereunder,
by purchasing or selling a security
while in possession of material
information not generally available to
the public [Sec. 61.1]
1. An insider who violates Subsection
27.3; OR
2. Any person in the case of a tender
offer who violates Subsection 27.4
(a), or any rule or regulation
thereunder,
by communicating material nonpublic
information shall be jointly and severally
liable under Subsection 61.1 with, and to
the same extent as, the insider, or person
in the case of a tender offer, to whom the
communication was directed and who is
liable under Subsection 61.1 by reason of
his purchase or sale of a security [Sec.
61.2].
Every person who controls any person
liable under this Code or the rules or
regulations
of
the
Commission
thereunder, shall also be liable jointly and
severally with and to the same extent as
such controlled persons to any person to
whom such controlled person is liable
[Sec. 51.1]
Any investor who, contemporaneously
with the purchase or sale of securities
that is the subject of the violation,
purchased or sold securities of the same
class unless such insider, or such person
in the case of a tender offer, proves that
such investor knew the information or
would have purchased or sold at the
same price regardless of disclosure of
the information to him [Sec. 61.1]
1.
Insider Trading
[Sec. 61]
Liability
disclosure
for
non-
Insider Trading
[Sec. 61]
Liability
for
communicating
nonpublic information about
issuer
Liabilities
of
Controlling Persons,
Aider and Abettor and
Other
Secondary
Liability
Liability of Controlling
Persons
COMMERCIAL LAW
Note: ‘Control’ may be by or through
stock ownership, agency, or otherwise, or
in connection with an agreement or
understanding with one or more other
persons [Sec. 51.1]
Defense: Lack of knowledge of the
existence of facts by reason of which the
liability of the controlled person is alleged
to exist [Sec. 51.1]
Liabilities
of Any director or officer of, or any owner
Controlling Persons, of any securities issued by, any issuer
Aider and Abettor and required to file any document, report or
Other
Secondary other information under this Code or any
Liability
rule or regulation of the Commission
thereunder, who, without just cause,
Liability
of hinders, delays or obstructs the making or
Director/Officer
for filing of any such document, report, or
Delay in the Filing of information [Sec. 51.2]
Required Documents
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Ground for Civil
Liability
Persons Liable
1.
2.
Liabilities
of
Controlling Persons,
Aider and Abettor and
Other
Secondary
Liability
Liability
Aider/Abettor
of
COMMERCIAL LAW
Who May Sue
Any person who aids, abets,
counsels, commands, induces or
procures any violation of this Code,
or any rule, regulation or order of the
Commission thereunder [Sec. 51.3]
Every person who substantially
assists the act or omission of any
person primarily liable under
Sections 57, 58, 59 and 60 of this
Code, with knowledge or in reckless
disregard that such act or omission is
wrongful, shall be jointly and
severally liable as an aider and abettor
for damages resulting from the
conduct of the person primarily
liable [Sec. 51.4]
Note: An aider and abettor shall be liable
only to the extent of his relative
contribution in causing such damages in
comparison to that of the person
primarily liable, or the extent to which the
aider and abettor was unjustly enriched
thereby, whichever is greater [Sec. 51.4]
H. Settlements,
Prescriptive Period, and
Damages
2. Prescription of Actions [Sec.
62]
Type of Action
1. Settlement of Cases [Sec. 55]
At any time, during an investigation or proceeding
under this Code, parties being investigated and/or
charged may propose in writing an offer of settlement
with the Commission.
Upon receipt of the offer of settlement, the
Commission shall consider such offer based on the
following:
a. Timing;
b. Nature of the investigation or proceeding; and
c. Public interest
The Commission may only agree to a settlement offer
based on its findings that such settlement is in the
public interest.
Any agreement to settle shall have no legal effect until
publicly disclosed. Such decision may be made
without a determination of guilt on the part of the
person making the offer.
False
Registration
Statement [Sec. 56]
Offering to sell or
selling a security in
violation
of
the
registration
requirements
[Sec.
57.1 (a)]
Offering to sell or
selling a security, by
means of a prospectus,
or
other
communication, which
includes an untrue
statement of a material
Page 237 of 330
Prescriptive Period
Within 2 years after the
discovery of the untrue
statement
or
the
omission, but not more
than 5 years after the
security
was bona
fide offered to the
public.
Within 2 years after the
violation upon which it
is based, but not more
than 5 years after the
security
was bona
fide offered to the
public.
Within 2 years after the
discovery of the untrue
statement
or
the
omission, but not more
than 5 years after the
sale.
U.P. LAW BOC
BANKING LAWS
fact or omits to state a
material fact [Sec. 57.1
(b)]
Any liability created
under
any
other
provision of the Code
Within 2 years after the
discovery of the facts
constituting the cause
of action and within 5
years after such cause
of action accrued.
3. Damages [Sec. 63]
All suits to recover damages pursuant to Sections 56,
57, 58, 59, 60 and 61 shall be brought before the
Regional Trial Court, which shall have exclusive
jurisdiction to hear and decide such suits.
The Court is hereby authorized to award:
a. Damages in an amount not exceeding triple the
amount of the transaction plus actual damages;
b. Exemplary damages in cases of bad faith, fraud,
malevolence or wantonness in violation of this
Code or the rules and regulations promulgated
thereunder; and
c. Attorney’s fees not exceeding thirty per centum
(30%) of the award.
Page 238 of 330
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BANKING LAWS
Commercial Law
Page 239 of 330
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COMMERCIAL LAW
4.
VII. BANKING LAWS
A. The New Central Bank
Act (NCBA) [R.A. 7653,
as amended by R.A.
11211]
The section numbers hereinafter generally pertain to
RA 7653, unless otherwise indicated.
1. State Policies
Sec. 1. 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. In line with
this policy, and considering its unique functions
and responsibilities, the central monetary authority
established under this Act, while being a
government- owned corporation, shall enjoy fiscal
and administrative autonomy.
2. Responsibility and Primary
Objective of the Bangko
Sentral ng Pilipinas (BSP)
Created by the NCBA, the BSP is an independent
central monetary authority, which replaced the
Central Bank of the Philippines and shares the same
functions, but is a new entity altogether.
NATURE OF THE BSP
a. A central monetary authority;
b. An independent and accountable body; and
c. A government-owned corporation that enjoys
fiscal and administrative autonomy. [Secs. 1 and
2]
PRIMARY OBJECTIVE AND OTHER
RESPONSIBILITIES OF THE BSP
a. Primary objectives
1. To maintain price stability conducive to a
balanced and sustainable economic growth;
2. To promote and maintain monetary stability
and the convertibility of the peso;
3. To promote financial stability and closely
work with the National Government;
To oversee the payment and settlement
systems in the Philippines; and
5. To promote broad and convenient access to
high quality financial services and consider
the interest of the general public.
b. Other responsibilities
1. Provides policy directions in the areas of
money, banking, and credit
2. Supervises operations of banks
3. Regulates the operations of finance
companies and
non-bank
financial
institutions
performing
quasi-banking
functions [Sec. 3]
SALIENT FEATURES OF THE BSP UNDER
THE NCBA
a. Assurance of BSP independence by providing for
the majority of the members of the Monetary
Board (MB) to come from the private sector. [Sec.
6]
b. The BSP now concentrates on monetary policy,
and has phased 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]
c. 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:
1. Capitalization of P200B; [Sec.2]
2. Maintenance of positive net foreign asset
position; [Sec.71]
3. Charging interests on all loans and advances
to banks; [Sec. 85]
4. Authority to collect interests on loans and
advances to closed financial institutions;
[Sec. 85] and
5. Prohibition against acquisition of shares,
including by collateral, nor participate in
neither ownership nor management of
enterprises, nor engage in development
banking or financing. [Sec. 128]
Exception: Whenever the MB, by a vote of at least 5 of
its members, deems an acquisition or investment to
be necessary to qualify or as required for membership
in international and regional organizations; or
determines that investing in and/or operating an
enterprise will be consistent with the effective
fulfillment of its mandate and will not constitute any
conflict of interest.
Page 240 of 330
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Capitalization of the BSP
The BSP has a capitalization of P200B subscribed by
the Government. [Sec. 2]
The 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 were 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]
The body through which the powers and functions of
the BSP are exercised [Sec. 6]
a. Powers and Functions
2.
3.
4.
5.
MEMBERS
1. The BSP Governor or his designated alternate,
i.e., a deputy governor);
2. A Cabinet member to be designated by the
President or his designated alternate, i.e., an
Undersecretary in his department); and
3. 5 members from the private sector [Sec. 6]
c. Reappointment
No member of the MB may be reappointed more
than once. [Sec. 6]
d. Qualifications
3. Monetary Board (MB)
1.
COMMERCIAL LAW
Issue rules and regulations it considers necessary
for the effective discharge of the responsibilities
and exercise of the powers vested in it;
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;
Establish a human resource management system
which governs the selection, hiring, appointment,
transfer, promotion, or dismissal of all personnel;
Adopt an annual budget for and authorize such
expenditures by BSP as are in the interest of the
effective administration and operations of BSP in
accordance with applicable laws and regulations;
and
Indemnify its members and other officials of the
BSP, including personnel of the departments
performing supervision and examination
functions, against all costs and expenses
reasonably incurred by such persons in
connection with any civil or criminal action, suit
or proceeding, to which any of them may be
made a party by reason of the performance of
their functions or duties, unless such members or
other officials are found to be liable for willful
violation of this Act, performed in evident bad
faith or with gross negligence. [Sec. 15]
b. Composition
The MB shall be composed of 7 members appointed
by the President with a 6-year term. [Sec. 6]
1.
2.
3.
4.
5.
6.
Citizenship – Natural-born citizens of the
Philippines;
Age
General Rule: At least 35 years old
Exception: Governor must be at least 40 years old;
Of good moral character;
Of unquestionable integrity;
Of known probity and patriotism; and
With recognized competence in social and
economic disciplines. [Sec. 8]
e. 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 MB is
disqualified by:
a. Direct connection with any multilateral banking
or financial institution; or
b. Substantial interest in any private bank in the
Philippines, within 1 year prior to his
appointment [Sec. 9]
f. Prohibition on a Member of the
MB
a.
Being a director, officer, employee, consultant,
lawyer, agent or stockholder of any bank, quasibank, or any other institution which is subject to
supervision or examination by the BSP (remedy:
resign and divest interests before assuming
office];
b. Holding any other public office or public
employment during his tenure; and
c. 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]
Page 241 of 330
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COMMERCIAL LAW
g. Grounds for Removal of Any
Member of the MB
4. The BSP and Banks in
a.
WHEN BANKS ARE IN DISTRESS
Distress
If the member is subsequently disqualified under
Sec. 8;
b. 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;
c. 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
d. If he no longer possesses the qualifications under
Sec. 8. [Sec. 10]
h. 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]
i. 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;
3. Fail to exercise extraordinary diligence in the
performance of their duties;
4. Disclose
confidential
information,
or
information relating to MB discussions or
resolutions, or about the BSP’s confidential
operations
Exceptions:
a. Disclosure is in connection with the
performance of official functions in the BSP;
b. MB or BSP Governor’s prior authorization;
or
5.
Use confidential information for their personal
gain or to the detriment of the Government,
BSP, or 3rd Parties [Sec. 16]
Liquidity is the ability of an asset to be converted
into cash. An entity is liquid when it is able to pay its
liabilities when they fall due.
Illiquidity occurs when the bank is not liquid. It
means that the bank cannot meet its current liabilities.
• Illiquidity is handled by conservatorship.
Insolvency – When the actual market value of assets
is 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.
• In contrast, a bank is solvent when current assets
are more than current liabilities, providing the
ability to pay debts. It is also solvent when it is
able to meet its long-term obligations/liabilities.
• Insolvency is handled by receivership and/or
closure.
a. Conservatorship
Grounds for Appointment of a Conservator
Whenever, on the basis of a report submitted by the
appropriate supervising or examining department, the
MB finds that a bank or quasi-bank is:
1. In a state of continuing inability; or
2. Unwillingness to maintain a condition of liquidity
deemed adequate to protect the interest of
depositors and creditors [Sec. 29]
Requisites for Placement of 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 quasibank falls under either of the grounds for
conservatorship; and
3. The Board of Directors must be informed in
writing of the order of the MB directing
conservatorship. [Sec. 29]
Duration
Shall not exceed 1 year [Sec. 29]
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Expenses
The expenses attendant to the conservatorship shall
be borne by the bank or quasi-bank concerned [Sec.
29]
Grounds for Termination of Conservatorship by
the MB
1. When the 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]
Effects of Conservatorship
1. Bank/Quasi-bank retains juridical personality;
2. Not a precondition to the designation of a
receiver [Sec. 30]; and
3. Perfected transactions cannot be repudiated [First
Philippine International Bank v. CA, G.R. No.
115849 (1996)]
COMMERCIAL LAW
receivership, the receiver takes over the management
of the bank.
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 nonimpairment clause of the Constitution. [First Philippine
International Bank v. CA, G.R. No. 115849 (1996)]
Remuneration
General Rule: The conservator shall receive
remuneration in an amount not to exceed 2/3 of the
salary of the president of the institution in 1 year,
payable in 12 equal monthly payments.
Exception: A conservator appointed by the MB
connected with the BSP. Said conservator shall not be
entitled to receive any remuneration or emolument.
