.
'
JOSE R. SUND1ANG, SR,
AB, BSE LL.B
Dean. Arellano Law Poiinciaiaor:
Professor of Law, San Bede College eC Law ark;
Arellano Law; Foundation
Reviewer on Commercial Lav.;, San Beds College of Lav.
Arellano Law Foundation, Recoietos Review Centex
(Manila & Cebu), UP Lave Center's Bar Preview Institute,
and Cosmopolitan Review Center
Former Dean, San Beda College of Lan
TIMOTEO B, AQUINO
AB, LL.B
Professor of Law
Angeles University Foundation, College of Lav.,
___________ Pre-Bar Reviewer
Recoletos Review Center
San Sebastian College Manila
Former Professor
San Beda College of Law,
Philippine judicial Academy,
University of Perpetual HeJp-DALTA
(Las Pinas}, Arellano Law Foundation
Former Prefect of Student Affairs, Bar; B eat Colley: of Law
Sixth .Edition
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by
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To my wife Felicitas, my children Macaria, Jocelyn, Jose, Jr.,
and Reriato and their families
Jose R. Sundiang
T M fh T B fi B . AQUINO
ISBN 978 -971 -23 -6489 “1
To my wife Bea and my children Leona Isabelle, Lean Carlo
and Lauren Margaret
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iii
PREFACE TO THE SIXTH EDITION
Books that are designed primarily to answer the needs of
Bar reviewees should be constantly updated to meet the ebb and
flow of the law and jurisprudence. Hence, this edition.
This edition adheres to the basic aim of the previous
editions — to present the core subjects of Commercial Law in
a simplified but comprehensive manner. The structure of the
book was purposely designed to help students review for the
Bar Examinations.
;
;
.
The authors extend their heartfelt gratitude to all those
who used this book in the past ten years. The authors hope that
this new edition will continue to be of help to students and Bar
Reviewees.
;
THE AUTHORS
iv
PREFACE
This book aims to provide law students with materials
for careful review of the fundamental principles, doctrines,
and rules on the cluster of laws that encompasses Commercial
Law. Like similar books of its type, this book does not contain
extended discussion of the statutory provisions or jurisprudence.
It includes rules that are presented in outline form, concise
statements of doctrinal pronouncements of the Supreme Court,
summary of significant cases, sample bar examination problems,
and problems based on cases.
However, since the book embodies what should be a
student's core knowledge of Commercial Law, it may be used
not only by students who are preparing for the bar examinations
but also as study guide of students who are taking Commercial
Law subjects in law school, especially Commercial Law Review.
The present edition incorporates new laws and
jurisprudence. For instance, this work includes salient features
of the Human Security Act of 2007, Civil Aviation Act of 2008
and the Universally Accessible Cheaper and Quality Medicine
Act of 2008. New topics like the laws on real estate mortgage,
salvage, and ship mortgage are now included. The authors re­
arranged the different parts of the book without deviating from
the general format of presentation of the materials. All laws and
discussion involving credit transactions are now part of Part V of
this volume.
The authors, in the preparation of the present edition,
are still guided by their belief that there is no such thing as
exceedingly early preparation for the bar examinations. Indeed,
such preparation should properly start when the law student
embarks on his study of law. Every student should heed the
caution given by Professor Henry Ballentine who declared that
Vll
students should not wait for the writing on the was — ' Thin; au
to be weighed in tiie balance by bar examiners, Vdor wire thee if thm;
art found wanting."
THE AUTHORS
CONTENTS
Introduction.............. ...... .... ......................................... ......... .......
1.
2.
3.
General Concepts...................... .............. ........ ......................
1.01. Commercial Law................................... .... .
1.02. Commerce................. ........ ................ ......... .
Applicable Laws.............. ........... ................................... .
2.01. Code of Commerce........................ ............................
2.02. New Civil Code ......................... .............. ............... .
2.03. Special Laws.................. ....... ........... ..... .............
Commercial Contracts........................... ............................ .
3.01. Concept and Formalities ............................................
3.02. Perfection ........ ................... ............................... ........
1
1
1
1
2
2
2
2
3
3
3
PART I
Negotiable Instruments Law
.:........................... - ..............(A c tM o ja m )_______________________
1.
2.
3.
4.
: 5.
6.
What is a Negotiable Instrument? ........... ......................
Requisites of Negotiability............... ............................. .
2.01. What does negotiation mean?......................... .
2.02. How is negotiability of an instrument
determined?.................................. ...... ...................
Governing Law.......................................................... .
3.01. Code of Commerce................. ........... ......... ........ .
3.02. Civil Code suppletorily applies.................. .... .
3.03. Applicability of the NIL...... ...... ........ ...................
Functions................................. .................. ................
4.01. Functions of negotiable instrument............................
4.02. Not legal tender...... ............. ..... ........ ..................
4.03. Coins as legal tender.......................... ........... .......... .
Two important features of negotiable instrument.........
5.01. Negotiability................... ........................ .
5.02. Accumulation of secondary contracts...................
Kinds of negotiable instruments ................
6.01. Bill of Exchange............... ..... .............................. .
ix
5
5
6
6
6
6
6
7
7
7
7
8
8
8
8
8
8
I
1
7.
8.
9.
10.
_____
11.
12.
13.
'
■
6J2, Promissory Note............. ......... ......... .........................
6,03. Kinds of Bils of E x c h a n g e . ........................ ........
6,04 tends of Promissory N ote..... .................. .............. .
6.05. When can a Bill of Exchange be treated as
promissory note?...... ........ ......................................
6.06. Negotiable Promissory Note vs. Negotiable
Bill of Exchange......... .................... ....................... .
6.07. Are Commercial papers negotiable instruments?....
Persons involved........................................ ............................
Distinctions......................... ...................... .— ........... .
8.01. Distinctions between negotiable instruments
and non-negotiable instruments.......... ..... ...............
8.02 Distinguish negotiability from assignability............
Requisites of Negotiability ....................................................
9.01. In Writing and signed by maker or drawer...........
9.02. Must contain an unconditional promise or
order to pay a sum certain in money...................... .
9.03. Payable in sum certain in money..............................
9.04. Payable on demand or at a fixed or
determinable future time............................................
9.05. Payable to order or bearer ....................................
9.06. Identification of the drawee................................... .
Omissions and Provisions that do not affect
negotiability........................................... .................................
Transfer and negotiation.............. .........................................
11.01. If instrument is negotiable, effected through...........
11.02. Issuance..................... ............. .... .......... .............. ......
11.03. Indorsement ................ ...... .............. ............. ........ .
11.04. Negotiation by prior party .
.......................
Holders.............. ........d..........;.................... .............. ............. .
12.01. Holder............................................ .............. ..............
12.02. Requisites.................................. ............................... .
12.03. Rights of HDC............................................... .
Real and Personal Defenses ...,....d..,..d.„,„.Ld................. .
13.01. Distinguish Real from Personal Defenses............ .
13.02. Forgery.................. ..................
13.03. Effects .................................................. ......... .............
13.04. Undated Instrument................................................. .
13.05. What is Material Alteration? What are
the effects?
............... ....... ...................
13.06. Fraud....... ............. ............................ ........ .................
13.07. Failure, absence of, or illicit consideration............ .
13.08. Minority or incapacity or wantof authority.............
13.09. Prescription..... ......... ..... ....................53
X
9
9
10
14.
10
15.
10
11
12
13
13
14
14
14
16.
15
18
20
21
24
17.
24
27
27
28
30
32
32
32
32
38
40
40
41
46
49
18.
49
5Q
51
52
Persons with secondary and primary liability
14.01. Liabilities............. .......... ......... .
14.02. Warranties................... ................ ..........
1403. .Who Is an accommodation party?.................. ..........
How to enforce liability...,............ ................................... .
15.01. Primarily liable.............. ............. ........ ...... ...............
15.02. Secondary liable.............................. ............... ............
15.03. Rules on presentment for payment.............. ........... .
15.04. Presentment for acceptance........ ........ ......................
15.05. Acceptance............ .................. ......... ..........................
15.06. Notice of Dishonor.................... ..................................
15.07. Protest....................... ..... ...... ..... ..... ............... ..... .
15.08. Acceptance for Honor............................................ .
15.09. Payment for Honor........................................... ..........
Bills in S et..................................... ............ ............. ...............
16.01. Bills in Set ................... .................. ............ ..... ..........
16.02. Purpose................................... ................................ .
16.03. Liability of Acceptor..................................... .
16.04. Obligations of Transferors..........................................
Discharge............................................. ............. .....................
17.01. How may negotiable instrument be discharged?....
17.02. What is payment in due course?...............................
17.03. When is a person secondarily liable discharged?....
Checks.................................................... ......... ......... .............
18.01. Definition................ ....... .— ................. ....................
18.02. Kinds............. .......................................................... .
18.03. Stopping payment................ ......................................
54
54
55
56
58
58
59
60
62
63
65
68
69
70
71
71
71
71
72
72
72
72
73
73
-Z3.
74
76
PART II
Insurance Code
(P.D. No. 1450, as amended)
1.
2.
Definitions............... ...... .................. ......................................
1.01. Contract of Insurance................... .............. .......... .....
1.02. Contract of Suretyship.................................... ........ ...
1.03. Insurance or transacting an insurance business......
Characteristics............... .........................................................
2.01. Insurance as a risk distributing device......................
2.02. Contract of Adhesion or Fine Print Rule..................
2.03. Aleatory............ ..................................................... .
2.04. Contract of Indemnity.............................................. .
2.05. UberrimaeFides Contract,. . . . . . .................... .
2.06. Personal Contract......................................... .
xi
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77
77
77
78
78
78
79
79
79
80
Elements of insurance....... ........................... .......... ....... .
Perfection............... ................. ................... ........... ........ .
4.01. Cover notes....................... .............. ............ ........ .......
4.02. The Policy
...........,.... ....... .......... .
5. Types of Insurance Contracts.................... .................... .......
6 . Parties to insurance contract.................................. ........ ......
6.01. Insurer................ ......... .................. ............ ......... ......
6.02. Insured..................... ....................... ........... ................
6.03. Beneficiary................................... ............... ........... .
7. Insurable Interest........ ............ ....... ................. ...................
7.01. Basic Concepts. . . . . . . . . . . . . . . .......
7.02. Insurable Interest in property vs. insurable
interest in life..............................................................
7.03. Insurable interest of mortgagor and
mortgagee over mortgaged property........ .
7.04. When interest retained............... ............ .
7.05. Insurable interest of beneficiary and
assignee of the policy................................ ........... .
7.06. Expectancy not insurable..................... ............ .... .
7.07. Effect of change of interest............................. ...........
8 , Risks insured against .....................................---- ----------- 9. Premium...............
9.01. General Rule......... .i .hi^^.v;.;i.■;*.............................
9.02. Effect of payment of the premium .........................
9.03. When insured entitled to return of premiums.........
9.04. Suretyship................................................
9.05. Non-default options in life insurance.....................
10 . Transfer of policy...................
10.01. May the policy be transferred?..................................
10.02. What is the effect of the transfer?..............................
11. Devices used for ascertaining and controlling
risk and loss............................................... .......................... .
11.01. Four primary concerns................................. ............ .
11.02. Devices used by the insurer...... ............. ...................
11.03. Concealment.................................................. .
11.04. Representation.................... ...... ............. ...... .............
11.05. Warranty................... ................. ............................
11.06. Distinctions.......................
11.07. Other Insurance Clause..............................................
12 . Incontestability clause......................... ............. ............... .
12.01. Definition.................................. ..... .............................
12.02. Requisites............................................. ...... .... .... .
12.03. Defenses that are not Mrred.....................................
13. Double Insurance and Reinsurance....... ................ ....... .
3.
4.
xii*
80
83
86
87
90
91
91
92
93
95
95
100
103
106
107
109
109
110
110
110
112
112
112
113
113
113
113
114
114
114
115
120
121
122
122
124
124
124
126
127
13.01. Double Insurance......... ............... ..... ........................
127
13.02. Effects of Double Insurance and Over Insurance.....
127
13.03. Reinsurance............. .... .......................... ..................
128
13.04. Distinctions.................. .... .......... ..... ......... ....... ....... .
128
14. Loss and Claims Settlement........................................... ......
131
14.01, Proximate Cause,and Immediate Cause
131
14.02, Notice arid Proof in Fire. Insurance..,,.............. ........
132
14.03, Claims;S.e.ttl:ement............................... .
133
15. Period of Prescription........................................ .......... ..... .
135
16. Right of S u b r o g a t i o n . ............................... ...... .
136
16.01. Principle of Subrogation......................................
136
16.02, Cases when there is ho Right of Subrogation...........
136
17. Marine Insurance............. .................................. ....... ...........
137
17.01. Coverage.................................................. .............. .
137
17.02. Implied Warranties................... ......... .......................
139
17.03. insurable Interest........................... ..................
139
17.04. Perils of the Sea vs. Perils of the Ship...................... .
140
17.05. Concealment.................. ....................................... .
141
17.06. General Average Loss vs. Particular Average Loss...
141
1-7.07. What is Co-insurance Clause?..................
143
17.08. Seaworthiness......................
145
17.09. Deviation..............................................................
147
17.10. Loss and Abandonment........................
148
18. Fire Insurance................................................................ ........
149
— -— 18y01t Fire Insurance.c. ................................................ ~ ...... 149~
18.02. Extent of Liability..............................
150
18.03. Alteration..................................................
150
18.04. Friendly Fire vs. Hostile Fire......................................
151
19. Casualty Insurance....................................... ......................
151
19.01. Casualty Insurance..............................
151
19.02. Intentional vs. Accidental Insurance.............
151
19.03. Third-party Lability.................
152
20. Compulsory Motor Vehicle Liability Insurance..................
153
20.01. Mandatory insurance........ ....... .......... ......... ............
153
20.02. Purpose...............................
154
20.03. No Fault Clause............................
154
20.04. From whom to Recover?..................
155
20.05. Time to File and Process Claim.................................
155
20.06. Liability of Insurer............................
156
20.07. Other Rules concerning Motor Vehicles..............
157
21. Suretyship................... ............. ............. ....... ............... .
159
21,01. Suretyship........... .................
159
xiii
22.
23.
24.
Lite insurance.................. .......... .............................. .