[Sec. 29]
b. Receivership
Qualifications of a Conservator
The conservator should be competent and
knowledgeable in bank operations and management.
[Sec. 29]
Concept
The MB may summarily and without need for prior
hearing close a banking institution and place it under
receivership.
The designation of a conservator shall be vested
exclusively in the MB. [Sec. 30]
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)]
Note: The conservator is a natural person to be
appointed by the MB. In contrast, the receiver is
generally the PDIC.
Powers and Duties of a Conservator
1. To take charge of the assets, liabilities, and the
management of the institution;
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; and
6. To overrule or revoke the actions of the previous
management and board of directors of the bank
or quasi-bank. [Sec. 29]
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 refers to the stage within which the
PDIC manages the affairs of the closed bank and
preserves its assets for the benefit of creditors. [Sec.
10(a, b), RA 9302]
Requisites
1. Report of the head of the supervising or
examining 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;
and
4. Notice in writing to the Board of Directors
informing the institution of the order of the MB.
[Sec. 30]
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Grounds for Receivership
Whenever the MB finds that a bank or quasi-bank:
1. Has notified the BSP or publicly announced a
unilateral closure, or has been dormant for at
least 60 days or in any manner has suspended the
payment of its deposit/deposit substitute
liabilities, or is unable to pay its liabilities as they
become due in the ordinary course of business.
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;
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.
In which the MB may, summarily and without need
for prior hearing, forbid the institution from doing
business in the Philippines and designate the
Philippine Deposit Insurance Corporation (PDIC) as
receiver in the case of banks AND direct the PDIC
to proceed with the liquidation of the closed bank
pursuant to Sec. 30 and RA 3591 [Sec. 30, as amended
by RA 11211].
The MB shall notify, in writing, through the receiver,
the BOD of the closed bank of its decision.
Note: Special Rule: in this situation, the MB may act
summarily and without hearing [Sec. 30].
Effect of the MB Decision
General Rule: The actions of the MB taken under Secs.
29-30 shall be final and executory, and may not be
restrained or set aside by the court [Sec. 30, as
amended by RA 11211].
[Sec. 30, as amended].
Exception: On petition for certiorari on the ground
that the action taken was in excess of jurisdiction or
with grave abuse of discretion. Requisites of the
petition:
a. Filed by the stockholders of record representing
the majority of the capital stock.
b. Filed within 10 days from receipt by the BOD of
the institution of the order directing receivership,
liquidation or conservatorship.
Who Acts as Receiver
1. If a banking institution: the PDIC
2.
COMMERCIAL LAW
If a quasi-bank or non-stock savings and loan
association: any person of recognized
competence in banking, credit or finance may be
designated by the BSP as receiver [Sec. 30]
Note: The authority of the MB to summarily and
without need for prior hearing forbid the bank or
quasi-bank from doing business in the Philippines
may also be exercised over non-stock savings and loan
associations, based on the same grounds.
Who Appoints Receivers
The appointment of a receiver shall be vested
exclusively in the MB. [Sec. 30]
Conservatorship vis-à-vis Receivership
The designation of a conservator is not a precondition
to the designation of a receiver. [Sec. 30]
c. Liquidation
Concept
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.
Kinds of Liquidation
1. Involuntary liquidation
2. 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, General Banking Law
of 2000 (GBL) (RA 8791)]
Grounds for Liquidation
See Grounds for Receivership above [Sec. 30, as
amended by RA 11211].
In which the MB may, summarily and without need
for prior hearing, forbid the institution from doing
business in the Philippines and designate the
Philippine Deposit Insurance Corporation (PDIC) as
receiver in the case of banks AND direct the PDIC
to proceed with the liquidation of the closed bank
pursuant to Sec. 30 and RA 3591 [Sec. 30, as amended
by RA 11211].
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The MB shall notify, in writing, through the receiver,
the BOD of the closed bank of its decision.
Effect of the MB Decision
General Rule: The actions of the MB taken under Secs.
29-30 shall be final and executory and may not be
restrained or set aside by the court.
Exception: On petition for certiorari on the ground
that the action taken was in excess of jurisdiction or
with grave abuse of discretion. Requisites of the
petition:
a. Filed by the stockholders of record representing
the majority of the capital stock.
b. Filed within 10 days from receipt by the BOD of
the institution of the order directing receivership,
liquidation or conservatorship [Sec. 30, as
amended by RA 11211].
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 bank’s 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.
d. Closure
See Proceedings in Receivership and Liquidation
above.
CLOSE NOW, HEAR LATER SCHEME
Sec. 29 of the NCBA 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 bank’s closure and at the same time allow a suit
to annul it on the basis of absence thereof [Central
COMMERCIAL LAW
Bank vs. CA and Triumph Savings Bank, GR No.
76118(1993)]
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.
5. Legal Tender Power
All notes and coins issued by the BSP shall be fully
guaranteed by the Government of the Republic of the
Philippines and shall be legal tender in the Philippines
for all debts, both public and private. [Sec. 52]
Limitation: Coins shall be legal tender in amounts
not exceeding P50 for denominations of 25 centavos
and above, and in amounts not exceeding P20 for
denominations of 10 centavos or less.
Exception to Limitation: MB may fix otherwise.
[Sec. 52]
The maximum amount of coins to be considered as
legal tender is: [BSP Circular 537 (2006)]
a. P1,000.00 for denominations of 1-Piso, 5-Piso
and 10-Piso coins; and
b. P100.00 for denominations of 1-sentimo, 5sentimo, 10-sentimo, and 25-sentimo coins.
Retirement of Old Notes and Coins
The BSP may call in for replacement:
a. Notes which are more than 5 years old, and
b. Coins which are more than 10 years old
Those called in for replacement remain legal tender
until one year from call.
After that period, they will no longer be legal tender,
but may be exchanged for new tender, for a period to
be determined by the BSP.
After the period for exchange, they cease to be a
liability of the BSP and will be demonetized.
In times of exchange crises, the BSP may, in its
discretion, stop issuing legal tender, or issue more
legal tender, as the case may be, in order to achieve
exchange stability.
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COMMERCIAL LAW
c. Acquisition of Inconvertible
Currencies
6. Foreign Exchange
Operations
General Rule: The BSP shall avoid the acquisition and
holding of currencies which are not freely convertible.
a. 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]
Limitation: 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]
b. Purchases and Sales of Foreign
Currency
The BSP may:
1. Buy and sell foreign notes and coins, and
documents and instruments of types customarily
employed for the international transfer of funds;
2. Engage in future exchange operations; and
3. In order to maintain the convertibility of the
Peso, at the request of any banking institution
operating in the Philippines, buy any quantity of
foreign exchange offered, and sell any quantity of
foreign exchange demanded, by such institution,
Provided, the foreign exchange offered or
demanded is freely convertible to gold or USD.
[Sec. 70]
Exception: The acquisition of such currencies in an
amount exceeding the minimum balance necessary to
cover current demand for said currencies only when
and to the extent that such acquisition is considered
by the MB to be in the national interest.
d. 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.
The 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]
• These restrictions do not apply to Foreign
Currency Deposits under RA 6426.
Limitations: It may only transact with the following
entities and persons:
1. Banking institutions operating in the Philippines;
2. The government, its political subdivisions and
instrumentalities;
3. Foreign or international financial institutions;
4. Foreign governments and their instrumentalities;
and
5. Other entities or persons authorized by the MB
to act as foreign exchange dealers under the rules
and regulations prescribed by the MB. [Sec. 70]
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B. Law on Secrecy of Bank
Deposits [RA 1405, as
Amended]
The section numbers hereinafter generally pertain to
RA 1405, unless otherwise indicated.
1. Policy
a. To encourage the people to deposit their money
in banking institutions;
b. To discourage private hoarding; [Sec. 1]
c. To encourage the people to deposit their money
in banks; and
d. 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. [BSP Group, Inc. v. Go, G.R. No.
168644 (2010)]
2. Prohibited Acts
a.
Examination, inquiry, or looking into deposits by
persons, government officials, bureaus, or
offices; [Sec. 2]
b. Disclosure by banking institutions' officials or
employees to unauthorized persons regarding
information about covered accounts. [Sec. 3]
3. Deposits Covered
a. General Rule
All peso 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, whether
denominated in pesos or foreign currency. Note that
investments in bonds in foreign currency are still
covered by RA 1405. The Foreign Currency Deposit
Act does not cover those investments..
COMMERCIAL LAW
b. Deposits Not Covered
1.
2.
Foreign currency deposits, which are governed
by the Foreign Currency Deposit Act, infra.
Funds placed in a bank not in the nature of a
deposit by private individuals or entities.
However, these may also not be disclosed, under
Sec. 55.1 of the General Banking Law of 2000.
However, take note of the ruling in Ejercito v. SB
Special Division, G.R. Nos. 157294-95 (2006).
c. 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)]
But see Morales, The Philippine General Banking Law
(Annotated) (2017), pp. 220-221.
d. 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 authority to inquire into such accounts, then such
doubts must be resolved in favor of confidentiality.
[Republic v. Eugenio, G.R. No. 174629 (2008)]
e. 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.
127685 (1998)].
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
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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)]
4. Exceptions
Deposits:
a. Upon written permission of the depositor
b. In cases of impeachment
c. Upon order of competent court in cases of
bribery and dereliction of duty.
d. 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 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
a. The Commissioner of Internal Revenue can
inquire into the bank accounts of the following
taxpayers:
1. A decedent in order to determine his gross
estate; or
2. A taxpayer who has filed an application to
compromise his tax liability on the ground of
financial incapacity; [NIRC, Sec. 6(f)]
3. A taxpayer, information on whose account is
requested by a foreign tax authority
b. Unexplained wealth under Sec. 8 of the AntiGraft 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)]
c. Inquiry by the Anti-Money Laundering Council,
under the AMLA [RA 9160, the Anti-Money
Laundering Act of 2001, as amended], after
obtaining a court order, 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
COMMERCIAL LAW
infra], except that no court order is required if the
covered investments are related to:
1. Kidnapping for Ransom [RPC ];
2. Dangerous Drugs [2002 Comprehensive
Dangerous Drugs Act];
3. Hijacking and other violations of RA 6235;
4. Destructive arson and murder;
5. Felonies similar to (i) to (iv) above which are
punishable under the penal laws of other
countries; and
6. Terrorism and conspiracy to commit
terrorism under the Human Security Act of
2007.
d. BSP inquiry or examination in the course of its
periodic or special examination of the bank. [Sec.
11, AMLA]
1. 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]
2. 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, RA 3591, as
amended by RA 9576].
Not necessarily 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 (Annotated)
(2017) citing Marquez v. Desierto, infra ]
5. 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 must be a pending case before a
court of competent jurisdiction. This is, in turn,
subject to the following additional requirements:
a. The account must be clearly identified;
b. The inspection limited to the subject matter of
the pending case before the court of competent
jurisdiction;
c. The bank personnel and the account holder must
be notified to be present during the inspection;
and
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d. Such inspection may cover only the account
identified in the pending case.
6. Garnishment of Deposits
was used to fund and open the foreign currency
deposit account. [China Banking v. CA, G.R. No.
140687 (2006)]. Note that both decisions are pro
hac vice.
General rule: The prohibition against examination of or
inquiry into a bank deposit under Republic Act 1405
does not preclude its being garnished to insure
satisfaction of a judgment. [China Banking Corporation
v. Ortega, G.R. No. L-34964 (1973); Philippine
Commercial and Industrial Bank v. Court of Appeals, G.R.
No. 84526 (1991)]
“[T]he prohibition against examination of or inquiry
into a bank deposit under Republic Act 1405 does not
preclude its being garnished to insure satisfaction of a
judgment. Indeed there is no real inquiry in such a
case, and if the existence of the deposit is disclosed
the disclosure is purely incidental to the
execution process. It is hard to conceive that it was
ever within the intention of Congress to enable
debtors to evade payment of their just debts, even if
ordered by the Court, through the expedient of
converting their assets into cash and depositing the
same in a bank.”[China Banking Corporation v. Ortega,
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]
7. Confidentiality of Foreign
Currency Deposits
General rule:
confidential.
Foreign
currency
deposits
COMMERCIAL LAW
are
Exceptions:
a. Upon written permission of the depositor [Sec. 8,
Foreign Currency Deposit Act ; Intengan vs CA,
G.R. No. 128996 (2002)]
This is the only exception given by law. [GSIS v.
CA, G.R. No. 189206 (2011)]. However,
jurisprudence provides another exception for
garnishment.
b. On grounds of equity, where a Filipino child was
raped by a foreigner, the SC allowed garnishment
of foreign currency deposits [Salvacion v. CA, G.R.
No. 94723 (1997)]; and where the party inquiring
into the deposits is the co-payee of the check that
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C. General Banking Law of
2000 (GBL)
The section numbers hereinafter generally pertain to
RA 8791, unless otherwise indicated.
1. Introduction
a. Definition
"Banks" shall refer to entities engaged in the lending
of funds obtained in the form of deposits. [Sec. 3.1]
How Banks are Structured
Generally, banks are corporations. However,
cooperative banks may also be formed under the
Cooperative Code.
N.B. Note that under RA 10641, banks, with MB
approval, may now be fully foreign owned, through
any of the following 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.
b. Classification of Banks
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.
In turn, an investment house underwrites
securities either on firm underwriting (good as
sold) or best efforts (excess to be returned to the
firm)
2.