22.01. Life insurance........................ ......... ........... ............... .
22.02. Effect of death of insured ............. ...................... .......
22.03. Kinds ............................. .................... ...... ..... ............ .
Variable Contract................ ......................... .
Powers of the Insurance Commissioner................ ..... .
24.01, Adjudicatory or quasi-judicial powers.......................
24.02. Revocation of certificate of authority.........................
160
160
160
160
161
161
161
162
PART HI
Business Organizations
A,
“
B.
Bask Types of Business Organizations.,....................... .
1.
Individuals and Sole Proprietorship...........................
1.01. Business name...... .......................... ......... ....... .
1.02. Merchants................... ..... ................................
1.03. Disqualification to engage in commerce ..........
1.04. Disqualifications under the Constitution ........
2.
Partnerships .............................
2.01. Partnership...... .............................................. .
2.02. Registration ..... .............................................. .
3.
Joint Accounts.................
3.01. Concept............. ..... ..........................................
3.02. Distinguished from partnership.......................
47“ Business Trusts...... ........................................................
5.
Joint Venture...................................................................
5.01. Joint venture ........................... ...... ............ .
6.
Cooperatives ......................
Corporation Code of the Philippines
(B.P. Big. 68)....
1. What is a Corporation? ..........
1.01. Attributes of a Corporation..............................
2. Discussion of Attributes..........................
2.01. Artificial, being with Separate Personality .......
2.02. Created by Operation of Law...........................
2.03. Right of Succession..... ............... ....... ...............
2.04. Powers, Attributes and Properties ......... .........
3. Classifications and Distinctions....................
3.01. Classes of Corporation ................ ..... ...............
3.02. Distinguished from Partnership .................
3.03. De facto Corporations vs. De jure
Corporations............................ ......... ........... .
xiv
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164
164
166
168
169
170
170
170
170
170
171
171
171
171
172
172
172
173
173
173
183
185
185
185
185
189
190
4.
Advantages and Disadvantages.................................
192
4.01 Advantages..................................... ................
192
4.02. Disadvantages.......... ....... ....... ..........................
192
5. Components of a Corporation
192
5.01. Components.............................. ........... .
192
5.02. Foreign Stockholders..................................... .
194
6. Formation of a Corporation.............................. .... .
196
6.01. Articles of Incorporation ......... .........................
197
6.02. Amendment of Articles of Incorporation ........
201
6.03. Suspension of Certificates of Registration
by SEC ............. ........ ........................................ .
202
7. By-Laws........... ......... ............. ....... ..... ......... ............ .
202
7.01. Definition ......... .... ...... ...................... .
202
7.02. Requisites of valid By-laws ........ ......... ..... .
202
7.03. Adoption and Amendment.................. ....... .
203
7.04. Binding Effect of Provisions of By-laws ..........
204
8. Powers of a Corporation ..............................................
204
8.01. Kinds.............................................................
204
8.02. Express Powers under the Corporation Code
205
8.03. Ultra vires Acts ........................ ..........................
206
8.04. Exercise of Powers................ ................ ........ .
208
8.05. When Corporation may acquire own Shares ..
213
8.06. Dividends ........... ......... ....... .............................
213
8.07. Sale of all or Substantially all Properties ........
219
_____8.08. Increase or Decrease of Capital ........... ......... .
221
9. Directors and Officers ..................................... ............
221
9.01. Qualifications of Directors..................... .........
221
9.02. Business Judgment Rule ................... ....... .
222
9.03. Criminal Liability............... ...... ....... .
222
9.04. Methods of Voting............... ......................... .
223
9.05. Removal and Vacancies in the Board ............. .
224
9.06. Doctrine of Corporate Opportunity ........... .
225
9.07. Interlocking Director......... ......... ......... ..... .
226
9.08. Are Corporate Agents solidarity liable? ..........
227
9.09. Self-dealing Directors / Trustees / Officers
227
9.10. Corporate Officers of a Corporation .............
229
9.11. Meetings of the Board ....... .
230
10. Trust Fund Doctrine .......................... ..................
232
10.01. Trust Fund Doctrine .................................. .
232
10.02. Examples of Cases ................
232
10.03. Distribution of Assets and Trust Fund
Doctrine ........... .................................................
232
11. Stockholders and Shares.................. ....... ............. .
235
11.01. Subscription Contract........ ............................................................
X¥
235
12.
13.
14.
15.
16.
17.
18.
19.
20.
21.
11.02. Shares of Stock ........... ............... .....................
Certificate o£ Stock................................... ....................
12.01. Formality ....... ........... ................................... ......
12.02. When Issued .................. .....................
Transfers of shares................................ .....................
13.01. How are Shares of Stocks Transferred?.....
13.02 May a Stockholder bring Suit to Compel
the Corporate Secretary to Register Valid
Transfer of Stocks? ........... ......... ..................... .
Rights and Obligations of Stockholders ............. .
14.01. Basic Rights of Shareholders ...........................
14.02. Suits by Stockholders/'Members .................. .
14.03. Pre-emptive Right Defined.............. ................
14.04. Right to Vote ................................ .......... ...... .
14.05. Appraisal Right................. .......... ...... ........ .
Collection of Unpaid Subscription.............................
15.01. What are the Remedies of Corporations
to enforce Payment of Stocks?..........................
15.02. What does the term Unpaid Claim mean?......
15.03. Call................................ ........................ .............
15.04. Procedure for Collection and Delinquency
Sale............. ............ ............... ..... .......... ...... ....
15.05. What are the effects of Stock Delinquency? ....
Books.............................. .............. .......... ......................
16.01. What books are required to be maintained
by the Corporation?................................... .
16.02. Entries in Stock and Transfer Book..................
16.03. Right of Stockholders to inspect Books......... .
Merger vs. Consolidation ................. ..........................
17.01. Definitions................ ........ ......... ......... ..... ........
17.02. Effects of Merger or Consolidation......... ........
17.03. Procedure............. ...............................................
Non-use of Corporate Charter....................... ............
18.01. Effects of Non-use of Corporate Charter
and Continuous Inoperation of Corporation...
Dissolution .....................................................................
19.01. Dissolution of a Corporation........................... .
19.02. Modes of Dissolution........................................
19.03. Effects of Dissolution.................... ....................
19.04. Liquidation after Three Years........ ...................
Liquidation .....................;............................... ............ .
20.01. Modes of Liquidation........................................
Foreign Corporation................................ ................ ...
21.01. Foreign Corporation...... ................. ................. .
xvi
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244
244
244
245
247
247
248
249
250
253
255
255
255
255
256
256
257
15T
257
258
258
258
259
260
261
261
262
262
262
264
265
265
265
265
266
21.02. What constitutes "Doing Business" in the
Philippines for Foreign Corporations? ............
21.03. Does an "Isolated Transaction" by a foreign
corporation qualify as "doing business"
in the Philippines?.......... ...... ............. .............
21.04. Explain the Contract Test of "doing business"
in the Philippines............ ........... ......................
21.05. "Doing Business" under the Foreign
Investment Act of 1991........................................
21.06. Requisites for Obtaining License to do
Business ..............................
21.07. Effect of Estoppel and Subsequent
Compliance..........
22. Close Corporations......................................... .............
22.01 Requirements for Close Corporations...............
22.02. What are those that cannot be a Close
Corporation................... ............ .......... ....... .
22.03. Pre-emptive Right in Close Corporations........
22.04. Deadlocks........................ ..... .......................... .
22.05. Characteristics............ ............ ...... ............. .....
23. Non-stock Corporations...........................................
23.01. Purposes of Non-Stock Corporations..............
23.02. Rights of Members.................. ............. ............
23.03. Termination of Membership.........................
--------- ---- 23.04. ■Conversion.■
;..■;;y;
..............
23.05. Order of Distribution of Assets......... .
24. Religious Corporations..........................
24.01. Kinds..................... ............................. .......... .
24.02. Corporation Sole........................ .............. ........
C.
266
266
267
268
269
269
270
270
271
271
271
272
272
272
272
273
274"
275
276
276
276
Securities Regulations Code and Related Laws................. 277
1. State the powers and functions of the SE C
277
1.01. Transferred Jurisdiction ......... .............. ...... .
279
2. What are Securities ..................
280
3. Definitions....................
281
3.01. What are Investment Contracts?......................
282
3.02. What are Derivatives?...................... ..... .
283
3.03. What are Commodity Futures Contracts?
What is a Commodity?........................ .............
283
4. How does the SRC protect the Public from
Investors? ............. ............ ....................................
284
5. State the basic rules regarding Registration
of Securities ......... ........ ....... ...................... ...................
284
xvii
6.
What Securities are exempt from the Requirement
of Registration ....... ......... ................ .............................
7. What transactions are exempt from Registration
Requirement under SRC .......... ............. .
8. Grounds for Revocation and/or Rejection of the
Registration of Securities ........ ................... ........ ........
9. State the Devices and Practices on Manipulation
of Security Prices identified under the SRC............ .
10. What is the rule regarding the Three Practices
in the SRC? ............... ............. .................. ........ .
11. Enumerate Acts that are considered Unlawful with
respect to Purchase and Sale of Securities.........
12. Who is an Insider?
.................... .
12.01. Duties of an Insider.............
12.02. Presumption.................................
12.03. Material Non-Public Information......................
12.04. Prohibition Imposed on Insiders regarding
Material Non-Public Information.....................
13. Tender Offer ......................... .............. ............. .............
13.01. Definition of Tender Offer............... ............... .
13.02. When Tender Offer is Mandatory....................
13.03. Exempt from Mandatory Tender Offer
Requirement............... ......... ........ ............... .....
13.04. Obligations of Persons making a Tender
_______________Offer.....................................................................
13.05. Direct and Indirect Acquisition.........................
14. Margin. Trading ....................................... .....................
14.01. Prohibitions...................
14.02 Parties to be consideredin Pari Delicto............
15. Violations of SRC.................. ............ ............ ..............
285
286
289
290
292
293
293
294
294
294
29S
295
295
296
296
22Z_
297
298
298
299
299
PART IV
A.
General Banking Law (R.A. No. 8791), Law on Secrecy
of Deposits and Related Laws ........... ............................. .
1.
Banks......................... ............. ......... ...... ................ .
1.01. Nature of business ....
1.02. Authority to incorporate and operate ......
2.
Classification of Banks .............. ................... .
2.01. Classification...............
2.02. Distinctions...................
3.
Functions of Banks ........................................................
3.01. -■Basic functions........ ....................................
3.02. Other functions......................... ... ..... ...... .
xviii
300
300
301
302
302
302
303
304
304
304
3.03. Prohibiten Acts.... ...... ...... ................ ........ .......
Deposit Function........... ....... .......... ......... ...................
4.01. Simple Loan.................. .......................... <.........
4.02. Depositors......... ................................................
4.03. Kinds of Deposits............ .... ............... .... ..... .
4.04. Other Accounts...................... ...........................
4.05. Secrecy of Bank Deposits ............ ........ .
4.06. Garnishment.................... ...... .................. .
4.07. Deposit Insurance............... ............ ............... .
4.08. Unclaimed Balances ............................... ..........
5.
Loan function of Banks ............ ................................. .
5.01. Basic rules/restrictions ........................................
5.02. DOSRI Accounts.............................. ...... ......... .
5.03. Collaterals ..................................... .......... .
6.
Prohibited Acts of Borrowers............ .............. ..........
7.
Ownership of Banks ......................... ........... ........... .
7.01. Foreign Ownership..................... ......... ...........
7.02. Filipino Stockholdings ......... .................... .
7.03. Stockholdings of Family Groups or related
interests.................... ...... ........... .................. .....
8.
Directors and officers .............. ............. ........... ....... .
8.01. Composition of Board ............... ............. ....... .
8.02. Meetings ......... ....................... ........................
8.03. Qualifications............. .... .............. ................ .
“9;-----Regulations to maintain Liquidity and SBCiirlty'T7~'.7
9.01. Dividends.................. ................................ .......
10. Ownership of Real Property .......... .............................
10.01. Acquisition of Real Estate by Any Bank..........
10.02. Limitations of Acquisition.................. .............
11. Loan to banks .................... ........ ..........................
11.01. Loans Without Collateral.................... .............
11.02. Emergency Loans....................... ................. .....
12. Conservatorship............ ...................... ........ ..............
12.01. Grounds................ ......... .......... .................. ..... .
12.02. Powers of Conservator............. ........................
13. Receivership and Liquidation ........................
13.01. Grounds..... ....... .......................... ............. ........
13.02. Duties of Receiver.................. ................. .
13.03. Close Now-Hear Later Scheme....... ......... .......
13.04. Effect of Receivership and Liquidation...........
13.05. Judicial Review................ ..................... .......... .
14. Trust Operations.of Banks ............................ ............. .
14.01. Prior Authority....................... ......... ..............
4.
x ix
305
305
305
306
306
308
308
312
312
317
318
318
319
322
323
324
324
325
325
326
326
326
326
328
328
328
329
329
329
329
330
330
330
330
330
331
332
332
333
334
334
15.
'14.02, Trust Business............................. .... ..... .
14.03. Powers of Trust Entity........
14.04. Separation of Trust Business of Banks..............
The Bangko Sentrai rig Pilipinas.................................
15.01. Bangko Sentral rtg Pilipinas as an
independent and Accountable Body.................
15.02. Responsibilities and Objectives.......................
15.03. Corporate Powers.................. ........................ .
15.04. Bank Supervision............................
15.05. Banker and Financial Adviser of
Government.....................................
15.06. The Governor..............................
B.
Other Related Laws .................................. ....... ......... ..........
1.
Philippine Deposit Insurance Corporation................
1.01. Primary Functions ....................... ............... .....
1.02. Insurer of deposit.............. ........... ........ ........ .
1.03. Regulator: Examination and Investigation
of Banks
............................ .
1.04. Rehabilitation Receiver of Banks .............. .
2.
Anti-Money Laundering A ct..............................
2.01. Money Laundering ...........................
2.02. Covered Transactions...... ................. ...............
2.03. Covered Entities ...... .......... .................. ............
2.04. Suspicious Transaction..................... ...... ........
------------- ±05-.— Dnlawfni Activity ........................
2.06. Prevention of Money Laundering ......
2.07. Freezing of Monetary Instrument
or Property.............................. .......... ............. .
2.08. Authority of AMLC to inquire into and
Examine Bank Deposits ......................... .........
3.
Truth in lending .........
3.01. Truth in Lending A c t........ .................
4.
Consumer A ct.... ......
5.
Human Security Act of 2007 .............
5.01. Examination and Sequestration
of Deposits ................. ..... ............. ........... ..... .
5.02. Examination of Bank Deposits ..........
5.03. Sequestration :............................... »............. .
6.
The Terrorism Financing and Prevention and
Suppression Act .................... ............... ............... .
6.01. Financing Terrorism................. ........................
6.02. Authority of AMLC-to Investigate ....................
6.03. Authority to Freeze ...........
XX
PART ¥
334
335
336
336
Credit Transactions
A,
336
336
337
338
339
339
340
340
340
340
340
341
343
343
343
343
344
344
347
348
349
350
350
353
355
355
355
357
358
358
359
359
Warehouse Receipts Law (Act No. 2137)............................
1.
Definitions................i....... ..............
1.01. Document of Title to Goods......... ............... .
1.02. Common Types.......... ......... ................ .............
2.
Three Functions of Documents of Title .......
3.
Negotiability of Warehouse Receipts...........................
4.
Formalities ........ ............
5.
Negotiation of Warehouse Receipts ..................... .
5.01. Negotiation by Delivery only ................... .
5.02. Indorsement coupled with Delivery .......... .
6.
Effects of Negotiation of WR....................
7.
Who may negotiate a Warehouse Receipt?.... ...........
8.
Warranties...............
8.01. Not Guarantor ............................................. .
8.02. Warranties of Transferor .......... ..... ......... ........
9.
Non-negotiable Receipts ...................
9.01. Rights of Transferee of Non-negotiable
receipt .................... ..... ............................. .......
10. Warehouseman's Defenses for Non-delivery or
Misdelivery................. .................................................
------- IT-—Wareheuseman^-hien .................
11.01. Claims that are Included........................... .
11.02. Properties that are Subject to Lien..........
11.03. Loss of Lien ........................... ............... .......... .
12. Adverse Claimant........................
13. Attachment or Levy................
13.01. Creditor's remedies to reach Negotiable
Receipts
.................................................
B.
C
General Bonded Warehouse Law (Act No. 3893,
R.A. No. 247).....................
1. Obligations of Warehouseman..................
Letters of Credit ..............
1.
Letters of Credit .............
2.
Governing Laws ...........
3.
Parties..... ..... .......... .............
4.
Independent Contracts...................
4.01. Independence Principle ..... ........................
4.02. Independence Principle ..... ..............................
xxi
361
361
361
361
362
362
362
364
364
364
365
368
369
369
370
370
370
371
374
374
375
375
375
376
376
377
377
377
377
377
378
379
379
380
380
380
381
Trust Receipts Law (P.D. No. 115)................................ .......
1.
Background ....... .......................................................
2.
What is a Trust Receipt? .............. ..... ................ ....... .
3.
Obligations....................... ........... ..... .............. ,..... .....
3.01. Remedies of the Entrusted ............. .
.4. No Agency is Established
................
5.
Nature of Entrusteds Title ........... .......................... .....
5.01. Security Interest.......... ........ .................... .
6.
Novation of Agreement ............ ......... ............. ....... .
382
382
383
384
384
385
385
386
388
Bulk Sales Law (Act No. 3952) ...........
1.
When is a Sale considered a Sale in Bulk?.......... .
2.
What is the purpose of the Bulk Sales Law? ...............
3.
What are the Formalities required by the BSL?........
4.
What Formalities /Requirements need not
be complied? ....... ................... ....... .......... ............... .
5.
Effects of the violation of BSL?................ ...................
389
389
389
389
5.
D.
E.
K
Mortgage ......................... ...... ..... ....................... ..................
1.
Requisites common to Real Estate Mortgage,
Chattel Mortgage and Pledge .............................. ......
1.01. Features of Mortgage.......................... .............
—■
— 2r.----ReaKEstate-Mortgage ...... .t.-.—
,..............39T
2.01. Subject............. ......... ........ ..... ..........................
2.02. Registration ......... ............... ...............................
2.03. Mortgagee in Good Faith.................................
2.04. Nature ............ ............... ............. .......................
2.05. After-acquired Property.............. ........ ......... .
2.06. After-incurred or Future Obligations.......
2.07. Foreclosure of Mortgage......... ........................
2.08. Extrajudicial foreclosure and Supreme
Court Circular .............. ..................... ..... ..........
3.
Chattel Mortgage .......................... ........... ...................
3.01. Subject Matter ............................. ............. .........
3.02. After-acquired Properties ..............................
3.03. After-incurred Obligations ........... ........... .
3.04. Formalities ................ ............... ............... ........
3.05. Right of Redemption...................................... .
3.06. Deficiency after Foreclosure .............. ..............
xxii
G.
EL
Recto Law
MS4, NCO .... ....................... ..............
Mn&iiCia! Rehabilitation anci insolvency Act of 2010
OLA. No, 10142) and Concurrence and Preference
of Credits (Arts. 2241-2244, NCC) .......................................
Policies .......................................................... ................
1.01. Key Definitions ........................... .
1.02. Proceedings covered by FRIA ..................... .
Excluded Debtors.......... .............. ................... ......... .
Meaning of Rehabilitation..... .......... ....... ...................
3.01. Rehabilitation of Sole Proprietorship,
Partnership and Corporation ............... .
3.02. Rehabilitation Plan............ ..........................
3.03. Stay Order ............. ...... .......... ........ ........ .........
3.04. Suspended Claim .............................
3.05. Who will Manage .................... ............ ............ .
3.06. Court Action on Petition for Rehabilitation ....
4.
Out-of-court Rehabilitation ............
5.
Suspension of Payments.......................
5.01. Distinctions............... .................................... .
5.02. Suspension Order......... ............... ................ .
5.03. Prohibited A cts........... ......... .
5.04. Creditors' Meeting ..................... ...... ............ .
6.
Liquidation of Individual Debtors ...........
7.
Liquidation Process ....................
7.01. Liquidation Order .............. ............. .................
7702. Effects of Liquidation Order ........... ................ !
7.03. Rights of Secured Creditors......................... .
8.
Distribution of Assets.................
8.01. Preference as to Specific Properties ................ .
8.02. Order of Preference with Respect to other
Properties ........... ...............................
9.
Cross-Border Insolvency ................
W K»
4,03. Fraud Exception ................. .... ..........................
4.04 Doctrine or Strict Compliance.........................
Kinds of Letters of C redit.......................... .................
389
390
390
390
390
391
391
391
392
392
392
393
400
401
401
402
404
406
406
407
407
408
409
412
413
414
415
415
417
417
418
419
420
420
421
421
422
423
426
428
PART VS
393
396
396
397
398
398
399
400
Laws on Transportation and Public Utilities
A.
General Concepts ............................. ...... .
1.
Concept of Common Carriers ...........
1.01. Tests............................ ................................... .
1.02. Common Carriers distinguished from
Private Carrier....................................................
2.
Governing Laws................
3.
Extraordinary Diligence and Presumption of
Negligence .............................................................. .
xxiii
430
430
430
433
437
438
4.
5.
Defenses of Common Carriers............ ........... ............
439
Duration of Liability ...................... .................. ...........
443
5.01. Goods ...................
443
5.02. Passengers .............................................
443
6.
Liability for Acts of Employees and Passengers ........
446
7.
Stipulations Reducing Diligence or Limiting
Liability ...... ................ ................... ..... ........... .
447
7.01. Reduction of Diligence ...... .......
447
7.02. Valid Stipulations relative to Liability of
Common Carriers ....... .........................
448
7.03. Invalid Stipulations with Common Carriers ..
448
7.04. Carriage of Goods by Sea Act ................
449
7.05. Purpose of Stipulation Limiting Liability ........
450
8.
Registered Owner Rule and Kabit System ........ ...... .
450
8.01. Registered Owner Rule ................................
450
8.02. Kabit System .................
451
9.
Concurrent Causes of Action .................. ......... ..........
452
9.01. Driver and Third Persons ..........
452
9.02. Joint and Several Liability ................
452
9.03. Arrasire Operator...................................
452
10. Passenger's Baggages ................. ............................
453
10.01. Baggage in the Custody of Passenger
or Employee ....... ........... ........... ..................... .
453
10.02. Baggage in the Custody of the Carrier ...........
454
11. Successive carriers ....... ................................................
454
— .---- ----- ILQl^Successive--Camers^y-Agreemeat-for............. —------Combined Services ............. ......... .......... .........
454
11.02. Liability of Successive Air Carriers ................
454
B.
Maritime Law ................... .......................................... ..........
12. General Concepts ....................... ............... ..... .......... .
12.01. Definition of Maritime Law....................
12.02. Vessel........... ......... ................. ......... ....... ..........
13. Limited Liability Rule ...................................... ..........
13.01. Doctrine of Limited Liability............. ............ .
13.02. How Claims are Satisfied under the Limited
Liability Rule .......................... ..... ............. ......
14. Protest ............. ..... ................................................ .
15. Collision .................. .............. ............ .............. ...... .
15.01. Doctrine of Inscrutable Fault.............................
15.02. Rules on Collision of Vessels ..................... .
15.03. Doctrine of Error in Extremis............. .
16. Arrival Under Stress ................... .............. .............. .
17. Persons involved in Maritime Commerce.........
17.01. Ship agents................................ ..... ............ .
xxiv
454
454
454
455
455
455
457
458
458
458
458
459
460
460
460
17.03. Officers and Crew oi the Vessel
..... .... 461
17.04. Supercargoes.................. ...... ...... .
...... 461
17.05. Desertion ................. ...... ................ ...... ..........
462
18. General Average v. Particular Average ................. ......
462
18.01. General Average ........................................... .
462
18.02. Particular Average ................ ...... ............ .
465
19. Charter party................... .................................... 467
20. Bill of Lading
............................................... —• 467
20.01. Functions of a Bill of Lading ......................
468
20.02. Types of Bills of Lading ......................................
468
21. Loans on Bottomry and Respondentia ........................
469
21.01. Definitions.............................. ........ .
469
21.02. Distinguished from Ordinary Loan .................
469
22. Procedure and Prescriptive Period for Claims..... .
469
22.01. Coastwise or within the Philippines ....... .
469
22.02. International carriage from foreign port
to the Philippines ..................................... .
470
22.03. Prescriptive period by COGSA.........
470
23. The Ship Mortgage Decree of 1978 ............... ....... .
471
23.01. Who may constitute a Ship Mortgage .............
472
23.02. Formal Requirements ...................................
472
23.03. Arrest and Foreclosure ........... .................... .
473
23.04. Concurrence and Preference of Credits......
474
_________ 23.05. Maritime Lien .......
474
24. Salvage Law ...........................
475
24.01. Definition..................... ......................
475
24.02. Requirements for Compensation................
476
24.03. Amount of Reward or Compensation .............
476
24.04. Who is entitled to Reward ............. .
477
C.
The Warsaw Convention and Civil Aviation Laws
(R.A.No. 9497 and R.A. No. 6235) ...............................
25. Warsaw Convention....................
25.01. Transportation by A ir................ ............ .
25.02. Damage or Injury for which the Carrier
is liable....................... .......... ......... ..... ....... .
25.03. Limit of Liability of Carrier ......................
25.04. Tort Liability
.................
25.05. Jurisdiction/Venue
.................... .......... .
26. Civil Aviation.......................
26.01. Definitions ..........
26.02. Inspection of Aircraft
............... .
26.03. -Nationality and Ownership of Aircraft ...........
XXV
477
477
478
478
478
479
. 480
480
481
482
484
fX
Public Service A ct............................. .............................. 485
27, Public Service A c t........................................ ..... ..........
27.01. Government Agencies replaced by the
Public Service Commission ............. .
27.02. Conditions that must Concur to Grant
certificate of Public Convenience................ .
27.03. Certificate of Public Convenience Property ....
27.04. Certificate of Public Convenience and
Certificate of Public Convenience and
Necessity............ ........... ........... ........ ..............
27.05. Prior or Old Operator Rule .......................
27.06. Grounds for Revocation of Certificate........
27.07. Notice and Hearing ....... ........... ................... .
27.08. Franchise .................. ....... .................. ....... ..... .
27.09. Public Utility............. ...................... ................ .
27.10. Regulation of Rates ........ ................. .................
27.11. Foreign Equity in Public Utilities ....................
27.12. Non-exclusivity...................... ..........................
27.13. Acts Requiring Approval by Successor
Agencies............................... .................. ..........
485
485
486
486
486
487
487
487
488
489
490
493
493
494
PART VII
.Intellectual Property Code
(R.A. No. 8293)
1.
2.
3.
4.
5.
State policies ................. ......................... ................. ............ .
Intellectual Property Code defined
.................................
International Law Related Provisions
...................... .
3.01. Reciprocity.......... ......... .......... ................................ .
3.02. National Treatment............. .......................................
3.03. Most-favoured-nation treatment............ .............. .
Intellectual Property Office ............... ............ ............. .........
4.01. Functions of the IPO............................ ............ .........
Copyright........................ ........................ ...... ......... .
5.01. Definitions .......................................... ............. ..........
5.02. Civil Code Provisions ................... ........... .................
5.03. Rights over Copyrights conferred................. ..........
5.04. Ownership of Copyright............... .......... ............. .
5.05. Duration of Copyright.............................. ........... .
5.06. Copyrightable Objects .................. .......... ...... ..........
5.07. Unprotected Works ........... ........................................
5.08. Rights of Authors...................... ........... ........... .........
5.09. Publisher's Rights ........................... ............... ...... .
xxvi
495
496
498
498
498
498
499
499
500
500
500
501
501
502
503
504
506
507
5.10. Acts that do not Infringe Copyright ....... ........... .....
5U7
5.11. f air U se .................... ....... ...................... ....................
509
5.12. Importation for Personal Purposes....... ............... .
509
5.13. Infringement.................. ............................................
510
6,
Trademarks .............................. .......................... ...... .