To invest in non-allied enterprises
Commercial Bank (KB)
Has the powers defined in Secs. 29. And 53, infra.
This is the most common kind of bank.
COMMERCIAL LAW
Thrift Bank
Thrift banks are banks that focus on basic banking
services for their clients, with an emphasis on
individuals and small businesses. Thrift banks are
primarily governed by RA 7906, the Thrift Banks Act.
Thrift banks include:
• Savings and mortgage banks;
• Savings and loan associations; and
• Private development banks.
Rural Banks
These 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 (Rural
Banks Act).
Cooperative Banks
These are banks organized as cooperatives under RA
6938, the Cooperative Code.
Islamic Banks
There is only one Islamic Bank in the Philippines, the
Al-Amanah Islamic Bank, which aims to provide
banking under the Shari’a principles governing
banking.
Other banks as classified by the BSP
This includes Land Bank of the Philippines, the
Philippine Veteran’s Bank, and Development Bank of
the Philippines.
2. Quasi-Banks and Trust
Entities
Quasi-banks refer to entities engaged in the
borrowing of funds through the issuance,
endorsement or assignment with recourse or
acceptance of deposit substitutes as defined in
Section 95 of the “New Central Bank Act” for
purposes of relending or purchasing of receivables
and other obligations.
Deposit-Substitute Taking or Quasi-Banking
Deposit-substitute taking or quasi-banking is an
alternative form of obtaining funds from the public,
other than deposits, through the issuance,
endorsement, or acceptance of debt instruments for
the borrower's own account, for the purpose of
relending or purchasing of receivables and other
obligations.
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BANKING LAWS
These instruments may include, but need not be
limited to, bankers’ acceptances, promissory notes,
participations, certificates of assignment and similar
instruments with recourse, and repurchase
agreements.
Instead, the funds are received from investors in
exchange for a financial instrument like a bond or a
promissory note, which will be paid at a given time.
b. Banking Powers and Incidental
Powers
A commercial bank shall have, in addition to the
general powers incident to corporations, all such
powers as may be necessary to carry on the business
of commercial banking such as:
1.
However, the deposit substitute must be on a with
recourse basis.
Accepting Drafts;
General rule: Only a UB and a KB can accept or
create demand deposits [Sec. 33]
Trust entities (Manual of Regulation for Banks)
are:
a. a bank, through its specifically designated
business unit to perform trust functions; or
b. trust corporation, authorized by the BSP to
engage in trust and other fiduciary business under
the 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 MB. [Sec.
33]
Fixed, savings, and current deposits of money in
banks and similar institutions shall be governed
by the provisions concerning simple loan. [Art.
1980, NCC]
3. Core Banking Functions
The core banking functions are:
a. The taking of deposits; and
b. The lending of the funds received as deposits.
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.
Relationship between depositor and bank:
Creditor (Depositor) and Debtor (Bank)
A depositor is presumed to be the owner of funds
standing in his name in a bank deposit; and where
a bank is not chargeable with notice that the
money deposited in such account is the property
of some other person than the depositor, the
bank is justified in paying out the money to the
depositor or upon his order, and cannot be liable
to any other person as the true owner. [Fulton Iron
Works Co. v. China Banking Corporation, G.R. No.
32576 (1930)]
4. Bank Powers and Liabilities
a. 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.
The exception is cooperative banks, which are in the
form of a cooperative, and have all the powers of a
cooperative under the Cooperative Code.
Granting of loans; security requirement
The GBL no longer requires credit to be secured only
by traditional security devices (such as a mortgage or
a pledge), in order to accommodate a different
security arrangement for microfinancing. This is in
contrast to the General Banking Act it replaced,
which requires all loans to be secured by traditional
security devices.
COMMERCIAL LAW
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 setoff which the bank has the option [but not the
obligation] to exercise. [BPI v. CA and Eastern
Plywood, G.R. No. 104612 (1994)]
2.
3.
4.
5.
Issuing letters of credit;
Discounting and negotiating promissory notes,
drafts, bills of exchange, and other evidences of
debt;
Accepting or creating demand deposits;
Receiving other types of deposits and deposit
substitutes;
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BANKING LAWS
Types of Deposits:
a. 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.
b. Savings Deposit - Bank pays an interest
rate, but not as high as time deposits.
c. Demand Deposits/Current Accounts No interest is paid by the bank because the
depositor can take out his funds any time. It
is called demand deposit because the
depositor can withdraw the money he
deposited on the very same day when he
deposited it or at any time thereafter.
[Villanueva, Commercial Law Review (2012)]
d. Negotiable Order of Withdrawal
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]
6.
7.
8.
Buying and selling foreign exchange and gold or
silver bullion;
Acquiring marketable bonds and other debt
securities; and
Extending credit.
2.
3.
4.
5.
COMMERCIAL LAW
Act as financial agent and buy and sell, by order
of and for the account of its customers, shares,
evidences of indebtedness and all types of
securities;
Make collections and payments for the account
of others and perform such other services for its
customers as are not incompatible with banking
business;
Upon prior approval of the MB, act as managing
agent, adviser, consultant or administrator of
investment management/advisory/consultancy
accounts; and
Rent out safety deposit boxes.
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. [Sia v. CA, 222 SCRA 24, 32 (1993)]
5. Nature of Bank Funds and
Bank Deposits
“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]
The deposit is a contract of loan with the bank being
lent money by the depositor. Under the Civil Code
provisions on loan, this means that the money
deposited with the bank becomes its property, which
it is free to use, subject to the condition that the
depositor can demand repayment, in the form of
withdrawals, at any time.
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]
Quasi-deposits
• Funds placed with bank, but which is not in the
nature of a deposit
• Must be on a with recourse basis
• As UB and KB no longer have to apply for
authority to accept deposit substitutes, this may
now be considered a core banking function of
those banks.
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 (2017)]
The relationship between a depositor and a bank is
that of a creditor and debtor in relation to the bank’s
deposit functions [Gullas vs. PNB, G.R. No. L-43191,
(1935)] and not that of depositor and depositary.
In addition to the operations specifically
authorized in the GBL, a bank may perform the
following services:
1. Receive in custody funds, documents and
valuable objects;
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-30511 (1980)].
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BANKING LAWS
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)]
unconscionable rates of interest collected on salary
loans and similar credit accommodations [Sec. 43]
7. Grant of Loans and Security
Requirements
a. Limit on Loans, Credit
Accommodations and
Guarantees
Money deposited is commingled with other money
constituting a common fund.
6. Stipulation on Interests
Against real
estate
As an accessory to its power to grant loans, banks may
stipulate interests.
With the removal of the limit on imposable interest
under CB Circular 905, banks may impose interest
past the legal interest rate of 6%. [CB Circular 799-13]
• However, this does not give banks the right to
impose excessive interests. A stipulated interest
rate under Art. 1956 of the Civil Code may
nevertheless be equitably reduced should the
same be found to be iniquitous, unconscionable,
and exorbitant under Art. 1229 of the Civil Code.
If such is the case, there is no stipulated rate, and
the legal rate applies. [Dio v. Japor, G.R. No.
154129 (2005)]
• A 3% monthly interest rate has been ruled
iniquitous. [Macalinao v. BPI, G.R. No. 175490
(2009)]
• 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)]
The MB 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 MB in the maximum maturities
shall apply only to loans and other credit
accommodations made after the date of such action.
The MB shall regulate the interest imposed on micro
finance borrowers by lending investors and similar
lenders such as, but not limited to, the
COMMERCIAL LAW
On security of
chattels and
intangible
properties
(patents,
trademarks,
trade names,
and copyrights)
General rule: Shall not exceed
75% of the appraised value of
the respective real estate
security, plus 60% of the
appraised value of the insured
improvements, and such
loans may be made to the
owner of the real estate or to
his assignees
Exception: Where the MB
otherwise prescribes [Sec. 37]
General rule: Shall not exceed
75% of the appraised value of
the security, and such loans
and
other
credit
accommodations may be
made to the title-holder of
the chattels and intangible
properties or his assignees
Exception: The MB otherwise
prescribes [Sec. 38]
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]
Purpose of loans
The purpose shall be stated in the application and in
the contract between the bank and the borrower. [Sec.
39]
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]
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Amortization on
accommodations
1.
BANKING LAWS
loans
and
other
credit
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]
All are subject to such rules as the MB may
promulgate. [Sec. 29]
b. 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]
General rule: A bank must conform to the risk-based
capital ratio prescribed by the MB.
Exceptions: The MB may alter or suspend compliance
with such ratio whenever necessary for a maximum
period of 1 year.
1. In case of a bank merger or consolidation; or
2. When a bank is under rehabilitation under a
program approved by the BSP; [Sec. 34]
Purpose
A bank must not be allowed to expand the volume of
its loans and investments in a manner that is
disproportionate to its net worth. [Morales (2017)]
COMMERCIAL LAW
Effect of non-compliance
1. The MB may limit or prohibit the distribution of
net profits by such bank and may require that part
or all of the net profits be used to increase the
capital accounts of the bank until the minimum
requirement has been met.
2. The MB may restrict or prohibit the acquisition
of major assets and the making of new
investments by the bank, with the exception of
purchases of readily marketable evidences of
indebtedness of the Republic of the Philippines
and the BSP and any other evidences of
indebtedness or obligations the servicing and
repayment of which are fully guaranteed by the
Republic of the Philippines, until the minimum
required capital ratio has been restored. [Sec. 34]
c. Single Borrower’s Limit (SBL)
General rule: The total loans, credit accommodations
and guarantees that may be extended by a bank to any
person, partnership, association, or corporation or
other entity shall at no time exceed 20% of the net
worth of such bank. [Sec. 35.1]
Exceptions:
1. The MB otherwise prescribes for reasons of
national interest. [Sec. 35.1] Now, the single
borrower’s limit is 25% of the net worth of the
lending bank.
2. Wholesale lending activities of government
banks to participating institutions for re-lending
to end-user borrowers: separate limit of 35% net
worth. [Sec. X303.f, Manual of Regulations for
Banks]
Increase of Limit
The MB 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]
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.
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[It] is a damage-control mechanism [and] a device for
risk amelioration. [Morales (2017)]
Basis for Determining Compliance
The basis for determining compliance with the SBL is
the total credit commitment of the bank to the
borrower. [Sec. 35.1]
Inclusions in the Ceiling
1. The direct liability of the maker or acceptor of
paper discounted with or sold to such bank and
the liability of a general indorser, drawer or
guarantor who obtains a loan or other credit
accommodation from or discounts paper with or
sells papers to such bank;
2. In the case of an individual who owns or controls
a majority interest in a corporation, partnership,
association or any other entity, the liabilities of
said entities to such bank;
3. In the case of a corporation, all liabilities to such
bank of all subsidiaries in which such corporation
owns or controls a majority interest; and
4. In the case of a partnership, association or other
entity, the liabilities of the members thereof to
such bank. [Sec. 35.3]
Guidelines on the Wholesale Lending of
Government Banks
1. It shall apply only to loans granted by
participating financial institutions [PFIs] on a
wholesale basis for on-lending to end-user
borrowers;
2. It shall apply only to loan programs funded by
multilateral, international, or local development
agencies, organizations, or institutions, especially
designed for 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.
[Sec. X303.f, Manual of Regulations for Banks]
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 MB as non-risk items [Sec. 35.5]
COMMERCIAL LAW
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]
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]
d. Restrictions on Bank Exposure
to Directors, Officers,
Stockholders, and Their Related
Interests (DOSRI)
General rule [Sec. 36]: 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]:
1. Valid insider lending;
2. Loans, credit accommodations and guarantees
extended by a cooperative bank to its cooperative
shareholders.
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.
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4.
5.
BANKING LAWS
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; and
Limited to an amount equivalent to the DOSRI
borrower’s unencumbered deposits and book
value of his paid-in capital contribution in the
bank [Sec. 36]
Exceptions [Sec. 36, GBL]:
1. Non-risk items; and
2. Loans in the form of fringe benefits.
Waiver 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]
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 (2017)]
8. Diligence Require of Banks
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)]
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)]
COMMERCIAL LAW
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. L66826 (1988)]
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. [BPI v. CA]
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)]
When the teller lost the passbook, the bank failed to
meet the high standards of integrity and performance.
[Consolidated Bank v. CA, G.R. No. 114286 (2011)]
As is failure to compare the signatures on the
withdrawal slip and signature cards. [PNB v. Pike, G.R.
No. 157845 (2005)]
Failure on the part of the bank to satisfy the degree of
diligence required of banks may warrant the award of
damages.
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:
• For disbursing funds to a dishonest employee
despite the employee’s failure to strictly abide
with the bank’s internal procedure. [Philippine
Bank of Commerce v. CA, G.R. No. 97626 (1997)]
• 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)]
• 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)].
Notwithstanding the degree of diligence required, a
bank is not expected to be infallible. [Prudential Bank
vs. CA, G.R. No. 125536 (2000)].
When the bank fails to credit funds deposited to the
depositor’s 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 nature of their relationship. [Simex
v. CA, G.R. No. 88013 (1990)]
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INTELLECTUAL
PROPERTY CODE
Commercial Law
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COMMERCIAL LAW
intellectual creations in the literary and artistic domain
protected from the moment of their creation.
Patentable inventions, on the other hand, 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 [Kho v. Court of
Appeals, 379 SCRA 410 (2002)].
VIII. INTELLECTUAL PROPERTY
CODE
A. Intellectual Property
Rights in General
3. Other Forms of Intellectual
1. Intellectual Property Rights
a. Related rights
a. Definition
This refer to
1. Moral Rights of authors and creators over their
works that entitles them to the right of attribution
and integrity (right against the mutilations and
distortion of their works and the right to alter
prior to, or to withhold it from publication);
2. Follow Up Rights or Rights to Proceeds in
Subsequent Transfers that are granted to
painters, sculptors, authors or composers over
their original manuscripts; and Neighboring
Rights (rights of Performers, Producers of Sound
recordings and Broadcasting Organizations)
Property
Intangible property rights granted by law to owners
of intellectual creations such as inventions, designs,
signs and names used in commerce, and literary and
artistic works.
b. Intellectual Property Rights
under the Intellectual Property
Code (RA 8293)
1.
2.
3.
4.
5.
6.
7.
Copyright and Related Rights;
Trademarks and Service Marks;
Geographic Indications;
Industrial Designs;
Patents;
Layout-Designs (Topographies) of Integrated
Circuits;
Protection of Undisclosed Information. [Sec. 4.1,
RA 8293]
2. The Difference Between
Copyright, Trademarks, and
Patent Lie in The Scope of
Protection
Trademark, copyright and patents are different
intellectual property rights that cannot be
interchanged with one another.
A trademark is 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. In relation
thereto, a trade name means the name or designation
identifying or distinguishing an enterprise.
Meanwhile, the scope of a copyright is confined to
literary and artistic works which are original
b. 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]
c. Industrial Design
Any composition of lines or colors or any threedimensional 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]
d. Layout Design (Topography) of
an integrated Circuit
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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COMMERCIAL LAW
e. Integrated Circuit
B. Patents
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]
1. Purpose of the Patent Law
f. Undisclosed Information
Information which:
a. 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;
b. Has a commercial value because it is secret; and
c. 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]
THREE-FOLD PURPOSE OF THE PATENT
LAW
a. To foster and reward invention;
b. To promote disclosures of inventions to
stimulate further innovation and to permit the
public to practice the invention once the patent
expires; and
c. The stringent requirements for patent protection
seek to ensure that ideas in the public domain
remain there for the free use of the public. [Pearl
and Dean vs. Shoemart, G.R. No. 148222 (2003)]
2. What are Patentable
a.
b.
c.
d.
Inventions;
Utility Model;
Industrial Designs; and
Lay-Out Designs (Topographies of Integrated
Circuits) [Note: this is actually a sui generis
regime but the amendment to RA 8293 placed
this in the Law on Patents]
a. Invention Patent
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 for registrability of Invention Patent
1. It must be novel;
2. It must be inventive; and
3. Industrially applicable.
1. Novelty
An invention shall not be considered new if it forms
part of a prior art. [Sec. 23, RA 8293]
PRIOR ART
This shall consist of:
a. 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]
b. The whole contents of an application for a
patent, utility model, or industrial design
registration, published in accordance with this
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Act, filed or effective in the Philippines, with a
filing or priority date that is earlier than the filing
or priority date of the application: Provided, That
the application which has validly claimed the
filing date of an earlier application under Section
31 of this Act, shall be prior art with effect as of
the filing date of such earlier application:
Provided further, That the applicant or the
inventor identified in both applications are not
one and the same. [Sec. 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:
a. The inventor
b. 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
c. 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. L45101 (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:
a. 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;
b. The mere discovery of any new property or new
use of a known substance; or
c.
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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]
b. Utility Model
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]
RA 8293 also removed substantive examination of
utility models.
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]
c. Industrial Designs
See Other Forms of Intellectual Property above.
RA 8293 also removed the substantive examination
of industrial design applications.
d. Lay-Out Designs
(Topographies) of Integrated
Circuits)
See Other Forms of Intellectual Property above.
3. Non-Patentable Inventions
The following shall be excluded from patent
protection:
a. Discoveries, scientific theories and mathematical
methods, and in the case of drugs and medicines,
the mere discovery of a new form or new
property of a known substance which does not
result in the enhancement of the known efficacy
of that substance, or the mere discovery of any
new property or new use for a known substance,
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or the mere use of a known process unless such
known process results in a new product that
employs at least one new reactant. Salts, esters,
ethers, polymorphs, metabolites, pure form,
particle size, isomers, mixtures of isomers,
complexes, combinations, and other derivatives
of a known substance shall be considered to be
the same substance, unless they differ
significantly in properties with regard to efficacy;
[Sec. 22.1, RA 8293 as amended by RA 9502]
b. Schemes, rules and methods of performing
mental acts, playing games or doing business, and
programs for computers; [Sec. 22.2, RA 8293]
c. Methods for treatment of the human or animal
body by surgery or therapy and diagnostic
methods practiced on the human or animal body.
This provision shall not apply to products and
composition for use in any of these methods;
[Sec. 22.3, RA 8293]
d. Plant varieties or animal breeds or essentially
biological process for the production of plants or
animals. This provision shall not apply to microorganisms
and
non-biological
and
microbiological processes; [Sec. 22.4, RA 8293]
e. Aesthetic creations; [Sec. 22.5, RA 8293]
f. Anything which is contrary to public order or
morality. [Sec. 22.6, RA 8293]
Cheaper Medicines Act: In addition to discoveries,
scientific theories and mathematical methods, the IP
Code now includes (as non-patentable), in case of
drugs and medicines:
a. The mere discovery of a new form or new
property of a known substance which does not
result in the enhancement of the known efficacy
of that substanc
b. The mere discovery of any new property or new
use of a known substance
c. 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]
4. Ownership of a Patent
2.
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employee’s regularly assigned duties [Sec. 30.2,
RA 8293].
In case of inventions created pursuant to a
commission, the person who commissions the
work shall own the patent [Sec. 30.1, RA 8293].
First-to-File rule
RA 8293 changed the basis of ownership of a patent
from First to Invent under RA 165 to First to File.
If two or more persons have made the invention
separately and independently of each other, the right
to the patent shall belong to the person who filed an
application for such invention, or where two or more
applications are filed for the same invention, to the
applicant who has the earliest filing date or, the
earliest priority date. [Sec. 29, RA 8293]
Right of Priority
An application for patent filed by any person who has
previously applied for the same invention in another
country which by treaty, convention, or law affords
similar privileges to Filipino citizens, shall be
considered filed as of the date of filing the foreign
application: Provided, That:
a. The local application expressly claims priority;
b. It is filed within 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 6 months from the date of filing in the
Philippines. [Sec. 31, RA 8293]
5. Term of a Patent
a. Term of Invention Patent
The term of a patent shall be 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]
b. Term of Utility Model
a. Right to a Patent
General Rule: The right to patent belongs to the
inventor, his heirs, or assigns. When two or more
persons have jointly made an invention, the right to a
patent shall belong to them jointly. [Sec. 28, RA 8293]
A utility model registration shall expire, without any
possibility of renewal, at the end of the 7th year after
the date of the filing of the application. [Sec. 109.3,
RA 8293]
Exception: Inventions created pursuant to employment
or a commissioned work
1. The employer has the right to the patent if the
invention is the result of the performance of the
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8. Rights Conferred by a Patent
c. Term of Industrial Design
The registration of an industrial design shall be for a
period of 5 years from the filing date of the
application. Renewable for not more than two
consecutive periods of 5 years each. [Sec. 118, RA
8293]
6. Cancellation of Patent
a. Grounds for Cancellation of a
Patent
Any interested person may 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]
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]
7. 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]
The action shall be filed within 1 year from the date
of publication made in accordance with Sections 44
and 51, respectively. [Sec. 70, RA 8293]
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]
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]
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]
Other rights
of
Patent
Owners
9. Limitations of Patent Rights
The owner of a patent has no right to prevent third
parties from performing, without his authorization,
the acts referred to in Section 71 hereof in the
following circumstances:
a. Owner’s Consent:
1. Domestic exhaustion - 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;
2. International exhaustion for drugs and medicines Provided, that in the case of drugs and
medicines, the limitations on patent rights
shall apply after a drug or medicine has been
introduced anywhere else in the world by the
patent owner, or by any party authorized to
use the invention [Sec. 72.1, RA 8293 as
amended by RA 9502]
b. Parallel Importation: The right to import the
drugs and medicines shall be available to any
government agency or any private third party;
[Sec. 72.1, RA 8293 as amended by RA 9502]
c. Non – Commercial: 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]
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d. Experimental Use: 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]
e. Drugs and Medicine: In the case of drugs and
medicines, where the act includes testing, using,
making or selling the invention including any data
related thereto, solely for purposes reasonably
related to the development and submission of
information and issuance of approvals by
government regulatory agencies required under
any law of the Philippines or of another country
that regulates the manufacture, construction, use
or sale of any product: Provided, That, in order
to protect the data submitted by the original
patent holder from unfair commercial use
provided in Article 39.3 of the Agreement on
Trade-Related Aspects of Intellectual Property
Rights (TRIPS Agreement), the Intellectual
Property Office, in consultation with the
appropriate government agencies, shall issue the
appropriate rules and regulations necessary
therein not later than 120 days after the
enactment of this law; [Sec. 72.4, RA 8293 as
amended by RA 9502]
f. Medicine Individual Preparation: 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]
g. Where the invention is used in any ship, vessel,
aircraft, or land vehicle of any other country
entering the territory of the Philippines
temporarily or accidentally: Provided, That such
invention is used exclusively for the needs of the
ship, vessel, aircraft, or land vehicle and not used
for the manufacturing of anything to be sold
within the Philippines.
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
COMMERCIAL LAW
been tampered, unlawfully modified, or infringed.
[Sec.159.4 RA 8293 as amended by RA 9502]
Prior User
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]
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 the
sections 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]
10. 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]
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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]
Doctrine of Patent Exhaustion (Sec. 72.1, RA
8293)
The patentee who has already sold his invention and
has received all the royalty and consideration for the
same will be deemed to have released the invention
from his monopoly. The invention thus becomes
open to use of the purchaser without further
restriction. [Adams v. Burke, in Notes on Selected
Commercial Laws, Catindig 2003 ed.]
11. Tests in Patent Infringement
Literal Infringement
In using literal infringement as a test, resort must be
had in the first instance to the words of the claim. To
determine whether the particular item falls within the
literal meaning of the patent claims, the court must
juxtapose the claims of the patent and the accused
product within the overall context of the claims and
specifications, to determine whether there is exact
identity of all material elements. [Godinez v. CA, G.R.
No. L-97343 (1993)]
The test is satisfied if:
a. The item that is being sold, made or used
conforms exactly to the patent claim of another;
b. One makes, uses or sells an item that has all the
elements of the patent claim of another plus
other elements.
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)]
The doctrine of equivalents thus requires satisfaction
of the function-means-and-result test, the patentee
having the burden to show that all three components
of such equivalency test are met. [Smith Klein Beckman
Corp. v. CA, G. R. No. 126627 (2003)]
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12. Criminal Liability for Patent
Infringement arises only
after a Final Judgment
Against the Infringer
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 6 months but not more
than 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 3 years from date of the
commission of the crime. [Sec. 84, RA 8293]
a. 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
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]
b. 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]
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Patent found invalid may be cancelled
In an action for infringement, if the court shall find
the patent or any claim to be invalid, it shall cancel the
same, and the Director of Legal Affairs upon receipt
of the final judgment of cancellation by the court,
shall record that fact in the register of the Office and
shall publish a notice to that effect in the IPO
Gazette. [Sec. 82, RA 8293]
Doctrine of File Wrapper Estoppel
Patentee is precluded from claiming as part of
patented product that which he had to excise or
modify in order to avoid patent office rejection, and
he may omit any additions he was compelled to add
by patent office regulations. [Advance Transformer Co. v.
Levinson 837 F.2d 1081(1988)]
c. Burden of Proof in Process
Patents
If the subject matter of a patent is a process of
obtaining a product, any identical product shall be
presumed to have been obtained through the use of
the patented process if the product is new or there is
substantial likelihood that the identical product was
made by the process and the owner of the patent has
been unable despite reasonable efforts, to determine
the process actually used. In ordering the defendant
to prove that the process to obtain the identical
product is different from the patented process, the
court shall adopt measures to protect, as far as
practicable, his manufacturing and business secrets.
[Sec. 76, RA 8293]
13. Licensing
a. 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.
4.
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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]
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:
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
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10.
11.
12.
13.
14.
15.
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arrangement due to reason(s) attributable to the
licensee; [Sec. 87.9, RA 8293]
Those which require payments for patents and
other industrial property rights after their
expiration, termination arrangement; [Sec. 87.10,
RA 8293]
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]
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]
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]
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]
Other clauses with equivalent effects. [Sec. 87.15,
RA 8293]
Effect of Non-compliance with any Provisions of
Secs. 87 and 88
The technology transfer arrangement shall
automatically be rendered unenforceable, unless said
technology transfer arrangement is approved and
registered with the Documentation, Information and
Technology Transfer Bureau under the provisions of
Section 91 on exceptional cases. [Sec. 92, RA 8293]
Right of Licensor
Unless otherwise provided in the technology transfer
agreement, the licensor shall have the right to:
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
2.