513
6.01. Functions.................. ....... ........... .......................... .
513
6.02. How marks are acquired............. ...................... .
513
6.03. Marks that cannot be registered .................................
515
6.04. Limitations.............. ......... .
516
6.05. Internationally Well-known Marks ................. ..... .
517
6.06. Rights conferred..................................... .
517
6.07. Duration................ ..... ...................... ..................... .
518
6.08. Infringement ......................... .
518
6.09. Protection of Tradename ........................... ............. .
524
6.10. Unfair Competition .......................... .................. .
524
6.11. Inter partes cases ...................................... ..................
526
7,
Patents .................................... .......................... .... ............ .
529
7.01. Patentable Inventions........................ ........................
529
7.02. Classes of Patentable Inventions ......... ...... ..............
531
7.03. Non-patentable inventions .................... ....................
532
7.04. Persons entitled to Right ................. ................. .......
532
7.05. Limitations of Patent Rights ........................ ............
533
7.06. Prejudicial Disclosure ................... ............................
534
7.07. Non-prejudicial Disclosure.......................................
534
_____21QA__TarromfLaJfatejit---------—
------5357.09. Infringement................ ............................. ............ .
535
7.10. Compulsory Licensing.................... ..........................
536
7.11. Voluntary License and Technology Transfer
Agreements ............ ................................ ............ .
538
7.12. Concept of Divisional Applications......... ....... ........
540
8,
Trade Secrets.............. ................ ............ ..... .................... .
542
8.01. Applicable laws .............................................. .......... .
543
8.02. Factors...................................................................... .
543
xxvii
■INTRODUCTION
1. GENERAL CONCEPTS
1.01. Commercial Law
It is defined as that branch of private law which
regulates the juridical relations arising from com­
mercial acts and according to which the questions or
controversies which may arise therefrom are resolved
(Vivante's Institutioms, p. 3; Espejo de Hinojasa, p. 61
cited in Tolentino, Commentaries and Jurisprudence on the
Commercial Laws of the Philippines, 6th Ed., Vol. 1, p. 1).
a)
Traditionally, Commercial laws in the Philip­
pines include laws governing the following: (1)
commercial documents sudhnas negotiable iir-struments, warehouse receipts, letters of credit
and the like, (2) business organizations like cor­
porations, single proprietorship and joint ac­
counts, (3) commercial contracts like insurance
or mortgage, (4) banking regulations, (5) insol­
vency, (6) securities, (7) intellectual properties,
and (8) public utilities and other activities or
transactions involving commerce.
1.02. Commerce
The mass of acts of human life, which tend to the
satisfaction of necessities by means of exchange or of
the rendition of services, effected with a purpose of
gain and falling within the domain of mercantile laws
(ibid.).
l
REVIEWER ON COMMERCIAL LAW
2.
INTRODUCTION
APPLICABLE LAWS
e)
Securities Regulation Code (R.A. No. 8799);
2.01. Code of C om m erce
f)
General Banking Law (R.A. No, 8791);
g)
New Central Bank Act (R.A. No. 7653);
h)
Warehouse Receipts Law (Act No. 2137);
i)
Trust Receipts Law (P.D. No. 115);
j)
Business Name Law. (Act No. 3883);
k)
Chattel Mortgage Law (Act No. 1508);
l)
Public Service Law (C.A. No. 146);
m)
Intellectual Property Code (R.A. No. 8293).
This law was extended to the Philippines by
Royal Decree of August 6, 1888. It took effect on
December 1, 1888. However, with the passage of the
New Civil Code, only the following are still governed
by the Code of Commerce:
a)
Merchants, Commercial Registries, Book of Mer­
chants, General Provisions on Commercial Con­
tracts (Arts. 1-63);
b)
Joint Accounts (Arts. 239-243);
c)
Transfer of Non-Negotiable Credits (Arts. 347-
348);
COMMERCIAL CONTRACTS
d)
Overland Transportation (Arts. 349-379);
3.01. Concept and Formalities
e)
Letters of Credit (Arts. 567-572); and
f)
Maritime Commerce (Arts. 573-869).
2.02. New Civil Code
The New Civil Code repealed the provisions of
the Code of Commerce on: (1) Sales, (2) Partnership,
(3) Agency, (4) Loan, (5) Guaranty, and (6) Deposit.
Hence, the New Civil Code provisions now govern
such contracts.
Contracts that are governed by the Code of
Commerce are called Commercial Contracts.
a)
In the absence of any requiremenLunrlpr the
Code of Commerce or Special Law that certain
formalities are required, commercial contracts
are valid in whatever form they appear (Arts. 51
and 52, CO- (Example: Joint Accounts.)
b)
Contracts that are expressly required to be in
writing under the Code of Commerce are: (1)
Letters of Credit (Art. 267, CC), (2) Loans on
Bottomry and Respondentia (Art. 720, CC), and
(3) Charter Parties (Art. 652, CC).
The New Civil Code is likewise the primary
governing law on Common Carriers.
2.03. Special Laws
Commercial laws include but are not limited to
the following statutes:
a)
Corporation Code of the Philippines (B.P. Big.
68);
b)
Negotiable Instruments Laws (Act No. 2031);
c)
Insurance Code of the Philippines (P.D. No. 1460
as amended);
d)
Financial Rehabilitation and Insolvency Act of
2010 (R.A. No. 10142);
3
3.02. Perfection
The general rule under the New Civil Code is
that contracts are perfected upon the meeting of minds
with respect to the object and the consideration.
a)
In perfection by correspondence, the applicable
rule is the Cognition Theory under which the
contract is perfected the moment the offeror
learns about the acceptance of his offer by the
REVIEWER ON COMMERCIAL LAW
offeree {-Art-1409, NCC), Thus, Cognition Theory
should apply to all .consensual contracts that are
governed by Commercial laws.
b)
c)
Article 54 of the Code of Commerce upholds the
Manifestation Theory under which the contract
is perfected the moment the acceptance of the
offer is "manifested" or made (Example: Sending
of acceptance letter). This applies to all contracts
that are still governed by the Code of Commerce
(Example: Loan on Bottomry).
However, even if the contract is still governed by
the Code of Commerce, neither the Manifestation
Theory nor the Cognition Theory applies if the
contract is perfected by delivery (real contract
like the contract of carriage proper) or through
the execution of formalities (formal contracts).
NEGOTIABLE INSTRUMENTS LAW
(Act No. 2031)
1. m M IS A NEGOTIABLE INSTRUMENT?
It is a written contract for the payment of money which
is intended as a substitute for money and passes from one
person to another as money, in such a manner as to give a
holder in due course the right to hold the instrument free
from defenses available to prior parties. The instrument
hiiist comply with Section 1 of the Negotiable Instruments
Law (NIL for short) to be considered negotiable.
2. REQUISITES OF NEGOTIABILITY (Sec. f, NIL; Caltex
Phils. v. CA, 212 SCRA448)
W
a)
Must be in writing and signed by the maker
or drawer;
U
b)
Must contain an unconditional promise or
order to pay a sum certain in money;
P
c)
Must be payable on demand, or at a fixed or
determinable future time;
O
d)
Must be payable to order or bearer; and
A
e)
When the instrument is addressed to a
■drawee, he must be named or otherwise
indicated therein with reasonable certainty.
K ey:W U ';F O A
'
5
6
REVIEWER ON COMMERCIAL LAW
PART 1 — NEGOTIABLE INSTRUMENTS LAW
(Act No. 2031)
3.03. APPLICABILITY OF THE NIL
2.01. What does negotiation mean?
a)
The transfer of an instrument from one person
to another in such a manner as to constitute the
transferee a holder .thereof, A holder is the payee or
indorsee of a bill or note who is in possession of it, or
the bearer thereof (Secs. 30 and 191, NIL).
b)
In determining the negotiability of an instru­
ment, consider the instrument in its entirety and only
what appears on its face. It must comply with the
requirements under Section 1 of the NIL (Caltex Phils.
_________
3.04. Decisions of the courts in the United States and in
England based on the American Uniform Negotiable
Instruments Law arid the Bills of Exchange Act of
1882 can be applied in this jurisdiction because those
foreign laws served as bases of NIL.
When negotiability ends. Section 47 of the NIL
3. GOVERNING LAW
3.01. CODE OF COMMERCE/
In addition to Act No. 2031, otherwise known as
the Negotiable Instruments Law (NIL for short), ne­
gotiable instruments are governed by the provisions
of the Code of Commerce that were not impliedly re­
pealed by the NIL. Example: Code of Commerce provi­
sions on crossed checks are still in force because there
is no provision in the NIL that deals with crossed
checks (Chan Wan v. Tim Kim, 109 Phil. 70611960]).
3.02. The New Civil Code applies suppletorily. Example:
Article 1216 of the New Civil Code (Metropolitan Bank
and Trust Co. v. CA, et ah, 194 SCRA 169 [1991]).
The NIL can be applied but only by analogy if
the instrument is not negotiable if there is no law
that can be applied (Borromeo v. Sun, 317 SCRA
176 [1999]).
v.CA/212 SCRA 448).
provides that "an instrument negotiable in its
origin continues to be negotiable until (1) it has
been restrictively indorsed or (2) discharged
by payment or otherwise." Note however, that
restrictive„ indorsement makes the instrument
npn-negdtiable only if it is the first type — it
prevents further negotiation of the instrument
— and not the two other types (constitute the
indorsee the agent or trusteie). ■
The provisions of the NIL can be applied only to
negotiable instruments. If the instrument is not
negotiable, the pertinent provisions of the Civil
Code or pertinent special laws should apply
(GSIS v. CA, 170 SCRA 533 [1989]; Kauffman v.
PNB, 42 Phil. 182 [1921]).
2.02. How is negotiability of an instrument determined?
a)
7
4.
FUNCTIONS
----- 4.01. What are the functions of ^ negotiable Instrument?"
a)
It operates as a substitute for money.
b)
It is a means of creating and transferring credit.
c)
d)
: It facilitates the sale of goods.
It increases the purchasing medium in circula­
tion.
4.02. NOT LEGAL TENDER
Section 52 of the New Central Bank Act (NCBA
for short), Republic Act No. 7653, provides that only
notes and coins issued by the Bangko Sentral ng Pilipi­
nas are considered legal tender.
Section 60 of the same law expressly provides
that checks .are not legal tender. Section 60 ;provides
that "checks representing demand deposits do not
have legal tender power arid their acceptance in the
payment of debts, both public and private, is at the
option of the creditor: Provided^ however, That a check
REVIEWER ON COMMERCIAL LAW
8
which has beeii icfeated a M credited to die account
of the creditor shall be equivalent to delivery to the
creditor of cash in an amount equal to the amount
credited to his account/'
4.03. COINS AS LEGAL TENDER
PAST 1 — NEGOTIABLE INSTRUMENTS LAW
(Act No. 2031)
by the person giving it, requiring the person to whom
it is addressed to pay on demand or at a fixed or de­
terminable future time a sum certain in money to cr­
uder or to bearer (Sec. 126, NIL).
.02. Promissory Note
Pursuant to Section 52 of Republic Act No.
7653 and BSP Circular No. 537, Series of 2006, the
maximum amount of coins to be considered as legal
tender is adjusted as follows:
a)
One thousand pesos (PI,000.00) for denomina­
tions of 1-Peso, 5-Peso and 10-Peso coins; and
b)
One hundred pesos (PiOO.OO) for denominations
of 1-centavo, 5-centavo, 10-centavo, and 25-cen­
tavo coins.
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 (Sec. 184, NIL).
03. Kinds of Bills of Exchange
a)
Draft — used synonymously with bill of ex­
change although it normally refers to a bill of
exchange used in documentary exchange like
letters of credit transactions.
'5)
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.
c)
Time draft — draft that is payable at a fixed
date.
d)
Sight or Demand draft — draft that is payable
when the holder presents it for payment.
e)
Trade acceptance —-bill that is used in contracts
of sale where the seller as drawer orders the buy­
er (as drawee) to pay a sum certain to the same
seller (payee).
f)
Banker's acceptance — a time draft across the
face of which the drawee has written the word
accepted.
5. WHAT A RE THE TWO IMPORTANT FEATURES OF A
NEGOTIABLE INSTRUM ENT?
5.01. Negotiability
9
______________ ^
It is that attribute or property whereby a bill or
note or check may pass from hand to hand similar to
money, so as to give the holder in due course the right
to hold the instrument and to collect the sum payable
for himself free from defenses.
5.02. Accumulation of Secondary Contracts
Secondary contracts are picked up and carried
along with them as they are negotiated from one
person to another, or in the course of negotiation
of a negotiable instrument, a series of juridical ties
between the parties thereto arise either by law or by
privity.
6. KINDS OF NEGOTIABLE INSTRUM ENTS
6.01. Bill of Exchange
A bill of exchange is an unconditional order In
writing addressed by one persOh to another, signed
g)
Check — a bill of exchange drawn on a bank
payable on demand.
REVIEWER ON COMMERCIAL LAW
PART I — NEGOTIABLE INSTRUMENTS LAW
(Act No. 2031)
6.04. Kinds of Promissory Notes
a)
b)
c)
Certificate of deposit — a form of promissory
note which is a written acknowledgment of a.
hank o£ its receipt of a certain sum with a promise
to repay the same.
Bonds — a certificate or evidence of a debt on
which the issuing company or governmental
body promises to pay the bondholders a speci­
fied amount of interest for a specified length of
time, and to repay the loan on the expiration
date.
Debenture — a promissory note of bond backed
by the general credit of a corporation and usu­
ally not secured by a mortgage or lien on any
specific property.
6.05. When can a Bill of Exchange be treated as a pro­
missory note?
---------------- Instances when a bill may be treated as a
promissory note by the holder (Secs. 17[e] and 130,
NIL).
a)
the drawer and the drawee are the same person;
b)
the drawee is a fictitious person;
c)
the drawee has no capacity to contract;
d)
the instrument is so ambiguous that there is
Maker primarily liable
Drawer secondarily liable
Only one presentment
(for payment)
Generally, 2
presentments: acceptance
and for payment
b)
Bill of Exchange vs. Check
ORDINARY BILL OF
■EXCHANGE
CHECK
Not drawn on a deposit.
It is not necessary that a
drawer of a BOE should
have funds in the hands of
the drawee.
It is necessary that a check
is drawn on a deposit.
Otherwise, there would be
fraud.
Death of the drawer of a
RfYE with thp-knowledge—
of the bank, does not
revoke the authority of the
bankertopay.