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foreign exchange earnings, employment
generation, regional dispersal of industries
and/or substitution with or use of local raw
materials
The case of BOI-registered companies with
pioneer status [Sec. 91, RA 8293]
b. Compulsory Licensing
Compulsory Licensing is the grant of the Director of
Legal Affairs of a license to exploit a patented
invention, even without the agreement of the patent
owner, in favor of any person who has shown his
capability to exploit the invention. [Sec. 93, Ra 8293
as amended by RA 9502]
Grounds
The Director General of the Intellectual Property
Office may grant a license to exploit a patented
invention, even without the agreement of the patent
owner, in favor of any person who has shown his
capability to exploit the invention, under any of the
following circumstances:
1. National emergency or other circumstances of
extreme urgency; [Sec. 93.1, RA 8293 as amended
by RA 9502]
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 anticompetitive; [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
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8.
INTELLECTUAL PROPERTY CODE
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]
Manufacture and export of drugs and medicines
to any country having insufficient or no
manufacturing capacity in the pharmaceutical
sector to address public health problems:
Provided, That, a compulsory license has been
granted by such country or such country has, by
notification or otherwise, allowed importation
into its jurisdiction of the patented drugs and
medicines from the Philippines in compliance
with the TRIPS Agreement. [Sec. 93-A.2, RA
8293 as amended by RA 9502]
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 4 years from the date of filing of the
application or 3 years from the date of the patent
whichever period expires last. [Sec. 94, RA 8293 as
amended by RA 9502]
Requirement to Obtain a License on Reasonable
Commercial Terms
General Rule: The license will only be granted after the
petitioner has made efforts to obtain authorization
from the patent owner on reasonable commercial
terms and conditions but such efforts have not been
successful within a reasonable period of time. [Sec.
95.1, RA 8293 as amended by RA 9502]
Exceptions: The requirement of authorization shall not
apply in the following cases:
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 terms, as determined by the Secretary
of the Department of Health. [Sec. 95.2, RA 8293
as amended by RA 9502]
Terms and Conditions of Compulsory License
1.
2.
3.
4.
5.
6.
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The scope and duration of such license shall be
limited to the purpose for which it was
authorized; [Sec. 100.1, RA 8293]
The license shall be non-exclusive; [Sec. 100.2,
RA 8293]
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]
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]
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]
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]
14. Assignment and
Transmission of Rights
An assignment may be of the entire right, title or
interest in and to the patent and the invention covered
thereby, or of an undivided share of the entire patent
and invention, in which event the parties become joint
owners thereof. An assignment may be limited to a
specified territory. [Sec. 104, RA 8293]
If two or more persons jointly own a patent and the
invention covered thereby, each joint owner shall be
entitled to personally make, use, sell, or import the
invention for his own profit. However, neither of the
joint owners shall be entitled to grant licenses or to
assign his right, title or interest or part thereof without
the consent of the other owner or owners, or without
proportionally dividing the proceeds with such other
owner or owners. [Sec. 107, RA 8293]
The assignment must be in writing and must be
notarized. [Sec. 105 RA 8293] It shall be void as
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against any subsequent purchaser or mortgagee for
valuable consideration and without notice, unless, it is
so recorded in the Office, within 3 months from the
date of said instrument, or prior to the subsequent
purchase or mortgage. [Sec. 106.2, RA 8293]
Trademark/
Service Mark
Tradename
Basis of Ownership
Prior use in Philippine
commerce
Registration
C. Trademarks
When Protected
1. Definition of Marks,
A mark needs to be
registered
Collective Marks, Trade
Names
A tradename may be
protected
even
if
unregistered
Remedies
a. 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]
Trademark
Any visible sign which
is adopted and used to
identify the source of
origin of goods, and
which is capable of
distinguishing
them
from goods emanating
from a competitor.
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Service Mark
Any visible sign capable
of distinguishing the
services of an enterprise
from the service of
other enterprises.
A trademark or service
mark owner can avail of
administrative, civil and
criminal remedies
Assignment
A trademark or service
mark can be assigned
independent of the
business
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)]
DIFFERENCES
BETWEEN
A
TRADEMARK/ SERVICE MARK AND A
TRADENAME UNDER THE IP CODE
A tradename can only
be assigned with the
business.
b. Functions of a Trademark
1.
2.
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]
A tradename owner
only has civil and
administrative remedies
3.
4.
5.
To point out distinctly the origin or ownership of
the goods and to which it is affixed;
To secure him, who has been instrumental in
bringing into the market a superior article of
merchandise, the fruit of his industry and skill;
To assure the public that they are producing the
genuine article;
To prevent fraud and imposition; and
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)]
c. Kinds of Marks; Spectrum of
Distinctiveness
Fanciful or “Coined” Marks
These are invented or “coined” words that do not
have any meaning and are made solely for the purpose
of the mark. They are considered “strong” marks for
purposes of registration and protection for being
inherently distinctive. Ex. “KODAK”
Arbitrary Marks
Common words used as marks, but are unrelated to
the good or service they represent. They neither
describe nor suggest the characteristic of the goods or
service, though they are considered highly distinctive
for purposes of registration. Ex. “APPLE”
Suggestive Marks
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Marks that hint or suggest the nature or quality of the
good or service without directly describing it. They
are “subtly descriptive” and are entitled to protection
despite lack of distinctiveness. Ex. “JAGUAR”
COMMERCIAL LAW
at its expiration upon payment of the prescribed fee
and upon filing of a request. [Sec. 145-146, RA 8293]
Descriptive Marks
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.j, RA 8239]
These are words that merely describe the product or
service or refer to their quality or characteristic.
General rule: Descriptive marks are not entitled to
protection and are too weak to function as a
trademark.
Exception: Doctrine of Secondary meaning, infra.
Examples: “ANG TIBAY,” “YELLOW PAGES”
Generic Marks
Generic Marks are those which constitute the name
of an article or substance; or comprise the genus of
which the particular product is a species of. [Societe Des
Produits Nestle v. CA, G.R. No. 112012, 2001]
These must remain in the public domain and can
never be registered as a trademark.
Examples: “SUGAR” for refined sugar, “KAPE” for
instant coffee, “WATER” for bottled water
2. Acquisition of Ownership of
Mark
While the IP Code expressly provides that the rights
to a mark shall be acquired through registration made
validly in accordance with law [Sec. 122, RA 8293],
the Supreme Court in 2 cases [Berris Agricultural Co.,
Inc. vs. Norvy Abyadang, G.R. No. 183404, 13 October
2010 ; E.Y. Industrial Sales, Inc. and Engracio Yap v. Shen
Dar Electricity and Machinery Co., Ltd.,
G.R.
No. 184850, 20 October 2010] held that
notwithstanding this express provision in the IP
Code, prior use is still the basis of trademark
ownership.
DURATION OF CERTIFICATE
A certificate of registration shall remain in force for
10 years and may be renewed for periods of 10 years
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f.
3. 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]
4. Non-Registrable Marks
A mark cannot be registered if it:
a. 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]
b. Consists of flags, coat of arms or other insignia
of the Philippines or any foreign country; [Sec.
123.1(b), RA 8293]
c. 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]
d. Is identical with a registered mark of another or a
mark with an earlier filing or priority date, in
respect of:
1. The same goods or services, or
2. Closely related goods or services, or
3. If it nearly resembles such a mark as to be
likely to deceive or cause confusion; [Sec.
123.1(d), RA 8293]
e. 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]
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]
g. 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]
h. Consists exclusively of signs that are generic for the
goods or services that they seek to identify; [Sec.
123.1(h), RA 8293]
i. 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]
j. 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]
k. 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]
l. Consists of color alone, unless defined by a given
form; [Sec. 123.1(l), RA 8293]
m. Is contrary to public order or morality. [Sec.
123.1(m), RA 8293]
Other instances when a mark may be registered:
a. When it is part of a composite mark, though there
should be a disclaimer and the person who
registers them will not acquire ownership thereto;
b. If they are contractions of or coined from generic
and descriptive terms;
c. If they are used in a fanciful or arbitrary manner;
d. Under the Doctrine of Secondary Meaning.
DOCTRINE OF SECONDARY MEANING
Only descriptive marks, shapes and colors may
acquire secondary meaning under RA 8293.
Secondary meaning is acquired when a descriptive
mark or a mark that consists of a shape or color
becomes distinctive because of its exclusive and
continuous use in Philippine commerce. 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 5
years before the date on which the claim of
distinctiveness is made. [Sec. 123.2, RA 8293]
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This doctrine is to the effect that a word or phrase
originally incapable of exclusive appropriation with
reference to an article of the market, because
geographically or otherwise descriptive, might
nevertheless have been used so long and so
exclusively by one producer with reference to his
article that, in that trade and to that branch of the
purchasing public, the word or phrase has come to
mean that the article was his product [Ang v. Teodoro,
G.R. No. L-48226 (1942)].
5. Use of Mark as a
Requirement
a. While RA 8293 No Longer
Requires Prior Use Before Filing
the Application, It Still Requires
Use of the Mark After Filing
COMMERCIAL LAW
registrable mark but such disclaimer shall not
prejudice or affect the applicant’s or owner’s rights
then existing or thereafter arising in the disclaimed
matter, nor such shall disclaimer prejudice or affect
the applicant’s or owner’s right on another application
of later date if the disclaimed matter became
distinctive of the applicant’s or owner’s goods,
business or services. [Sec. 126, RA 8293]
The basic purpose of disclaimers is to make of record,
that a significant element of a composite mark is not
being exclusively appropriated by itself apart from the
composite. [Rule 608, Rule on Trademarks]
DISCLAIMED WORDS
Words in a mark that are not being claimed for
exclusive use, including: 1. Generic terms; 2.
Descriptive words; and 3. Those that do not function
as part of the trademark. [Rule 608, Rule on
Trademarks]
RA 8293 no longer requires prior use before filing the
application (i.e., it shifted to an intent to use
system). However, the law still requires use of the
mark after filing.
Note: Disclaimed words can later on be registered as
part of the trademark if it acquires distinctiveness.
Declaration of Actual Use (DAU)
The applicant or the registrant is required to file a
Declaration of Actual Use after filing, registration and
renewal.
1.
Note: Failure to file declaration of actual use
automatically results in the denial of the registration
or the cancellation of the registration by operation of
law.
When to File Declaration of Actual Use
Under the IPC or RA 8293:
1. Within 3 years from the application date (3rd
Year DAU); and
2. Within 1 year from the 5th anniversary of the
registration of the mark (5th Year DAU); and
3. Within 1 year from the date of renewal of the
registration of the mark.
Trademarks registered under RA 166:
1. Within 1 year from the 5th anniversary of
registration of the mark (5th Year DAU);
2. Within 1 year from the 10th anniversary of
registration of the mark (10th Year DAU); and
3. Within 1 year from the 15th anniversary of
registration of the mark (15th Year DAU).
DISCLAIMERS
The Office may allow or require the applicant to
disclaim an unregistrable component of an otherwise
b. Non-Use of Mark When Excused
2.
3.
4.
5.
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]
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]
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]
The use of mark by a company related to the
applicant or registrant
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]
Declaration of Non-Use (DNU)
A registrant is allowed to keep the registration active
if such registrant is not able to comply with the
requirements of DAU for non-use of the mark.
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In the following cases, a Declaration of Non-Use may
be filed within 3 years from filing of the application
or within the extension period if a request for
extension
was timely made:
1. Where the applicant or registrant is prohibited
from using the mark in commerce because of a
requirement imposed by another government
agency prior to putting the goods in the market
or rendering of the services;
2. Where a restraining order or injunction was
issued by the Bureau of Legal Affairs, the courts
or quasi-judicial bodies prohibiting the use of the
mark; or
3. Where the mark is the subject of an opposition
or cancellation case.
The Declaration of Non-Use shall be under oath and
shall clearly state the facts prohibiting the actual use
of the mark in commerce. The corresponding fee
must also be paid upon filing of the declaration. [Rule
206 as amended by Office Order No. 56 (2013)]
6. Tests To Determine
Confusing Similarity
between Marks
a. Dominancy Test
The dominancy test considers the dominant features
in the competing marks in determining whether they
are confusingly similar. Under the dominancy test,
courts give greater weight to the similarity of the
appearance of the product arising from the adoption
of the dominant features of the registered mark,
disregarding minor differences. Courts will consider
more the aural and visual impressions created by the
marks in the public mind, giving little weight to
factors like prices, quality, sales outlets and market
segments. [McDonald’s Corporation v. L.C. Big Mak
Burger, Inc., et al., G.R. No. 143993 (2004)]
The dominancy test is now embodied in Sec. 155 of
the IPL and is therefore the controlling test. [Ibid]
b. 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
COMMERCIAL LAW
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)]
c. Doctrine of Related
Goods/Services
1.
2.
3.
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.
The use of identical marks on non-competing but
related goods may likely cause confusion.
Corollarily, the use of identical marks on noncompeting and unrelated goods is not likely to
cause confusion.
In resolving whether goods are related, several factors
come into play:
1. The business (and its location) to which the
goods belong
2. The class of product to which the goods belong;
3. The product's quality, quantity, or size, including
the nature of the package, wrapper or container;
4. The nature and cost of the article;
5. The descriptive properties, physical attributes or
essential characteristics with reference to their
form, composition, texture or quality;
6. The purpose of the goods;
7. Whether the article is bought for immediate
consumption, that is, day-to-day household
items;
8. The fields of manufacture;
9. The conditions under which the article is usually
purchased; and
10. The channels of trade through which the goods
flow, how they are distributed, marketed,
displayed and sold [Mighty Corp. v. E&J Gallo,
G.R. No. 154342, Jul 14, 2004]
It has been held that where the products are different,
the prior owner’s chance of success is a function of
many variables, such as the:
1. Strength of his mark;
2. Degree of similarity between the two marks;
3. Reciprocal of defendant’s good faith in adopting
its own mark;
4. Quality of defendant’s product;
5. Proximity of the products;
6. Likelihood that the prior owner will bridge the
gap;
7. Actual confusion; and
8. Sophistication of the buyers.
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7. Well-Known Marks
A well-known mark is a mark which a competent
authority of the Philippines has designated to be wellknown internationally and in the Philippines.
In determining whether a mark is well-known,
account shall be taken of the knowledge of the
relevant sector of the public, rather than the public at
large, including knowledge in the Philippines which
has been obtained as a result of the promotion of the
mark. [Sec. 123.1(e), RA 8293]
a. Determinants
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 or services and owned by others
[Rule 102, Rule on Trademarks]
Note: The determinants need not concur.
b. Protection Extended to WellKnown Marks
COMMERCIAL LAW
persons or entities cannot use the mark even for
unrelated goods, provided that:
1. The use of the mark in relation to those goods or
services would indicate a connection between
those goods or services, and the owner of the
registered mark; and
2. That the interests of the owner of the registered
mark are likely to be damaged by such use.
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
(Provided, the Philippine application is filed within 6
months from the filing of the foreign application).
[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
applicant’s 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)]
c. Rights Conferred By a WellKnown Mark
1.
2.
Right to be protected whether or not it is
registered in the Philippines;
If registered under Sec. 123.1(e), extension of
protection to goods and services which are not
similar to those in respect of which the mark is
registered, provided that:
a. The use of the mark in relation to unrelated
or dissimilar goods or services would
indicate a connection between those goods
or services and the owner of the mark; and
b. The interests of the owner of the registered
mark are likely to be damaged by such use.
[Sec. 147.2, RA 8293]
If the well-known mark is registered in the
Philippines: A mark cannot be registered if it is
identical with, or confusingly similar to, or constitutes
a translation of an internationally well-known mark
for identical goods or services.
8. Rights Conferred by
If the well-known mark is registered in the
Philippines: Under the Theory of Dilution, other
Except in cases of importation of drugs and
medicines allowed under Section 72.1 of this Act and
Registration
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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]
a. Limitations on Such Rights
1.
2.
Duration (except that, inasmuch as the
registration of a trademark could be renewed
every 10 years, a trademark could conceivably
remain registered forever);
Territorial (except well-known marks).
Registration of the mark shall not confer on the
registered owner the right to preclude third parties
from using bona fide their names, addresses,
pseudonyms, a geographical name, or exact
indications concerning the kind, quality, quantity,
destination, value, place of origin, or time of
production or of supply, of their goods or services:
Provided, That such use is confined to the purposes
of mere identification or information and cannot
mislead the public as to the source of the goods or
services. [Sec. 148, RA 8293]
b. Assignment and Transfer of
Application and Registration
1.
2.
3.
4.
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]
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]
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]
Assignments and transfers of registrations of
marks shall be recorded at the Office on payment
of the prescribed fee; assignment and transfers of
5.
COMMERCIAL LAW
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]
Assignments and transfers shall have no effect
against third parties until they are recorded at the
Office. [Sec. 149.5, RA 8293]
Any license contract concerning the registration of a
mark, or an application therefor, shall provide for
effective control by the licensor of the quality of the
goods or services of the licensee in connection with
which the mark is used. If the license contract does
not provide for such quality control, or if such quality
control is not effectively carried out, the license
contract shall not be valid. [Sec. 150.1, RA 8293]
c. 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]
9. Infringement and Remedies
a. 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 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]
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INTELLECTUAL PROPERTY CODE
ELEMENTS
OF
TRADEMARK
INFRINGEMENT
1. The validity of the mark;
2. The plaintiff’s 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 –
1. Confusion of goods (product confusion) and
2. Confusion of business (source or origin
confusion).
While there is confusion of goods when the products
are competing, confusion of business exists when the
products are non-competing but related enough to
produce confusion or affiliation. [McDonald’s
Corporation v. L.C. Big Mak Burger, Inc., et al., G.R. No.
143993 (2004)]
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:
1. The resemblance between the trademarks;
2. The similarity of the goods to which the
trademarks are attached;
3. The likely effect on the purchaser; and
4. The registrant’s express or implied consent and
other fair and equitable considerations. [Mighty
Corporation v. E. & J. Gallo Winery, G.R. No.
154342 (2004)]
The mere fact that one person has adopted and used
a trademark on his goods would not prevent the
adoption and use of the same trademark by others on
unrelated articles of a different kind. [Taiwan Kolin v.
Kolins Electronics Co., G.R. No. 209843 (2015)]
The protection to which the owner of a trademark is
entitled extends to cases in which the use of by a
junior appropriator of a trademark of trade name is
likely to lead to a confusion of source, as where
prospective purchasers would be misled into thinking
that the complaining party has extended his business
into the field or is in any way connected with the
activities of the infringer; or when it forestalls the
normal potential expansion of the business. [Dermaline
v. Myra Pharmaceuticals, Inc., G.R. No. 190065 (2010)]
In order to bring a civil action for infringement, it is
not required that there is an actual sale of the goods
COMMERCIAL LAW
or services using the infringing material [Sec. 155.2,
RA 8293]. Infringement takes place upon the mere
use or reproduction of the registered mark.
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)]
b. 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]
c. Infringement of Name and
Marks of Ownership Stamp on
Containers
"Stamped or marked container" means, any
container of goods upon which a mark is impressed
or molded which will give a distinctive effect,
provided that the mark cannot be deleted or removed
from the container. The stamp or mark on the
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INTELLECTUAL PROPERTY CODE
COMMERCIAL LAW
container must be legible and visible for registration.
[Rule 1001, Rule on Trademarks]
1.
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]
2.
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]
e. Requirement of Notice
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. 1209619(1997)]
3.
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
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]
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]
f. Other Remedies Available:
d. 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]
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.
2.
3.
4.
5.
Injunction [Sec. 156.4, RA 8293];
Impounding of sales invoices and other
documents [Sec. 156.2, RA 8293];
Double damages in case of actual intent to
defraud or to mislead [Sec. 156.3, RA 8293];
Court order for the disposal or destruction of the
infringing goods [Sec. 157, RA 8293];
Criminal Action;
g. 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]
h. Limitations to Actions for
Infringement
The remedies given to the owner of a right infringed
shall be limited as follows:
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U.P. LAW BOC
1.
2.
3.
4.
5.
INTELLECTUAL PROPERTY CODE
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]
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]
Where the infringement complained of is
contained in or is part of paid advertisement in a
newspaper, magazine, or other similar periodical
or in an electronic communication, the remedies
of the owner of the right infringed as against the
publisher or distributor of such newspaper,
magazine, or other similar periodical or electronic
communication shall be limited to an 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]
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]
COMMERCIAL LAW
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:
a. Any person, who is selling his goods and gives
them the general appearance of goods of another
manufacturer or dealer, either as to the goods
themselves or in the wrapping of the packages in
which they are contained, or the devices or words
thereon, or in any other feature of their
appearance, which would be likely to influence
purchasers to believe that the goods offered are
those of a manufacturer or dealer, other than the
actual manufacturer or dealer, or who otherwise
clothes the goods with such appearance as shall
deceive the public and defraud another of his
legitimate trade, or any subsequent vendor of
such goods or any agent of any vendor engaged
in selling such goods with a like purpose; [Sec.
168.3(a), RA 8293]
b. Any person who by any artifice, or device, or who
employs any other means calculated to induce the
false belief that such person is offering the
services of another who has identified such
services in the mind of the public; [Sec. 168.3(b),
RA 8293]
c. Any person who shall make any false statement
in the course of trade or who shall commit any
other act contrary to good faith of a nature
calculated to discredit the goods, business or
services of another. [Sec. 168.3(c), RA 8293]
The elements of an action for unfair competition are:
a. Confusing similarity in the general appearance of
the goods, and
b. 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. [McDonald’s
Corporation v. L.G. Big Mak Burger, Inc., et al., G.R. No.
143993 (2004)]
10. Unfair Competition
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U.P. LAW BOC
Infringement of
Trademark
INTELLECTUAL PROPERTY CODE
Unfair Competition
Unauthorized use of a Passing off of one’s
trademark
goods as those of another
Fraudulent intent
unnecessary
is Fraudulent
essential
intent
is
Prior registration of the Registration
is
not
trademark
is
a necessary
prerequisite to the action
[In and Out Burger vs. Sehwani, G.R. No. 179127 (2008)]
The law on unfair competition is broader and more
inclusive than the law on trademark infringement.
The latter is more limited but it recognizes a more
exclusive right derived from the trademark adoption
and registration by the person whose goods or
business is first associated with it. Hence, even if one
fails to establish his exclusive property right to a
trademark, he may still obtain relief on the ground of
his competitor’s 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)]
11. 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)]
WHAT MAY NOT BE USED AS TRADE
NAME
a. If by its nature or the use to which the name or
designation may be put, it is contrary to public
order or morals.
b. If it is liable to deceive trade circles or the public
as to the nature of the enterprise identified by the
name
c. 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]
COMMERCIAL LAW
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.
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)]
12. 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]
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:
a. That only the registered owner uses the mark; or
b. That he uses or permits its use in contravention
of the agreements referred to in Subsection 166.2;
or
c. That he uses or permits its use in a manner liable
to deceive trade circles or the public as to the
origin or any other common characteristics of the
goods or services concerned. [Sec. 167.3, RA
8293]
The registration of a collective mark, or an
application therefor shall not be the subject of a
license contract. [Sec. 167.4, RA 8293]
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D. Copyright
COMMERCIAL LAW
b. Protection Extends Only to the
Expression of an Idea, Not the
Idea Itself
1. Definition
Copyright or economic rights shall consist of the
exclusive right to carry out, authorize or prevent the
following acts:
a. Reproduction of the work or substantial portion
of the work;
b. Dramatization,
translation,
adaptation,
abridgment,
arrangement
or
other
transformation of the work;
c. The first public distribution of the original and
each copy of the work by sale or other forms of
transfer of ownership;
d. Rental of the original or a copy of an audiovisual
or cinematographic work, a work embodied in a
sound recording, a computer program, a
compilation of data and other materials or a
musical work in graphic form, irrespective of the
ownership of the original or the copy which is the
subject of the rental;
e. Public display of the original or a copy of the
work;
f. Public performance of the work; and
g. Other communication to the public of the work.
[Sec. 177, RA 8293]
2. Basic Principles
a. Works are Protected by the Sole
Fact of Their Creation
PRINCIPLE
OF
AUTOMATIC
PROTECTION
Copyright is vested from the very moment of
creation. [Sec. 172.2, RA 8293]
The enjoyment and exercise of copyright, including
moral rights, shall not be the subject of any formality;
such enjoyment and such exercise shall be
independent of the existence of protection in the
country of origin of the work. [Article 5(2), Berne
Convention for the Protection of Literary and Artistic Works]
The Denicola Test in intellectual property law states
that if design elements of an article reflect a merger of
aesthetic and functional considerations, the artistic
aspects of the work cannot be conceptually separable
from the utilitarian aspects; thus, the article cannot be
copyrighted.
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]
c. 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]
d. Copyright is a Statutory Right.
Copyright, in the strict sense of the term is purely a
statutory right. Being a mere statutory grant, the rights
are limited to what the statute confers. It may be
obtained and enjoyed only with respect to the subjects
and by the persons, and on terms and conditions
specified in the statute. Accordingly, it can cover only
the works falling within the statutory enumeration or
description. [Pearl and Dean vs. Shoemart, G.R. No.
148222 (2003)]
3. Copyrightable Works
a. 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:
1. Books, pamphlets, articles and other writings;
2. Periodicals and newspapers;
3. Lectures, sermons, addresses, dissertations
prepared for oral delivery, whether or not
reduced in writing or other material form;
4. Letters;
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U.P. LAW BOC
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
INTELLECTUAL PROPERTY CODE
Dramatic or dramatico-musical compositions;
choreographic works or entertainment in dumb
shows;
Musical compositions, with or without words;
Works of drawing, painting, architecture,
sculpture, engraving, lithography or other works
of art; models or designs for works of art;
Original ornamental designs or models for
articles of manufacture, whether or not
registrable as an industrial design, and other
works of applied art;
Illustrations, maps, plans, sketches, charts and
three-dimensional works relative to geography,
topography, architecture or science;
Drawings or plastic works of a scientific or
technical character;
Photographic works including works produced
by a process analogous to photography; lantern
slides;
Audiovisual works and cinematographic works
and works produced by a process analogous to
cinematography or any process for making audiovisual recordings;
Pictorial illustrations and advertisements;
Computer programs; and
Other literary, scholarly, scientific and artistic
works [Sec. 172.1, RA 8293]
When 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)]
Originality is not determined by novelty, aesthetic
merit or ingenuity but that it is an independent
creation.
coordination or arrangement of their contents.