Death of the drawer of
a check, with the kn-ow-- —
ledge by the bank, revokes
the authority of the banker
to pay;
May be presented for
payment within a reason­
able time after its last
negotiation (Sec. 71).
Must be presented
for payment within a
reasonable time after its
issue (Sec. 186).
doubt whether it is a bill or a note.
6.06. a)
Negotiable Promissory Note vs. Negotiable
Bill of Exchange
- PROMISSORY NOTE :
BILL OF EXCHANGE
Unconditional promise
Unconditional order
Involves 2 parties
Involves 3 parties
W/v-.V-r :-N;'W w.-vN
6.07.
Are the following commercial papers negotiable
instruments under the NIL?
1)
a crossed check
2)
a trade acceptance
3)
a money order
4)
a warehouse receipt
5)
pawnticket
PART 1 — NEVDTJABLE INSTRUMENTS LAW
(Act No. 2031)
REVIEWER'ON COMMERCIAL LAW
12
a)
6)
treasury warrant
7)
bill of lading
8)
trust receipt
Crossed check — usually negotiable as it nor­
mally complies with the requirements under
Section 1, NIL, but issued for a special purpose
c)
Drawer — the person who draws the bill of
exchange and orders the drawee to pay a sum.
certain in money.
d)
Drawee — the person to whom the order to pay
is addressed in a bill of exchange.
e)
Acceptor
a drawee who accepts the order
to pay made by the drawer. It is only when a
drawee becomes an acceptor that he is primarily
liable.
f)
Holder —■the person who is in possession of
and can be negotiated only once.
b)
Trade acceptance — .negotiable, it is a Bill of
Exchange addressed by the' seller of the goods to
' 'the buyer. However, Section 1 must be complied
a bearer instrument or an indorsee of an order
instrument who is in possession thereof. A
holder is the obligee, a person who can enforce
payment of the instrument.
with.
c)
Money Order — non-negotiable as it is gov­
erned by postal rules and regulations which may
be inconsistent with the NIL and it can only be
g)
negotiated once.
d)
Warehouse receipt — not negotiable under the
NIL for the same reason as in Bill of Lading.
e)
Pawn Ticket — non-negotiable, it does not
represent money but the pawned articles.
f)
Treasury warrant —- non-negotiable being pay­
able out: of a particular fund.
g)
Bill of Lading — not negotiable under die NIL,
it represents goods, not money.
.............. h)
Trust Receipt — not negotiable under the NIL, it
is an evidence of ownership of goods, not mon­
t.
8.01. Distinctions between negotiable instruments and
npn-negotiable instruments may be stated as fol­
lows:
a)
Only negotiable instruments are governed by
the NIL. If an instrument is not negotiable, the
NIL does not apply. Application of the NIL to
non-negotiable instruments is only by analogy.
b)
Negotiable instruments can be transferred by
negotiation or by assignment. Non-negotiable
instruments can be transferred only by assign­
ment.
c)
The transferee of a non-negotiable instrument
can never be a holder in due course but remains
to be an assignee. A transferee of a negotiable
-instrument can be a holder -in due course if all
the requirements under Section 52 of the NIL are
complied with,
7. PERSONS INVOLVED
Maker — the person who makes a promissory
note and promises to pay the amount stated
therein.
b)
Payee — the obligee, that is, the person who, by
the terms of the note or the bill, is to receive pay­
ment.
Referee in ease of need — a person who may be
designated in the instrument as the person who
may be resorted to by the parties in case of dis­
pute.
DISTINCTIONS----------------------------------------------------------
ey*
a)
13
REVIEWER ON COMMERCIAL LAW
PART I — NEGOTIABLE INSTRUMENTS LAW
(Act No. 2031)
d) Since the transferee of a non-negotiable instru­
ment cannot be a holder-'in due course, all
defenses available to prior parties may be raised
against the last transferee.
the word * ‘written' includes printed, and 'writingr
includes print."
b)
8.02. Distinguish Negotiability from Assignability
a)
Assignability pertains to contracts in general,
negotiability pertains to negotiable instruments.
b)
One who takes an instrument by assignment
takes the instrument subject to the defenses
obtaining among the original parties, whereas a
person, who takes the instrument by negotiation,
takes it free from personal defenses available
among the parties.
"is important is that the maker or the drawer used
what he affixed as his own signature for authen­
tication.
PROBLEM:
1.
Juan Cruz borrowed PI, 000.00 from Pedro Santos
as evidenced by a promissory note executed by X as
maker. All other requisites of negotiability are present
in the note except that Juan Cruz did not affix his usu­
al signature thereon. As Juan was ailing at that time,
he was only able to put "X" in the blank space meant
for the signature of the maker. Is -die requisite that the
instrument must be signed by the maker complied
with?_______ ___ ________ — — ------------------------------
A:
Yes. The letter "X" is sufficient to comply with the
requirement that the instrument must be signed by
the maker. It appears from the problem that such
letter was adopted by Juan Cruz with the intent to
authenticate the instrument. It is not necessary that
the signature is the usual signature of the maker.
9. R E Q U ISIT E S OF NEGOTIABILITY
Section 1. Bonn o f negotiable instruments. — An
instrument to be negotiable must conform to the following
requirements:
~~
(a) It must be in writing and signed b y the maker or
drawer;
(b) Must contain an unconditional promise or order
to pay a sum certain in money;
(c) Must be payable oh demand, or at a fixed or
determinable f uture time;
(d) Must be payable to order or to bearer; and
Te) Where the instrument is addressed to a drawee,
he'm ust be named; or otherwise indicated therein with
reasonable certainty,
9.01. IN WRITING AND SIGNED BY THE MAKER OR
DRAWER
a)
Must be in writing — may be printed, in ink
or in pencil, arid it may be written in any mate­
rial that substitutes paper like cloth, leather, or
parchment. Section 191. -of the NIL provides that
Signed by the maker or drawer — the signature
inay be in one's handwriting, printed, engraved,
lithographed, or photographed so long as they
are adopted as the signature of the signer. What
9.02. IT MUST CONTAIN AN UNCONDITIONAL
P R A I S E OR ORDER TO PAY A SUM CERTAIN
IN MONEY
a)
Promise or Order to Pay
The promise in a promissory note is the
undertaking made by the maker to pay a sum
certain in money to the payee or the holder.
The "order" in a bill is a command made by the
drawer addressed to the drawee ordering the
latter to pay 'the payee or the holder a sum cer­
tain in money.
PART I — NEGOTIABLE INSTRUMENTS LAW
(Act No. 2031)
REVIEWER ON COMMERCIAL LAW
d)
1) The word "promise" or "order" need
not appear in the instrument to satisfy the
requirements of Section 1(b) of the NIL, Examples:
(1) "An acknowledgment may become a promise
by the addition of words by which a promise of
Fund for
Reimbursement
payment is naturally implied, such as, 'payable/
'payable on a given day/ 'payable on demand/
' paid. . . when called for';
B. Particular fund
indicated is not
the direct source of
payment.
Promise or Order to Pay Must be Uncondition­
al
1)
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
2)
A statement of the transaction which gives
rise to the instrument. Example: An instru­
ment that contains the following, "per con­
tract of sale dated Jan. 1,2003."
c) - Conditional
(1)
An order or promise to pay out of a particu­
lar fund;
(2)
An instrument payable upon a contingency
(the happening of the event does not cure
the defect).
,.
■Fund
himself from the
particular fund
indicated.
Bucoy, 103 Phil 40 [1958]).
------ An unqualified order or promise lo pay is~
unconditional within the meaning of NIL though
coupled with:
Indicating Particular
A. (1) The draweepays A, There is only one
the payee from
act — the drawee
pays directly from
his own funds
the particular fund
afterwards.
indicated.
(2) The drawee pays
2) 'Due A.B. or order US$325, payable
on demand/ or, 'I acknowledge myself to be in­
debted to the order of A in US$109, to be paid on
demand, for value received/ or, 'I.O.U. US$85 to
be paid on May 5th / are held to be promissory
notes, significance being given to words of pay­
ment as indicating a promise to pay." (Jimenez v,
b)
Indication of a Particular Fund for Payment vs.
Fund for Reimbursement
T e /'
e)
B. Particular fund indi­
cated is the direct
source of payment.
Is a promissory note wherein the maker promises to pay "as soon as his means permit him to
do so" negotiable?
No. The phrase "as soon as his means per­
mit him to do so" renders the promise condi­
tional, although under the Civil Code, it may be
considered as an obligation with a period.
PROBLEMS: )
A treasury warrant was issued by Mr. BA in his capa­
city as disbursing officer of the Food Administration,
a government instrumentality. The warrant states that
it is "payable for additional cash advances for the Food
Program Campaign in La'Union" and the amount
stated therein is "payable from the appropriation
for Food Administration." The warrant is now in the
hands of Mr. BA, who claims to b e -a holder in due
course. Can BA be considered a. holder in due course?
PART 1— NEGOV: MR - •METAJ -
REVIEWER ON COMMERCIAL LAW
18
{Aft No.
A t.
2.
A:
Mr. BA cannot be considered a holder in due course
because he is not even a holder of the warrant,
He cannot be a holder because the warrant is not
negotiable. The-promise to pay is conditional because
the- sum is payable out of a particular fund, that is,
the appropriation for food -administration (Benjamin
Abubakar v. The Auditor General, G.R. No. L-1405, July
31,1948, 31 Phil 359).
A bookstore received five postal money orders total­
ing PI,000.00 as part of sales receipts, and deposited
the same with a bank, A day after, the bank tried, to
clear them with the Bureau of Posts. It turned out,
however, that the postal money orders were irregu­
larly issued, thereby prompting the Bureau of Posts
to serve notice upon all banks not to pay orders if
presented for payment. The Bureau of Posts further
informed the bank that the amount of P1;0Q0.00 had
been deducted from the bank's clearing account for
the same amount. A complaint was filed by the book­
store against the Bureau of Posts and the bank for the
recovery of the sum of P I,000.00 which however, was
dismissed by the trial court. The bookstore appealed
contending that postal money orders are negotiable
instruments and that their nature could not have been
affected by the notice sent by the Bureau of Posts to
the banks. How would you resolve the controversy?
The bookstore's contention is untenable. Postal
money orders are not negotiable instruments. Pos­
tal money orders are under the restrictions and
limitations of the postal laws. Hence, they do not
contain an unconditional promise or order required
by Sections 1 and 3 of the NIL (1980 Bar; Philippine
Education Company, Inc. v, Mauricio A. Soriano, et ah,
G.R. No. 1-22405, June30,1971, 39 SCRA 587).
9.03. PAYABLE IN A SUM CERTAIN IN MONEY
a)
Money need not be "legal tender." An instru­
ment is still negotiable although the amount to
W L ■W
19
}
be paid is expressed in c c r -m c y that is not legal
tender so long as it is expressed in money (PNB
v. Zulueta, 101 Phil. 1071) Example: payable in
Under Republic Act No. 8183, the agree­
ment to pay in foreign currency is valid.
b)
If the obligor like the maker is given the option
to deliver something in lieu of money, the ins­
trument is not negotiable (Sec. 5, NIL). Example:
A note where the maker "promises to deliver
P1,000.0Q or a sack of rice" at his option.
c)
If the instrument gives the holder an election to
require something to be done in lieu of payment
of money, the instrument is still negotiable (Sec.
5[dJ). Example: Where the maker promises to pay
P I,000.00 or a sack of rice at the option of the
holder
d)
A sum is certain within the contemplation of
Section 1(b) of the NIL if the amount that is to
Be unconditionally paid by the maker or drawee
can be determined on the face of the instrument
even if it requires mathematical computation.
”
e)
The sum payable is a sum certain within the
meaning of this act, although it is to be paid (Sec.
2, NIL):
1)
With interest; or
2)
By stated installments; or
3)
By stated installments, with a provision
that, upon default in payment of any install­
ment or of interest, the whole shall become
due; or
4)
With exchange, whether at a fixed rate or at
the current rate; or
5)
Wifheosts o fE le ctio n or an attorney's fee,
in case payment shall not be made at matu­
rity.
20
REVIEWER ON COMMERCIAL LAW
PART I — NEGOTIABLE INSTRUMENTS LAW
■Act No. 2031)
£}
STATED INSTALLMENTS
The dates of each installment must be fixed
or at least determinable and the amount to be
paid for each installment must be stated. Example;
The instrument is not negotiable if "payable in
5 installments in the amount of PI,000.00 per
installment" without stating the dates of each
uncertain. Example: "payable within five (5)
days from.- death of Mr. X."
c ) ' Acceleration Clauses
The negotiability of the instrument is not
affected even if it is to be paid by stated install­
ments, with a provision that, upon default in
payment of any installment or of interest, the
whole shall become due (Sec. 2, NIL).
installment.
9.04. PAYABLE ON DEMAND OR AT A FIXED OR
DETERMINABLE FUTURE TIME
a)
d)
1)
e)
When it is so expressed to be payable on
demand, or at sight, or on presentation; or
Where an instrument is issued, accepted, or
indorsed when overdue, It is, as regards the
person so issuing, accepting, or indorsing
it, payable on demand.
Example: An instrument is still negotiable if
it is payable "two (2) years from date subject to
extension for another one (1) year at the option
of the maker."
Payable at a-Determinable Future Time
An instrument is payable at a determinable
future time if it is expressed to be payable (Sec. 4,
NIL):
1)
9.05. PAYABLE TO ORDER OR BEARER
a)
An instrument that is payable to a specified person
or entity is not negotiable because the NIL
requires that the instrument must be payable to
order or to beiarer.
b)
:Is a certificate of time- deposit wherein it is stated:
"This is to certify that bearer has deposited x x x ,
repayable to said depositor" negotiable?
At a fixed period after date or sight. Exam­
ple: "twenty days after date."
2)
On or before a fixed or determinable future
time specified therein. Example: "payable
on or before Jan. 5, 2006."
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
Extension Clauses
An instrument is payable at a definite time
if by its terms it is payable at a definite time sub­
ject to extension at the option of the holder, or to
^tensiondo...a..fiirlher:.definite.tlme.at.the.option.
of the maker or acceptor dr automatically upon
or after a specified act or event.
2) In which no time for payment is expressed;
____ ________ ....■■■and.............. ............................ ........................ .......
3)
Insecurity Clauses
Provisions in the contract which allow the
holder to accelerate payment "if he deems him­
self insecure." The instrument is rendered nonnegotiable.