[Sec. 173.1, RA 8293]
Derivative works are protected as new works
provided they shall not:
1. Affect the force of any subsisting copyright upon
the original works employed or any part thereof;
or
2. 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 IP 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]
4. Non-Copyrightable Works
a. Unprotected Subject Matter
1.
2.
Works are protected irrespective of their mode or
form of expression. [Sec. 172.2, RA 8293]
3.
b. Derivative Works
4.
5.
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
COMMERCIAL LAW
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;
News of the day and other miscellaneous facts
having the character of mere items of press
information;
Any official text of a legislative, administrative or
legal nature, as well as any official translation
thereof;
Pleadings;
Original decisions of courts and tribunals (Note:
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]
Television newscasts are subject to copyright.
Although news or the events themselves are not
copyrightable, expression of the news particularly
when it underwent a creative process is entitled to
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INTELLECTUAL PROPERTY CODE
copyright protection. [ABS-CBN Corp. vs. Gozon, G.R.
No. 195956 (2015)]
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 vs. Rural Telephone Services,
499 U.S. 340 (1991)]
b. Works of the Government of The
Philippines
Work of the Government of the Philippines
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]
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]
COMMERCIAL LAW
c. Works of the Public Domain
These include works whose term of copyright has
expired.
d. 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.
5. Rights of Copyright Owner
a. 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
This includes the right to control the erection of any
building which reproduces the whole or a substantial
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INTELLECTUAL PROPERTY CODE
part of the work either in its original form or in any
form recognizably derived from the original:
Provided, That the copyright in any such work shall
not include the right to control the reconstruction or
rehabilitation in the same style as the original of a
building to which that copyright relates. [Sec. 186, RA
8293]
Communication to the Public of Copyrighted
Works
This includes point-to-point transmission of a work,
including video on demand, and providing access to
an electronic retrieval system, such as computer
databases, servers, or similar electronic storage
devices. Broadcasting, rebroadcasting, retransmission
by cable, and broadcast and retransmission by satellite
are all acts of “communication to the public” within
the meaning of the IPC. [Rule 11, Copyright
Safeguards and Regulations]
First Public Distribution of Work
An exclusive right of first distribution of work
includes all acts involving distribution, specifically
including the first importation of an original and each
copy of the work into the jurisdiction of the Republic
of the Philippines. [Rule 12, Copyright Safeguards and
Regulations]
Civil Code Provisions
Intellectual Creation
on
Ownership
of
Art. 721, NCC. 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. 722, 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.
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.
COMMERCIAL LAW
Art. 723, 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.
b. 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)]
c. 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 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
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paragraphs shall have the exclusive right of making a
collection of his works. [Sec. 176.2, Ra 8293]
WAIVER OF MORAL RIGHTS
While Moral Rights cannot be assigned or licensed, it
can be waived. [Sec. 198, RA 8293]
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]
The right of an author under Section 193.1. shall last
during the lifetime of the author and in perpetuity
after his death while the rights under Sections 193.2.
193.3. and 193.4. shall be coterminous with the
economic rights. [Sec. 198, RA 8293 as amended by
RA 10372]
d. Rights to Proceeds on
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 50 years after his death. [Sec.
200, RA 8293]
Works not covered
Prints, etchings, engravings, works of applied art, or
works of similar kind wherein the author primarily
derives gain from the proceeds of reproductions. [Sec.
201, RA 8293]
COMMERCIAL LAW
e. Related Rights (Neighboring
Rights)
Performer’s 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]
Such right shall be maintained and exercised 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 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
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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]
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
This 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)]
COMMERCIAL LAW
Limitations on Protection
Sections 203, 208 and 209 shall not apply where the acts
referred to in those Sections are related to:
1. The use by a natural person exclusively for his
own personal purposes;
2. Using short excerpts for reporting current events;
3. Use solely for the purpose of teaching or for
scientific research; and
4. Fair use of the broadcast subject to certain
conditions. [Sec. 212, RA 8293]
The issue in this case is whether or not the playing
and signing of musical compositions, which have
been copyrighted under the provisions of the
copyright law, inside the restaurant constitute a
performance for profit? – The Court ruled that the
word “perform” as used in the Act has been applied
to one who plays a musical composition on a piano,
thereby producing in the air sound waves which are
heard as a music… and if the instrument he plays on
is a piano plus a broadcasting apparatus, so that the
waves are thrown out, not only upon the air but upon
others, then he also performing a musical
composition. In relation thereto it has been held that
the playing of music in dine and dance establishments
which was paid for by the public in purchases of food
and drink constitute performance for public. The
music provided for is for the purpose of entertaining
and amusing customers in order to make the
establishment more attractive and desirable. The
expenses entailed thereby are added to the overhead
of the restaurant which are either eventually charged
to the price of the food and drink or the overall total
of additional income produced by the bigger volume
of business which the entertainment was
programmed to attract. Nevertheless, there is no
infringement of copyright law as the composers in
this case waived their right in favor of the public
when they allowed their intellectual creations to
become property of public domain. [Filipino Society of
Composers vs. Benjamin Tan, G.R. NO. L-36402 (1987)]
Term of Protection
Works
Term
50 years from the end of the
For performances
year in which the performance
not incorporated in
took place [Sec. 215.1(a), RA
recordings
8293]
For sound or image
and
sound
recordings and for
performances
incorporated
therein
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50 years from the end of the
year in which the recording
took place. [Sec. 215.1(b), RA
8293]
U.P. LAW BOC
Works
INTELLECTUAL PROPERTY CODE
Term
Work
20 years from the date the
broadcast took place [Sec.
215.2, RA 8293]
Broadcasts
Letters
Copyright
a. Ownership of Copyright
Ownership
Single Creator of Belongs to the author of the work
an Original 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 the
Works of Joint work consists of parts that can be
Authorship
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
employer. However, belongs to
during the course
the employer if the work is in the
of employment
performance of the employee’s
regular duties unless there is an
agreement to the contrary. [Sec.
178.3, RA 8293; Asked in ‘08]
The person who commissioned
Work
the work holds ownership of the
commissioned by work per se, but copyright
a person other remains with the creator unless
than
the there was a stipulation to the
employer
contrary. [Sec. 178.4, RA 8293;
Asked in ‘95, ‘04]
Audio
works
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
visual producers shall exercise the
copyright as may be required for
the exhibition of the work, except
for the right to collect license fees
for the performance of musical
compositions in the work. [Sec.
178.5, RA 8293]
Ownership
Belongs to the writer, but the
court may authorize their
publication or dissemination of
the public good or interest of
justice requires, pursuant to Art.
723, New Civil Code. [Sec. 178.6,
RA 8293]
6. Rules on Ownership of
Work
COMMERCIAL LAW
Publishers are deemed to
represent the authors, unless the
Anonymous and contrary
appears,
the
pseudonymous pseudonyms or adopted names
works
leave no doubt as to the author’s
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]
b. Duration of Copyright
Works
Term
Original Literary and Lifetime of author and for
Artistic Works including 50 years after his death
Posthumous Works
[Sec. 213.1, RA 8293]
Derivative
Works Lifetime of author and for
including Posthumous 50 years after his death
Works
[Sec. 213.1, RA 8293]
Lifetime of the last
surviving author and for
50 years after his death
[Sec. 213.2, RA 8293]
Joint Authorship
50 years from date of first
Anonymous
or
lawful publication [Sec.
Pseudonymous Works
213.3, RA 8293]
25 years from date of
making [Sec. 213.4, RA
8293]
Applied Art
Published Photographic 50 years from publication
Works
[Sec. 213.5, RA 8293]
Unpublished
Photographic Works
50 years from the making
[Sec. 213.5, RA 8293]
Published Audio-visual 50 years from publication
Works
[Sec. 213.6, RA 8293]
Unpublished
visual Works
Page 285 of 330
Audio- 50 years from the making
[Sec. 213.6, RA 8293]
U.P. LAW BOC
INTELLECTUAL PROPERTY CODE
COMMERCIAL LAW
e. Collective Management
Organizations (CMO)
c. 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]
d. 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 or more persons jointly own a
copyright or any part thereof, neither of the owners
shall be entitled to grant licenses without the prior
written consent of the other owner or owners. [Sec.
180.3, RA 8293]
The copyright is distinct from the property in the
material object subject to it. Consequently, the
transfer, assignment or licensing of the copyright shall
not itself constitute a transfer of the material object.
Nor shall a transfer or assignment of the sole copy or
of one or several copies of the work 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]
CMOs are entities that manage the bundle of
copyrights that their members own by providing the
legal platform to efficiently enforce their intellectual
property rights.
A group of artists, writers, composers and other
creators, or copyright/related rights holders whose
primary purpose is to collectively manage copyright
and/or related rights. including any or all of the
following activities:
1. Negotiation with and grant of licenses to users of
protected literary, scholarly, scientific and artistic
works, derivative works, performances, sound
recordings, audiovisual works and broadcasts;
2. Collection of royalties and other forms of
remuneration for the use of protected literary,
scholarly, scientific and artistic works, derivative
works, performances, sound recordings,
audiovisual works and broadcasts;
3. Collection of proceeds In subsequent transfers of
the originals of paintings, sculptures and
manuscripts;
4. Collection of additional remuneration for
subsequent communication or broadcast of a
performance;
5. Collection of single equitable remuneration for
the broadcast, other communication to the public
or public performance of a sound recording; and
6. Distribution of the abovementioned collections
to the rights holders [Office Order 13-173
s.2013]
7. Limitations on Copyright
DOCTRINE OF FAIR USE
The fair use of copyrighted work for criticism, news
reporting, teaching (including multiple copies for classroom
use), research and similar purposes is not an
infringement of copyright.
A privilege, in persons other than the owner of the
copyright, to use the copyrighted material in a
reasonable
manner
without
his
consent,
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notwithstanding the monopoly granted to the owner
by the copyright. It is meant to balance the
monopolies enjoyed by the copyright owner with the
interests of the public and of society.
Decompilation
Refers to the reproduction of the code and translation
of the forms of the computer program to achieve the
inter-operability of an independently created
computer program with other programs. This may
also constitute fair use. [Sec. 185.1, RA 8293]
The fact that a work is unpublished shall not by itself
bar a finding of fair use if such finding is made upon
consideration of all the above factors. [Sec. 185.2, RA
8293]
Factors to consider in determining fair Use
a. The purpose and character of the use, including
whether such use is of a commercial nature or is
for non-profit educational purposes;
b. The nature of the copyrighted work;
c. The amount and substantiality of the portion
used in relation to the copyrighted work as a
whole; and
d. 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)]
Commercial use of the copyrighted work can be
weighed against fair use. [ABS–CBN Corp. vs. Gozon,
G.R. No. 195956 (2015)]
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)]
COMMERCIAL LAW
8. Copyright infringement
Infringement of Copyright
The IP Code was amended to expand infringement
not only to cover direct infringement but also third
party infringement:
SEC. 216. Infringement. - A person infringes a
right protected under this Act when one:
a. Directly commits an infringement;
b. Benefits from the infringing activity of
another person who commits an
infringement if the person benefiting has
been given notice of the infringing activity
and has the right and ability to control the
activities of the other person;
c. With knowledge of infringing activity,
induces, causes or materially contributes to
the infringing conduct of another.
It also includes the act of any person who at the time
when copyright subsists in a work has in his
possession an article which he known, or ought to
know, to be an infringing copy of the work f or the
purpose of:
a. Selling, letting for hire, or by way of trade
offering or exposing for sale, or hire, the article
b. Distributing the article for purpose of trade, or
for any other purpose to an extent that will
prejudice the rights of the copyright owner in the
work; or
c. Trade exhibit of the article in public. [Sec. 217.3,
RA 8293]
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,
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U.P. LAW BOC
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assembling, packaging to marketing, including the
mere offering for sale of counterfeit goods. [Microsoft
Corp vs. Maxicorp Inc., G.R. No. 140946 (2004)]
Knowledge of infringement is material only when a
person is charged of aiding and abetting a copyright
infringement. The liability for copyright infringement
is in in the nature of strict liability. It does not require
mens rea or culpa. [ABS–CBN Corp vs. Gozon, G.R.
No. 195956 (2015)]
The
following
shall
NOT
constitute
infringement of copyright:
a. Recitation or performance of a work once it has
been made accessible to the public if (1) privately
done AND free of charge OR (2) strictly for a
charitable or religious institution; [Sec. 184.1(a),
RA 8293]
b. Making of quotations from a published work: (1)
compatible with fair use, (2) extent is justified by
the purpose, (3) source and name of the author,
appearing on work, must be mentioned; [Sec.
184.1(b), RA 8293]
c. Reproduction or communication to the public by
mass media of articles on current political, social,
economic, scientific or religious topic, lectures,
addresses and other works, delivered in public:
(1) for information purposes, (2) not expressly
reserved, and (3) source is already indicated; [Sec.
184.1(c), RA 8293]
d. Reproduction and communication to the public
of literary, scientific or artistic works as part of
reports of current events by means of
photography, cinematography or broadcasting to
the extent necessary for the purpose; [Sec.
184.1(d), RA 8293]
e. Inclusion of a work in a publication, broadcast or
other communication to the public, sound
recording or film if made by way of illustration
for teaching purposes compatible with fair use
and the source and the name of the author
appearing on work, must be mentioned; [Sec.
184.1(e), RA 8293]
f. Recording made in schools, universities, or
educational institutions of a work included in a
broadcast for the use of schools, universities or
educational institutions. Such recording must be
deleted within a reasonable period; such
recording may not be made from audio-visual
works which are part of the general cinema,
repertoire of feature films except of brief
excerpts of the work; [Sec. 184.1(f), RA 8293]
g. Making of ephemeral recordings; (1) by a
broadcasting organization, (2) by means of its
work or facilities, (3) for use in its own broadcast;
[Sec. 184.1(g), RA 8293]
COMMERCIAL LAW
h. 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]
i. Public performance or the communication to the
public of a work in a place where no admission
fee is charged by a club on institution for
charitable or educational purpose only and the
aim is not profit-making; [Sec. 184.1(i), RA 8293]
j. Public display of the original or a copy of the
work not made by means of a film, slide,
television, image or otherwise on screen or by
means of any other device or process either the
work has been published, sold, given away, or
transferred to another person by the author or his
successor in title; [Sec. 184.1(j), RA 8293]
k. Use made of a work for the purpose of any
judicial proceedings or for the giving of
professional advice by a legal practitioner. [Sec.
184.1(k), RA 8293]
l. The reproduction or distribution of published
articles or materials in a specialized format
exclusively for the use of the blind, visually- and
reading-impaired persons: Provided, That such
copies and distribution shall be made on a
nonprofit basis and shall indicate the copyright
owner and the date of the original publication.
[Sec. 184.1(l), RA 8293 as amended by RA 10372]
Reproduction of Published Work
General Rule: The private reproduction of a published
work in a single copy, where the reproduction is made
by a natural person exclusively for research and
private study, shall be permitted, without the
authorization of the owner of copyright in the work.
[Sec. 187.1, RA 8293]
Exceptions: Such permission shall not extend to:
a. A work of architecture in the form of building or
other construction;
b. An entire book, or a substantial part thereof, or
of a musical work in graphic form by
reprographic means;
c. A compilation of data and other materials;
d. A computer program except as provided in
Section 189; and
e. Any work in cases where reproduction would
unreasonably conflict with a normal exploitation
of the work or would otherwise unreasonably
prejudice the legitimate interests of the author.
[187.2, RA 8293]
Reprographic Reproduction by Libraries
Any library or archive whose activities are not for
profit may, without the authorization of the author of
copyright owner, make a single copy of the work by
reprographic reproduction:
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a.
Where the work by reason of its fragile character
or rarity cannot be lent to user in its original form;
b. Where the works are isolated articles contained in
composite works or brief portions of other
published works and the reproduction is
necessary to supply them, when this is considered
expedient, to persons requesting their loan for
purposes of research or study instead of lending
the volumes or booklets which contain them; and
c. Where the making of such a copy is in order to
preserve and, if necessary in the event that it is
lost, destroyed or rendered unusable, replace a
copy, or to replace, in the permanent collection
of another similar library or archive, a copy which
has been lost, destroyed or rendered unusable
and copies are not available with the publisher.
[Sec. 188.1, RA 8293]
It shall not be permissible to produce a volume of a
work published in several volumes or to produce
missing tomes or pages of magazines or similar works,
unless the volume, tome or part is out of stock:
Provided, That every library which, by law, is entitled
to receive copies of a printed work, shall be entitled,
when special reasons so require, to reproduce a copy
of a published work which is considered necessary for
the collection of the library but which is out of stock.
[Sec. 188.2, RA 8293]
Reproduction of Computer Program
The reproduction in one back-up copy or adaptation
of a computer program shall be permitted, without
the authorization of the author of, or other owner of
copyright in, a computer program, by the lawful
owner of that computer program: Provided, That the
copy or adaptation is necessary for:
a. The use of the computer program in conjunction
with a computer for the purpose, and to the
extent, for which the computer program has been
obtained; and
b. Archival purposes, and, for the replacement of
the lawfully owned copy of the computer
program in the event that the lawfully obtained
copy of the computer program is lost, destroyed
or rendered unusable. [Sec. 189.1, RA 8293]
COMMERCIAL LAW
infringing articles prohibited under Part IV of this Act
and under relevant treaties and conventions to which
the Philippines may be a party and for seizing and
condemning and disposing of the same in case they
are discovered after they have been imported or
before they are exported [Sec. 190, RA 8293 as
amended by RA 10372]
Remedies for Infringement
a. An injunction restraining such infringement;
b. Actual damages, including legal costs and other
expenses, as he may have incurred due to the
infringement as well as the profits the infringer
may have made due to such infringement, and in
proving profits the plaintiff shall be required to
prove sales only and the defendant shall be
required to prove every element of cost which he
claims, or, in lieu of actual damages and profits,
such damages which to the court shall appear to
be just and shall not be regarded as penalty.
c. Impounding during the pendency of the action,
upon such terms and conditions as the court may
prescribe, sales invoices and other documents
evidencing sales, all articles and their packaging
alleged to infringe a copyright and implements
for making them;
d. Deliver under oath for destruction without any
compensation all infringing copies or devices, as
well as all plates, molds, or other means for
making such infringing copies as the court may
order.
e. Such other terms and conditions, including the
payment of moral and exemplary damages, which
the court may deem proper, wise and equitable
and the destruction of infringing copies of the
work even in the event of acquittal in a criminal
case.
f. Criminal liability.
Importation for Personal Purposes
Sec. 190.2 of RA 8293 that limited the importation of
books was repealed by RA 10372. RA 10372 expressly
limited the prohibition to import or export only to
counterfeit goods.
It provides: Subject to the approval of the Secretary
of Finance, the Commissioner of Customs is hereby
empowered to make rules and regulations for
preventing the importation or exportation of
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Commercial Law
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IX. SPECIAL LAWS
A. Anti-Money Laundering
Act
Money Laundering is a crime where the proceeds of
an unlawful activity are transacted, thereby making
them appear to have originated from legitimate
sources.
It is governed by RA 9160, as amended by RA 9194
(2003), RA 10167 (2012), RA 10365 (2013) and RA
10927 (2017).
1. Policy of the Law
It is the policy of the State to:
a. Protect and preserve the integrity and
confidentiality of bank accounts;
b. Ensure that the Philippines shall not be used as a
money laundering site for the proceeds of any
criminal activity.
Consistent with its foreign policy, the State shall
extend cooperation in transnational investigations
and prosecutions of persons involved in money
laundering activities whenever committed [Sec. 2].
2. Covered Institutions and
Their Obligations [RA 9160,
as amended by RA 10365 and
RA 10927]
a.
Banks, non-banks, quasi–banks, trust entities,
foreign exchange dealers, pawnshops, money
changers, remittance and transfer companies and
other similar entities and all other persons and
their subsidiaries and affiliates supervised or
regulated by the BSP;
b. Insurance companies, pre-need companies and
all other persons supervised or regulated by the
Insurance Commission;
c. 1. Securities dealers, brokers, salesmen,
investment houses and other similar entities
managing securities or rendering services as
investment agent, advisor, or consultant,
2. Mutual funds, close – end investment
companies, common trust funds, pre – need
companies and other similar entities
COMMERCIAL LAW
3. Foreign exchange corporations, money
changers, money payment, remittance and
transfer companies and other similar entities, and
4. Other entities administering or otherwise
dealing in currency, commodities or financial
derivatives based thereon, valuable objects, cash
substitutes and other similar monetary
instruments or property supervised or regulated
by the Securities and Exchange Commission
(SEC).
d. Jewelry dealers in precious metals, who, as a
business, trade in precious metals, for
transactions in excess of Php1,000,000.
e. Jewelry dealers in precious stones, who, as a
business, trade in precious stones, for
transactions in excess of Php1,000,000.
f. Company service providers which, as a business,
provide any of the following services to third
parties:
1. Acting as a formation agent of juridical
persons;
2. Acting as, or arranging for another person to
act as:
a. A director or corporate secretary of a
company
b. A partner of a partnership, or
c. A similar position in relation to other
juridical persons;
3. Providing a registered office, business
address or accommodation, correspondence
or administrative address for a company, a
partnership or any other legal person or
arrangement; and
4. Acting as, or arranging for another person to
act as, a nominee shareholder for another
person
g. Persons who provide any of the following
services:
1. Managing of client money, securities or other
assets;
2. Management of bank, savings or securities
accounts;
3. Organization of contributions for the
creation, operation or management of
companies; and
4. Creation, operation or management of
juridical persons or arrangements and buying
or selling business entities. [Sec. 1, as
amended by RA 10365]
5. Casinos, including internet and ship-based
casinos, with respect to their casino cash
transactions related to their gaming
operations [Sec. 1, as amended by RA
10927].
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The term ‘covered persons’ excludes
lawyers and accountants acting as
independent legal professionals, (1) in
relation to information concerning their
clients; or (2) where disclosure of
information would compromise client
confidences
or
the
attorney-client
relationship. Provided, (1) that these lawyers
and accountants are authorized to practice in
the Philippines and (2) shall continue to be
subject to the provisions of their respective
codes of conduct and/or professional
responsibility or any of its amendments [Sec.
1].
3. Covered Transactions
General Rule: A covered transaction is a transaction
in cash or other equivalent monetary instrument
involving a total amount in excess of Php 500,000
within one banking day [Sec. 3(b)].
Exception: for Casinos or “covered persons under
Section 3(a)(8),” a single casino transaction involving
an amount in excess of Php 5,000,000 or its equivalent
in any other currency.
4. Suspicious Transactions
Transactions with covered institutions, regardless of
the amount involved, where any of the following
circumstances exist:
a. There is no underlying legal or trade obligation,
purpose or economic justification;
b. The client is not properly identified;
c. The amount involved is not commensurate with
the business or financial capacity of the client;
d. Taking into account all known circumstances, it
may be perceived that the client’s transaction is
structured to avoid being the subject of reporting
requirements under this Act;
e. Any circumstance relating to the transaction
which is observed to deviate from the profile of
the client and/or the client’s past transactions
with the covered institution;
f. The transaction is in any way related to an
unlawful activity or offense under this Act that is
about to be, is being or has been committed; [Sec.
3(b-1), as amended by Sec. 1 of RA 9194]
COMMERCIAL LAW
5. Obligations of Covered
Institutions
a. Customer Identification
b. Record Keeping
c. Reporting of Covered
Transactions
and
Suspicious
Customer Identification
Covered institutions shall:
a. Establish and record a true identity of its clients,
based on official documents
b. Maintain a system of verifying the true identity of
their clients
c. In case of corporate clients, require a system to
verify:
1. Legal existence and organizational structure;
and
2. Authority and identification of persons
purporting to act on their behalf
Anonymous accounts, accounts under fictitious
names, and all other similar accounts shall be
absolutely prohibited. Peso and foreign currency nonchecking numbered accounts shall be allowed. The
BSP may conduct annual testing solely limited to the
determination of the existence and true identity of the
owners of such accounts. [Sec. 9, RA 9160]
Record Keeping
All records of all transactions of covered institutions
shall be maintained and safely stored for five (5) years
from the dates of transactions.
With respect to closed accounts, the records on
customer identification, account files and business
correspondence, shall be preserved and safely stored
for at least five (5) years from the dates when they
were closed.
Reporting of Covered and Suspicious
Transactions
General Rule: Covered institutions shall report to the
AMLC all covered transactions within five (5)
working days from occurrence.
Exception: If the Anti Money Laundering Council
(AMLC) prescribed a longer period not exceeding
fifteen (15) working days [Sec. 9(c), as amended].
When reporting covered transactions to the
AMLC:
a. Covered institutions and their officers, and
employees
are
prohibited
from
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communicating, directly or indirectly, in any
manner, to any person, entity, or the media:
1. The fact that a covered transaction report
has or is about to be reported;
2. The contents thereof;
3. Any other information in relation thereto;
and
b. Neither may such reporting be published or
aired in any manner or form by the mass media,
electronic mail, or other similar devices [Sec. 9,
RA 10365].
In case of violation, criminal liability ensues as against
the concerned officer and employee of the covered
person and media.
SAFE
HARBOR
PROVISION
–
No
administrative, criminal or civil proceedings shall lie
against any person for having made a covered
transaction report in the regular performance of his
duties and in good faith, whether or not such
reporting results in any criminal prosecution under
this Act or any other Philippine law. [Sec. 9, RA 9160]
Lawyers and accountants acting as independent legal
professionals are not subject to the reporting
requirement if the relevant information was obtained
in circumstances subject to professional secrecy or
legal professional privilege [Sec. 9(c), as amended].
6. When is Money Laundering
Committed
Money laundering is a crime whereby the proceeds of
an unlawful activity are transacted, thereby making
them appear to have originated from legitimate
sources.
Money Laundering is committed by any person
who, knowing that any monetary instrument or
property represents, involves, or relates to the
proceeds of any unlawful activity:
a. Transacts said monetary instrument or property;
b. Converts, transfers, disposes of, moves, acquires,
possesses or uses said monetary instrument or
property;
c. Conceals or disguises the true nature, source,
location, disposition, movement or ownership of
or rights with respect to said monetary
instrument or property;
d. Attempts or conspires to commit money
laundering offenses referred to in paragraphs (a),
(b) or (c);
e.
f.
COMMERCIAL LAW
Aids, abets, assists in or counsels the commission
of the money laundering offenses referred to in
paragraphs (a), (b) or (c) above; and
Performs or