Payable on Demand
The instrument should be paid the moment
it is presented for payment. An instrument is
payable on demand (Sec. 7, NIL):
b)
21
wit-Is negotiable being payable to bearer.
However, where the Certificates of Time Depo-
22
REVIEWER ON COMMERCIAL LAW
c)
When is an instrument payable to bearer (Sec.
9, NIL)
1)
When it is expressed to be so payable; or
2)
When it is payable to a person named there­
in or bearer; or
3)
.
When ib is payable to the order of a ficti­
tious or mon-exisfing person, and such fact
was known to the person making it so pay­
able; or
4)
When the name of the payee does not pur­
port to be the name of any person (Example:
"pay to cash"); or
5)
When the only or last indorsement is an
indorsement in blank.
Note: In No. 3, the payee need not be
actually fictitious or non-existent. It can
still be payable to bearer even if the payee
is existing if the maker or drawer does not
intend the payee to have any right over the
instrument.
d)
Section 8 of the NIL likewise identifies the
: persons who can be designated as payees in an
1)
A payee who is not the maker, drawer, or
drawee; or
2)
The drawer or maker; or
3)
The drawee; or
4)
Two or more payees jointly; or
5)
One or some of several payees; or
6)
The holder of an office for the time being.
PROBLEMS:
1.
Determine if the following instrument is negotiable:
"FOR VALUE RECEIVED, I /we jointly and severally
promise to pay to the ITM Corporation, the sum
of ONE MILLION NINETY THREE THOUSAND
SEVEN HUNDRED EIGHTY NINE PESOS &
______71/100 only (PI .093.789.71), Philippine Currency,
the said principal sum, to be payable in 24 monthly
installments starting July 15, 1978 and every 15th of
the month thereafter until fully paid..
A:
The note is not negotiable because it is not payable to
order or to bearer. It is payable to a specified person
(Consolidated Plywood Industries, Inc., et a l v. IFC
Leasing & Acceptance Corporation, G.R. No. L-72593,
April 30,1987, US SCRA 448,458-459).
Order Instruments
There are only two (2) ways by which an
instrument can be made payable to order under
Section 8 of the NIL. The instrument can either
be payable to the order of a specified person (i.e.,
"pay to the order of Juan De La Cruz") or to a
specified person or his order ("pay to Juan De La
Cruz or order")
23
order instrument
the persons to whose order
the instrument, may be made: payable. The ins­
trument may be payable to the order of:
ilwisSliiiSL
sits (CTD) were delivered, but not endorsed
as security, there is no -negotiation; at most the
holder would be a holder for value up to the
extent of his lien under Section 27 of the NIL or a
pledgee under the Civil Code.
PART I — NEGOTIABLE INSTRUMENTS LAW
(Act No, 2031)
2.
ATL drew a check on Nov. 16, 2000 upon C Bank for
the sum of P4,000.00 payable to the order of cash. He
delivered the check to Mr. LHH on the same day in
exchange for money. LHH gave the money to ATL
because the latter represented that he badly needed
the amount but could not withdraw from this-bank
because the bank was already closed. ATL's check
was later dishonored because the account on which it
was drawn did not have sufficient funds. When ATL
was later prosecuted for estafa under Article 315(d)
R EV IEW ® ON COMMERCIAL LAW
PARI I — NEGOTIABLE INSTRUMENTS LAW
(Act No, 2031)
(2) of the Revised Penal Code, he alleged that he is not
liable arguing that the check should not have been,
presen ted for payment because he- did not indorse the
same. Is the argument of ATL tenable?
A:
The argument of ATL is untenable. A check that is
payable to the order of cash is a bearer instrument
(Sec. 9[d], NIL). Hence, the drawee bank may pay it
to the person presenting it for payment without the
drawer's indorsement. "A check payable to bearer is
authority for payment to the holder. Where a check
is in the ordinary form, and is payable to bearer, so
that no indorsement is required, a bank, to which it
is presented for payment, need not have the holder
identified, and is not negligent in failing to do so"
v
.. ...
b)
A bill may be addressed to more than one draw­
ee jointly, whether they are partners or not; but
not to two or more drawees in the alternative or
in succession (Sec. 128, NIL). Example: An instru­
ment may be addressed "to Juan De La Cruz and
Pedro Santos" but not "to Juan De La Cruz or
Pedro Santos."
10. OMISSIONS AND PROVISIONS THAT DO NOT AFFECT
NEGOTIABILITY
10.01. The validity and negotiable character of an instrument
are not affected by the fact that (Sec. 6, NIL):
.I)
It is. not dated (date of issuance); or .
Does not specify the value given, or that any
value hadheen given therefor; or
3)
Does not specify the place where it is drawn or
the place where it is payable; or
4)
Bears a seal; or
5)
Designates a particular kind of current money in
which payment is to be made;
6)
Addressed to more than one drawee jointly.
When date is necessary in order to determine the
maturity date of the instrument. Examples: (1) where
an instrument expressed to be payable at a fixed
period after date is issued undated; (2) where the
acceptance of an instrument payable at a fixed period
after sight is undated.
9.06. IDENTIFICATION OF THE DRAWEE
Where the instrument is addressed to a drawee
(meaning in a bill of exchange), he must be
named or otherwise indicated therein with
reasonable certainty. The holder must know
to whom he should present it for acceptance
and/or for payment, otherwise, the purpose of
negotiable instrument as a tool in commercial
dealings will be greatly hampered.
2)
10.02. When date may be inserted by holder
(AngTek Lian v. CA, 87 Phil. 383).
a)
23
N ote: Under Section 11 of the NIL, "where the
-------- instrument or—an acceptance or-nny..indorsement
thereon is dated, such date is deemed prima facie to be
the true date of the making, drawing, acceptance, or
indorsement, as the case may be."
PROBLEM:
1.
Can a bill of exchange or a promissory note qualify as
a negotiable instrument if: (a) it is not dated; (b) or the
day and the month, but not the year of its maturity,
is given; (c) or it is payable to "cash"; (d) or it names
two alternative drawees; (e) or it does not state the
place:where it is made or payable?
A:
(a) " Yes. Section 6(a) provides that the negotiability
of an instrument is not affected if it is not
dated. The date of issuance is not a requisite of
negotiability prescribed by Section 1, NIL.
(b)
No. Absence of the year of maturity affects the
negotiability. The evident intent is to make the
PART I — NEGOTIABLE INSTRUMENTS LAW
(Act No. 2031)
REVIEWER ON COMMERCIAL LAW
PNB the amount of P.61,000.00, The note contains the
following stipulations; .."Without-defalcation, value
received; and do hereby authorize any attorney in the
. Philippines, in case this note be not paid at maturity
■to. appear in the name and. confess judgment for the
above sum ..with..interest,. .cost of ...suit and attorney's
fees of ten percent ,(10%) for collection, a release of
all errors and waiver of all rights to inquisition and
appeal, and to the benefit of all laws exempting
property, real or personal, from levy or sale." MORB
claims that the instrument is not negotiable because
the above stipulations are invalid. Is MORB correct?
instrument payable on a fixed date but the year
was omitted. Hence, the time for payment is not
determinable in this case.
(c)
Yes. Under Section 9(d) of the NIL, an instrument
is payable to bearer if the name of the payee does
not purport to be the name of any person. The
name of a payeie (cash) is an inanimate object,
hence, it is a bearer instrument.
(d)
No. Section 128 of the NIL provides a bill may
not be addressed to two or more drawees in the
alternative or in succession. Otherwise, there is
no certainty as to the person to whom the instru­
ment may be presented for payment.
(e)
The negotiability of an instrument is not affected
if it does not state the place where it is made or
where it is payable. All that is required under the
NIL is compliance with Section 1 thereof (1988
and 1997 Bar).
10fl3rAdditional provisions
.....
An instrument is still negotiable even if the
following are present (Sec. 5, NIL):
1)
Authorizes the sale of collateral securities in case
the instrument be not paid at maturity; or
2)
Authorizes a confession of judgment if the ins­
trument be not paid at maturity; or
3)
Waives the benefit of any law intended for the
advantage,or protection of the obligor; or
4)
Gives the holder an election to require some­
thing to be done in lieu of payment of money.
PROBLEM:
1.
' The manager and treasurer of MORB Company
executed and delivered to PNB a promissory note
:. whereby the company promises to pay to the order of
27
A:
The negotiability of the instrument is not affected by
the stipulations, Although MORB is correct in stating
that the stipulations are void, it is still negotiable if all
other requirements of Section 1 are present. They are
in the nature of stipulations authorizing confession of
judgment which is considered void for being against
public policy in this jurisdiction. However, Section 5
' of the NIL provides that the negotiable character of
an instrument otherwise negotiable is not affected by
a provision which authorizes confession of judgment
if the instrument be not paid at maturity. In other
words, only the stipulation is avoided (Philippine
National Bank v. Manila Oil Refining & By-Products Co.,
43 Phil. 444).
11. TR A N SFER AND NEGOTIATION
11.01. If the instrument is negotiable, transfer thereof can
be effected either through; (a) negotiation; or (b)
assignment.
a)
If the instrument is merely assigned, the trans­
feree does not become a holder and he merely
steps into the shoes of the transferor (Salas v. CA,
G.R. No. 76788, Jan. 22,1990). Any defense avail­
able against the transferor is available against
the transferee. Example: Where the instrument
REVIEWER ON COMMERCIAL LAW
PART I — NEGOTIABLE INSTRUMENTS LAW
(Act No. 2031)
that- is payable to order was merely delivered
without indorsement.
02. a)
such holders as make title through his indorsem m ti& ec. 46, NIL),
ISSUANCE
" Issue" is the first delivery of the instru­
ment complete in form to a person who takes it
as a holder (Sec. 191, NIL).
1)
1.
Issuance to the payee is negotiation because
the transfer constitutes the payee the holder
of the instrument. The payee may even be
a holder in due. ,course if he has acquired
the note from another holder or he has not
=directly dealt with the maker thereof.
Delivery is defined as the transfer of pos­
session of the instrument by the maker or
drawer with the intention to transfer title
to the payee and recognize him as holder
thereof (De la Victoria v. Burgos, 245 SCRA
_________ 374119951).
___________ ^
NEGOTIATION
An instrument is negotiated when it is
transferred from one person to another in such
manner as to constitute the transferee the holder
thereof.
c)
1)
If .payable to bearer, it is negotiated by de­
livery.
2)
If payable to order, it is negotiated by the
indorsement of the holder completed by
delivery.
Richard Clinton makes a promissory note payable to
bearer and delivers the same to Aurora Page. Aurora
Page, however, indorses it to X in this manner:
"Payable to X. Signed: Aurora Page"
Later, without indorsing the promissory note, X
transfers and delivers the same to Napoleon. Richard
Clinton subsequently dishonors the note. May Napo­
leon proceed against Richard Clinton for the note?
A:
Yes, Napoleon may proceed against Richard Clinton.
The instrument was negotiated by delivery to
Napoleon. Despite the special indorsement of Ms.
Page it can still be negotiated by delivery because
it is originally a bearer instrument (Sec. 40, NIL)._____________
Hence, Napoleon became a holder who has the right
to enforce the instrument against the maker, Richard
Clinton (1998 Bar).
d)
INCOMPLETE 'NEGOTIATION OF ORDER
INSTRUMENT
1)
Where the holder of an instrument payable
to his order transfers it for value without
indorsing it, the transfer vests in the trans­
feree such title as the transferor had therein,
and the transferee acquires in addition, the
right to have the indorsement of the trans­
feror (Sec. 49, NIL).
2)
For the purpose of determining whether
the transferee is a holder in due course, the
negotiation takes effect as o f the time when
the indorsement is actually made (Sec. 49,
BEARER INSURANCE ALWAYS A BEARER
INSURANCE
Where an instrument, payable to bearer,
is indorsed specially it may nevertheless be
further negotiated by delivery; but any person
indorsing specially is liable as indorser to only
j
PROBLEM:
2)
b)
29
NIL).
30
REVIEWER ON COMMERCIAL LAW
Example: Mr. M through fraud was in­
duced by Mr. A to issue a negotiable prom­
issory note payable to the order of Mr. A.
The payee, Mr. A, delivered the note to Mr.
B on May 3, 2003 without indorsing it. On
May 20, 2003, Mr. A, upon Mr. B's request,
placed his indorsement at the back of the
note: "Pay to B, Sgd. A." If Mr. B learned
about the fraud committed by Mr. A prior
to May 20, 2003, Mr. B cannot be a holder
in due course because he had knowledge of
the defect of title of Mr. A at the time the
negotiation was made complete. He can be
a holder in due course if he had no such
knowledge at the time the indorsement was
made on May 20, 2003.
11.03. INDORSEMENT
a)
b)
c)
d)
PART I — NEGOTIABLE INSTRUMENTS LAW
(Act No. 2031)
2)
on the instrument itself; or
2)
separate piece of paper attached to the
instrument called "allonge" (Sec. 31, NIL).
3)
Qualified Indorsement ■
— qualified in­
dorsement 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 in­
dorsement does not impair the negotiable
character of the instrument.
4)
Conditional Indorsement (Sec. 39, NIL) —
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.
5)
Restrictive Indorsement (Sec. 36, NIL).
Indorsement must be of the entire instrument (Sec.
32, NIL). Example: An instrument for P5,000.00 can­
not be indorsed for less like PI,000.00. Exception:
when there was previous partial payment.
Section 32 of the NIL disallows negotiation to two
or more indorsees severally. Example: Indorse­
ment of a P20,000.G0 note that states "Pay to Jose
Cruz, P15,000.00 and Pedro Santos P5,000.00" is
not considered negotiation although it may be
considered an assignment.
Kinds of Indorsem ent
1)
Blank indorsem ent — no indorsee is speci­
fied and it is done by affixing the indorser's
signature.
.Special indorsement -— designates the
indorsee. "Pay to X."
Note: 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 char­
acter of the indorsement (Sec. 35, NIL).
Where indorsem ent should be placed
1)
31
(i)
Prohibits the further negotiation of the
instrument ("Pay to X only"); or
(ii) Constitutes the indorsee the agent of
the indorser ("Pay to X for collection");
or
(iii) Vest the title in the indorsee in trust
for or to the use of some other persons
("Pay to X in trust for Y").
6)
Rights of Restrictive Indorsee (Sec. 37,
NIL)
(i)
To receive payment of the instrument;
(ii) To bring any action thereon that the
indorser could bring;
I — NEGOTIABLE INSTRUMENTS LAW
(Act No. 2031)
REVIEWER ON COMMERCIAL LAW
32
(iii) To transfer, his rights., as such indorsee,
where the .rforrn of th e. indorsement
authorizes .him to do so. In case of
transfer, all subsequent indorsees ac­
quire only the title of the first indorsee
under the restrictive indorsement.
been previously dishonored, if such was
the fact;
y
3)
That he. took it in good faith and for value;
4)
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;
1)
Even a holder not in due course may sue
thereon in his own name and payment to
him in due course discharges the instru­
ment (Sec. 51, NIL). The only disadvantage
of a holder not in due course is that the ins­
trument is subject to defenses as if it were
11.04. Negotiation by Prior Party
Where an instrument: is negotiated back to a
prior party, such party may reissue and further nego­
tiate the same. But he is not entitled to enforce pay­
ment thereof against any intervening party to whom
he was personally liable (Sec. 50, NIL). However, he
may strike out the intervening indorsements because
they are not necessary for his title and he is liable to
them because of his initial indorsement (Sec. 48, NIL).
Example: "A" payee indorsed the instrument to B,
then B indorsed it to C, C to D, then D to B. B can fur­
ther negotiate the instrument. He may also strike out
the indorsements of C and D.
~
12. HOLDERS
12.01. "Holder"
The payee or indorsee of a bill or note who is in
possession of it or the bearer thereof (Sec. 191, NIL). In
other words, the payee or indorsee is the holder of an
order instrument while the payee or the bearer is the
holder of bearer instrument.
a)
non-negotiable (Dino v. judal-Loot, G.R. No.
170912, AprilM, 2010).
2)
C
1)
That it is complete and regular upon its
.face;..
O
2)
,;r
'w
That he became the holder of it before it
was overdue/, and without notice that it has
A payee can be a holder in due course. Section
191 defines "holder" as the payee or indorsee
— — — of a bill or 'note, who is in possession of
if or the bearer thereof. Hence, the word
"holder" in the first clause of Section 52
and in the second subsection thereof "may
be replaced by the definition in Section
191 so as to read a holder in due course is
a payee or an indorsee in possession, etc."
(De Ocampo v. Gatchalian, 3 SCRA 596 [1961];
Prudencio v. CA, 143 SCRA 7 [1986]).
This applies even to crossed checks
where the payee was not involved in the
underlying transaction (Yang v. CA, G.R.
12.02. REQUISITES (Sec. 52, NIL)
A holder in due course is a holder who has taken
the instrument under the following conditions:
33
No. 138074, Aug. 15,2003).
b)
Demand Instruments
Where an instrument payable on demand
is negotiated after an unreasonable length of
time after its issue, the holder is not deemed a
• holder in due course.(Sec. 53, NIL).
REVIEWER ON COMMERCIAL LAW
■■
■ What can be considered "unreason­
able" is relative. Section 193 of the NILprovides
that "in determining what is 'reasonable time"
or an 'unreasonable time/ regard is to be had in
the nature of the instrument, the usage of trade
or business (if any) with respect to such instru­
ments, and the facts of the particular case."
c)
Notice of Infirmity and Defect
Infirmity in the instrument means any
irregularity in the instrument. Thus, notice of
an alteration which is apparent is notice of an
infirmity in the instrument. Notice of forgery
in the maker or the drawer's signature is also
notice of infirmity in the instrument. On the
other hand, a title of a prior party is defective
when he obtained the instrument, or any signa­
ture thereto, by fraud, duress^ or force and
fear, or other unlawful means, or for an illegal
-------consideration, or when-he-negotiales ibiribf-eachof faith, or under such circumstances as amount
to a fraud (Sec. 57, NIL).
d)
PART I — NEGOTIABLE INSTRUMENTS LAW
(Act No. 2031)
indue course. The act of crossing a check serves
•as warning to the holder that the check has been
issued'ior a definite.purpose so that he must in­
quire if he has received the check pursuant to
that purpose (Bataan Cigar & Cigarette Factory v.
CA,230SCRA 643 [1994]).
Holderfor ^ l u e
Value — a consideration sufficient to sup­
port a simple contract. These include antecedent
debts and a lien on the instrument.
1)
The holder is a holder for value only to the
extent that the consideration agreed upon
has been paid, delivered, or performed.
Non-performance of the obligation will
give rise to partial or full defense of failure
of consideration as the case may be.
2)
Where the transferee receives notice of any
infirmuly in the instrument u r defect in the'
title of the person negotiating the same
before he has paid the full amount agreed
to be paid therefor, he will be deemed a
holder in due course only to the extent of the
amount paid therefor by him. Example: If the
holder took the instrument on the strength
of his promise to deliver P20Q,000.00, but
he had only delivered P100,000.00, he is a
holder in due course only up to P100,000.00
if he receives notice of infirmity before he
could fully pay the consideration.
3)
As regards an accommodation party, the
fourth condition, ie,, lack of notice of any
infirmity in the instrument or defect in title
of the persons negotiating it, has no appli­
cation (Stelco Manufacturing Corp. v. CA, 210
SCRA 51). However, the inapplicability of
fire fourth requisite is limited to notice of
Good Faith
The Supreme Court explained in Vicente R.
De Ocampo & Co. v. Anita Gatchalian, et al. (No.
L-15126, Nov. 3 0 ,1961,3 SCRA596), that although
good faith on the part of the holder is presumed,
such presumption is destroyed if the payee or
indorsee "acquired possession of the instrument
under circumstances that should have put him
to inquiry as to the title of the holder who ne­
gotiated the instrument." The burden is now on
the part of the holder to show that notwithstand­
ing the suspicious circumstances, it acquired the
check in actual good faith.
Note: A person who bakes a crossed check
without making further inquiries is not a holder
35
36
REVIEWER ON COMMERCIAL LAW
absence of consideration, tha-; is, -solace of
the fact that -the party is a mere accommo­
dation party who did not receive any con­
sideration on the instrument. If the holder
has notice of other infirmity in the instru­
ment or defect in title of the persons nego­
tiating the instrument, then the holder is
subject to personal defenses.
PROBLEMS:
A is indebted to B in the amount of P100,000.00. In
order to raise funds to pay for his obligation, A sold
his old car to C for P100,000.00 on Jan. 20, 2001.
A agreed to deliver the car to C on Jan. 25, 2001.
However, A convinced C to immediately issue a
check and to make the check payable to B. A informed
C that the check will be issued to B because of A's
outstanding obligation. Hence, C issued a check to B
-------- to pay for the-loan-e fA -payabie-eR-Jaftf-25> 2Q91-.--Thecheck was delivered to B through A. B and C were
not aware at that time that the car was sold, it was
already destroyed by fire. A fraudulently hid such
fact in order to convince C to issue the check and to
convince B to acceptihe check. Can B, the payee of
the check be considered a holder in due course?
1.
A:
Yes, he can be considered a holder in due course.
Nothing in the problem indicates that he is not a
holder in due course, hence, the presumption that he
is a holder in due course stands. All the requirements
of Section 52 of the NIL are present in the case because
...... . it appears that B is -a holder of the;instrument who
has taken the instrument complete and regular on its
face, he took it before it was overdue and it was not
previously dishonored; he took it in good faith and
for value and he had no notice of any infirmity in the
instrument or a defect of the title of a prior party.
PART I — NEGOTIABLE INSTRUMENTS LAW
(Act No. 2031}
37
Rolando, intending to .buy' a car, saw an old friend,
Roger, who is an agent to .sell the car .belonging to
Delgado Clinic. After negotiation, (Rolando decided
to buy said car. He drew .upon, .request of Roger,
& crossed check for P600.00, payable to Delgado
Clinic as evidence of his good faith, but which was
merely meant to be shown to Delgado Clinic by
Roger who received said check. The check would
then be returned when Roger brings the car and its
registration certificate for Rolando's inspection. For
failure of Roger to bring the car and its certificate of
registration, and to return the check, Rolando issued
a "stop payment order" to the ^drawee bank. In the
meantime, Roger paid the check to the Delgado Clinic
for the hospital bill of his wife and was given P158.25
as change. May Delgado Clinic be considered a holder
in due course, hence entitled to recover? Decide with
reasons.
Delgado Clinic may not be considered a holder in
due course, hence not entitled to recover. Although
Delgado Clinic was not in fact aware of the cir­
cumstances with respect to the delivery of the check
to Roger, there are circumstances that should have
put him on inquiry. Thus, it should have noted that
Rolando had no relation with it; that the amount of the
check did not correspond exactly with the obligation
of Roger to the clinic; and that the check is a crossed
check, which means that the check could only be
deposited but may not be converted into cash should
have put the clinic to inquiry as to the possession of
the check by Roger, and why he used it to pay his
accounts (1977 and 1962 Bar).
Po Press issued in favor of Jose a postdated crossed
check, in payment of newsprint which Jose promised
to deliver. Jose sold and negotiated the check to Excel
Inc. at a discount. Excel did not ask Jose the purpose
of crossing the check. Since Jose failed to deliver
the newsprint, Po ordered the drawee bank to stop
PART I — NEGOTIABLE INSTRUMENTS LAW
(Act No. 2031)
REVIEWER ON COMMERCIAL LAW
38
c)
payment on the check. Efforts of Excel to collect from
Po failed. Excel wants to know from yon as counsel:
1) Is Excel a holder in due course? 2) Can Po Press
raise absence or failure of consideration as a defense?
A:
1)
Excel is not a holder in due course. The instru­
ment involved 'is a crossed check and was
supposed to be deposited only. Excel is therefore
obligated to inquire regarding the circumstances
involving the issuance of the check. Failure on
his part, as in this case, will prevent him from
becoming a holder in due course; such failure or
refusal constituted bad faith.
2)
Yes. Since Excel is not a holder in due course,
Excel is subject to the personal defense which Po
Press can set up against Jose. There was failure
of consideration in the problem because Jose
failed to deliver the newsprint to Po Press (1994
Bar) . ;
12.03. RIGHTS OF A HDC
a)
b)
A holder in due course holds the instrument free
from any defect of title of prior parties, and free
from defenses available to prior parties among
themselves, and may enforce payment of the
instrument for the full amount thereof against
all parties liable thereon.
1)
a holder in due course is free from personal
defenses.
2)
a holder indue course is not free from real
defenses.
A holder not in due course is subject to personal
and real defenses.
Exception: A holder who is not a holder in
due course but he derived his title from a holder
in due course (Sec. 58, NIL).
39
May one who fails to inquire as to an infirmity
iri a negotiable. instrument and defect in the
holder's title, be a holder in due-coiirse?
YES, because the law does not impose on
a holder the obligation to inquire into the infir­
mity in the instrument or defect of the title of the
person negotiating it to him, However, failure to
make inquiry, when the circumstances indicate
defect,, renders the holder not a.bolder in due
course. Gross negligence may amount to legal
absence of good faith (De Ocampo v. Gatchalian, 3
SCRA 596).
i
PROBLEM:
1.
™
.A:
Larry issued a negotiable promissory note to Evelyn
and authorized the latter to fill up the amount in
blank with his loan account in the sum of P I,000.00.
However, Evelyn inserted P5,000.00 in violation
of the instruction. She negotiated the note to Julie
who had knowledge of the infirmity. Julie in turn
negotiated said note to Devi for value and who had no
knowledge of the infirmity. Supposing Devi endorses
the note to Baby for value but who has knowledge of
the infirmity, can the latter enforce the note against
Larry?
Yes. The problem indicates that Baby is not a holder
in due course. When she took the instrument, she had
knowledge of the breach of trust committed by Evelyn
against Larry. However, she has all the rights of a
holder in due course because she took the instrument
from Devi, a holder in due course. Although Baby is
not a holder in due course, she did not participate
in the breach of trust committed by Evelyn. Hence,
U Larry cannot set up the defense ithat the instrument
was completed in breach of trust against Baby because
such defense is a personal defense (1993 Bar).
40
REVIEWER ON COMMERCIAL LAW
13. REAL AND PERSONAL DEFENSES
REAL DEFENSES
PERSONAL DEFENSES
1. Minority (available only
to the minor)
1. Failure or Absence of
Consideration
2. Forgery
2.
3. Non-delivery of Incom­
plete Instrument
3. Non-delivery of Com­
plete instrument
4. Material Alteration
4.
Conditional delivery of
complete instrument
5.
Fraud in inducement
5.
Ultra Vires act of Corpo­
Illegal Consideration
PART I — NEGOTIABLE INSTRUMENTS LAM'
(Act No. 2031)
entitled to raise them. -While- personal or equitable
defenses are available only against the holder who
stands in privity with .the party who is entitled to set
up or those who are not or do not have the rights of a
holder in due course.
13M .F 0R G 11Y a.
7. Illegality — if declared
--------void for any purpose------
6. Filling up blank not
within authority
7. Duress or Intimidation
8. Vicious Force or Violence
8.
Filling up blank beyond
reasonable time
9. Want of authority
9. Transfer in breach of
faith
10.
Prescription
10. Mistake
11.
Discharge in Insolvency
11.
Insertion of wrong date
12.
Ante-dating or Post-dat­
ing for illegal or fraudu­
lent purpose
13.01. Distinguish Real Defenses from Personal Defenses
" Real or absolute defenses attached Id the instru­
ment and are available1against all holders, whether
...in'due courseor nohbut only.by.the party or parties
What are the. effects of Forger/? (Sec. 23, NIL)
When a signature is forged or made with­
out the authority of the person whose signature
it purports to be, it is wholly inoperative, and
no right to retain the instrument, or to give a
discharge therefor, or to enforce payment there­
of against any party thereto, can be acquired
through or under such signature, unless the
party against whom it is sought to enforce such
right is precluded from setting up the forgery or
want of authority.
ration
6. Fraud in Factum or in
.Esse Contractus
«
b.
Take note of the following rules in relation to123
1)
Only the forged signature is wholly inope­
rative not the instrument itself, and not the
genuine signatures;
2)
In case of forgery of an indorsement of an
instrument payable to order, it is not only
the person whose signature was forged
who would not be liable but also the par­
ties prior to such person. Payment under a
forged indorsement is not to the drawer's
; order;
3)
Despite the forgery of the signature, there
may be parties who shall be precluded
from Setting up forgery or want of author­
ity, such as: (i) those who warrants like the
acceptors, indorsers; (ii) those who ratified
the forgery express or implied; and (iii)
those who were negligent.
REVIEWER ON COMMERCIAL LAW
PART I — NEGOTIABLE INSTRUMENTS LAW
(Act No. 2031)
in one '■case, the drawer was not
allowed to recover although Ins signature
was allegedly forged because it was
established that the person who encashed
the checks was his trusted secretary. The
drawer's negligence was considered the
proximate cause of his loss because he
entrusted his blank checks and credit cards
to his secretary He also entrusted to his
secretary the verification and reconciliation
of his accounts. He did not personally check
his statement of accounts and cancelled or
used checks as the same were also entrusted
to his secretary (Ramon K. Ilusorio v. CA,
although said checks were payable to BIR.
Hence,.the drawee was clearly- negligent in
encashing the checks.
5)
The general rule is that in case of forgery of
the indorsement of the payee of the check
the drawee bank cannot debit the drawer's
account and that loss shall be borne by the
drawee bank. The depositary or collecting
bank is liable to the drawee in case of forged
indorsement because it guarantees all prior
indorsement. N ote: This is subject to the
qualification that the drawee himself was
not negligent or guilty of such conduct as
would estop him from asserting the forged
character of the indorsement as against the
drawer.
1.
M, maker, prepared a promissory note payable to
the order of A, but he did not sign the same and left
it inside his drawer. X, a thief, stole the instrument,
forged M's signature and delivered the same to A. A
indorsed the instrument to B, B in turn indorsed it to
C, then C to D, the present holder, (a) Against whom
can D enforce payment? (b) Will your answer be the
same if the instrument is a bearer instrument?
A:
(a)
this case encashed checks (one of which is
crossed) presented by unknown persons
D can enforce payment from X, A, B, and C but
not against M. Under Section 23 of the MIL, the
forged signature of M is wholly inoperative
and no right to enforce payment was acquired
against M by virtue of the forged signature.
However, the indorsers A, B, and C are
liable because they are parties after the forger}/
and are therefore precluded from setting up such
forgery against the present holder, D. When A, B,
and C indorsed the instrument, they warranted
that the instrument is genuine and in all respects
what it purports to be.
In another case, the Supreme Court
explained that only the drawee may be
held liable if it was not established that
the checks containing forged indorsements
passed through the alleged collecting bank
(Traders Royal Bank v. RPN, Inc., et ah, G.R.
No. 138510, Oct. 10, 2002). The drawee in
If the signature of the drawer in a check is
forged, the drawee cannot charge the ac­
count of the drawer and the drawee cannot
recover from the collecting bank.
PROBLEMS:
G.R.No. 139130, Nov. 27,1002).
4)
43
On the other hand, the forger will be
deemed the principal debtor because his wrong­
doing prevented recovery from M. He is in effect
the maker of the instrument.
(b)
Yes, the answer would still be the same if the
instrument is a bearer instrument. The forged
signature of M is still inoperative as to him.
REVIEWER ON COMMERCIAL LAW
44
The indorsers : are still secondarily liable
because tihe MIL -provides that persons who
indorse bearer instruments are liable to subse­
quent parties who acquired tide through their
indorsement. In this case, D acquired title
through the indorsement of A, B, and C.
2.
Juan de la Cruz signs a promissory note payable to
Pedro Lim or bearer, and delivers it personally to
Pedro Lim. The latter somehow misplaces the said
note and Carlos Ros finds the note lying around the
corridor of the building. Carlos Ros endorses the
promissory note to Juana Bond, for value, by forging
the signature of Pedro Lim. May Juana Bond hold
Juan de la Cruz liable on the note?
A;
Yes, Juana Bond may hold Juan de la Cruz liable. The
promissory note is payable to bearer hence title is
transferred through negotiation by mere delivery of
the note. Juana Bond may obtain title even if there is
TT~mrto4ndorseinent:----------:----------------- :-----------However, Juan de la Cruz may validly invoke
the defense of non-delivery of a complete instrument
by Pedro Lim if Juana Bond is not a holder in due
course. It does not appear however that Juana Bond
is not a holder in due course, so she is presumed to be
such holder in due course (1980 Bar).
3.
A;
Fenando forged the name of Daniel, manager of a
Trading Company, as the drawer of a check. The
Bank of the Philippine Islands, the drawee bank, did
not detect the forgery and paid the amount. May the
bank charge the amount paid against the account of
the alleged drawer? Reasons.
No. The drawee may not charge the account of
the trading company. A bank is charged with the
knowledge of the signature of its customer and it
should not honor any checkbearing a forged signature
of the drawer (1977 Bar).
PART I — NEGOTIABLE INSTRUMENTS LAW
(Act No. 2031)
45
Hernan issued a check payable to the order of
Fernando in the sum of P12,000.00, and drawn on X
Bank. The check was delivered to Matilde by Adriano
for encashment. A t that time, the check had the
indorsements of Fernando and Rosa. When Matilde
encashed it with X Bank, she affixed her signature on
the check. Upon Matilde's receipt of the cash proceeds
of the check she turned over the amount to Adriano.
X Bank was informed that the alleged indorsement of
the payee Fernando was a forgery, since the latter had
died 2 years ago. X Bank having refunded the amount
to Hernan, sued Matilde, who refused to return the
money, a) Was X Bank correct in paying Hernan? b)
Does X Bank have a cause of action against Matilde?
a)
Yes. X Bank was correct in paying Heman.
The forged signature of the payee is wholly
inoperative and no right to give discharge to the
instrument was acquired by X Bank through the
forged signature. When X Bank paid Matilde,
------- It- d-id -not comply with the- order of its client.
Hence, it is the duty of the bank to reimburse its
client Hernan.
b)
Yes, X Bank has a cause of action against
Matilde. Matilde is a general indorser and as
such she warrants that she has good title to the
instrument. Having Breached such warranty,
she is now responsible to the collecting bank.
Even if she encashed the check for Adriano as
an accommodation party, her liability as an
indorser remains (Sec. 29, NIL).
In fact, she is liable even if she was merely
an agent of Adriano as it does not appear that she
disclosed the fact that the check was delivered to
her for encashment (1982 Bar).
A delivers a bearer instrument to B. B then specially
indorses it to C and C later indorses it in blank to
D. E steals the instrument from D and, forging the
46
REVIEWER ON COMMERCIAL LAW
EAKTI —•NEGOTIABLE INSTRUMENTS LAW
(Act No. 2031)
signature of D, succeeds in "negotiating" it to F who
acquirer, the instrument in good faith and for value.
If for any reason, the drawee bank refuses to honor
the check, can F enforce the instrument against the
: drawer? In case of the dishonor of the check by both
the drawee and the drawer, can F hold any of B, C,
I : Toth cases, however, the instrument
must be filled up strictly in accordance with the
authority given and within reasonable time in
order that it may be enforced against any person
who became a party thereto prior to its comple­
tion. However, persons negotiating after its com­
pletion are liable because of their warranties.
and D liable secondarily on the instrument?
A holder in due course may enforce the
instrument as if it had been filled up strictly in
accordance with the authority given and within
a reasonable time (Sec, M, NIL).
A:
F can enforce it against the drawer but he cannot
hold B, C and D liable. The instrument involved is
a negotiable instrument that is payable to bearer.
The holder thereof is whoever is in possession of the
instrument and indorsement is not necessary for the
title of the holder-indorsee. Hence, the drawer is liable
to the holder. Nevertheless, persons who indorse
the instrument are liable to those who acquired
title through their indorsements. In this case, F did
not acquire his title through the indorsements of B,
C, and D. D did not even indorse the instrument
and the title of F cannot be traced from B and C s
—------ mdurseineuL because of "the.. break created by the
forged indorsement of D. The fact that F is a holder
in due course is not material because forgery is a real
defense (2997 Bar).
^Hencefi it risAno: defense in an action to
enforce a negotiable promissory note that it was
signed in blank asSection 14 of the NIL concedes
prima facie authority of the person in possession
of negotiable instruments to fill in the blanks
(Quirino Gonzalez Logging Concessiomire, et al. v.
CA, G.R. No. 126568, April 30,2003).
b)
13.03. Give the effects of each of the following: a) Incom­
plete but delivered instrument; b) Complete but
undelivered instrument; c) Incomplete undelivered
instrument
-r
a)
;;
Delivery is essential to the validity of any negotiable instrument. As between immediate parties
and those who are similarly situated, delivery
must be coupled with the intention of transfer­
ring title to the instrument.
However, if the instrument is in the hands
of a holder in due course, valid delivery to him
is conclusively presumed.
instrument is only a personal defense (Sec. 16,
Where the instrument is Wanting in any mate­
rial particular the person in possession thereof,
is prima facie presumed authorized to complete
it.
A signature on a blank paper delivered by
the person making the signature in order that it
may be converted into a negotiable instrument
operates as prima facie authority to fill it up as
such for any amount.
47
NIL).
c)
Non-delivery of an incomplete instrument is a
real defense (Sec. 15, NIL).
PROBLEMS:
1.
Jose Reyes signed a blank check, and in his haste to
attend a party, left the check at the top of his executive
deskin his office. Later, Nazarenp forced open the door
I
|
REVIEWER ON COMMERCIAL LAW
to Reyes" office, and stole the blank check, Nazareno
immediately filled in the amount of P5Q,0OO.OG and a
.fictitious name as payee on the said check. Nazareno
then endorsed the check in the payee's name and
passed it to Roldan. Thereafter, Roldan endorsed the
check to Dantes.
a)
A:
Can Dantes enforce the check against Jose Reyes?
Explain.
b)
If Dantes is a holder in due course will your
answer to- question (a) be the same? Explain.
a)
Dantes cannot enforce the instrument against
Jose Reyes. Jose Reyes can raise the defense that
the incomplete instrument was not delivered
since the check was only stolen and filled up by
Nazareno.
b)
My answer will be the same even if Dantes is a
holder in due course. If an incomplete instrum ent
__________ has not been delivered, it will not, if completed
and negotiated without authority be a valid
contract against any holder, even a holder in due
course (Sec. 15, NIL; 1985 Bar).
2.
At
A signed a blank check and kept it inside the drawer
of his desk in his office. B, a janitor of the office opened
the drawer, got the check and filled in the amount of
P I00,000.00 with B's name as payee. Thereafter; B
indorsed the check to C and C indorsed the check to
D. Should the drawee bank dishonor the check? Can
D hold A liable? Would your answer be the same if D
was a holder in due course? How about B and C, are
they liable to D?
' NO, D cannot hold A liable because the instrument is
incomplete and undelivered. Under Section 15, NIL,
an incomplete and . .undelivered instrument would
not be a valid instrument in the hands of any Holder
as against any person whose signature was placed
before delivery.
PART I ~ NEGOTIABLE INSTRUMENTS LAW
(Act No. 2031)
49
YES, my answer will be the same even if D is a
holder in due course because the law, Section 15, NIL
says "any holder."
YES, B and C are liable. B because he was the
forger and besides .an indorser, and he warrants that
the instrument is genuine-, and in all respects what it
purports to be. So also with G
13.04. UNDATED INSTRUMENT
A negotiable promissory note payable at a fixed
period after date was issued undated and without
any amount and was delivered to the payee named
therein. Will the filling up of the blanks with any date
and for any amount avoid the note in the hands of the
holder?
No. Under Section 13 of the NIL, the insertion
of a wrong date will 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. And under Section 14, NIL, if an incomplete
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 within reasonable time.
13.05. What is Material Alteration? What are the effects of
Material Alterations? (Secs. 1M and 125, NIL)
Material Alteration — any alteration which
changes the date, sum payable, time or place of
payment, number or relation of parties, or medium
or currency of payment, or adds a place of payment
where none is specified or which alters the effect of
the instrument in any respect (PNB v. CA).
a.
Effect of Material Alteration
Avoids the instrument, except as against
the party who made, authorized, or assented to
PART I — NEGOTIABLE INSTRUMENTS LAW
(Act No. 2031)
REVIEWER. ON COMMERCIAL LAW
due course. Can C file an action successfully against
B, the maker of the note, for the amount of the note?
Explain.
..
■
the ^Iteration and, subsequent indorsers. HDC
can enforce it according to, its original tenor,
b.
Is the alteration @f the 'Serial nwfi&er ©f a check
a material, alteration?
A:
NO. The alteration' of the serial number
of the check does not alter the effect of the
instrument, nor does it modify in any respect the
obligation of a party thereto. If does not change
the items which are required to be stated under
Section 1, NIL (PNB v. CA),
"Fraud in execution" (fraud in factum or fraud
in esse contractus) — present when a person is
induced to sign an instrument not knowing its
character as a note or a bill. The person who signs
the instrument does not know that he is signing
a negotiable instrument. Example: A blind person
was made to sign a piece of paper he believes
------- to be -a-ercdit application although-it is really a
promissory note.
b)
c)
"Fraud in inducement" — the person who
signs the instrument intends to sign the same
as a negotiable instrument but was induced to
do so only through fraud; his consent to issue a
negotiable instrument was vitiated by fraud.
b)
Yes. C can file an action successfully against
B. C is presumed to be a holder in due course.
These are only personal defenses. However, with
respect to illegality, the exceptional case when it is a
real defense is if the statute declares the instrument*1
void for any purpose.
!§i
PROBLEMS:
1.
NM issued 2 postdated checks to CV, as security for
pieces of jewelry to be sold. Each check has a face value
of P50,000.00. Thereafter, CV negotiated the check to
SIH, Inc. without the knowledge of NM. NM returned
the jewelries to CV and tried to retrieve the checks.
Having failed to do so, NM withdrew her funds from
the drawee bank and the checks were consequently
dishonored when presented for payment. SIH sued
NM who interposed the defense that the checks do
not have any consideration. However, NM did not
present proof that SIH is not a holder in due course.
Will the- defense of absence of consideration prosper
against: SIH?
A:
NM cannot invoke the defense of absence of consid­
eration against SIH. There is no showing that SIH is
Fraud in factum is a real defense while fraud in
inducement is a personal defense.
A induced B by fraud to make a promissory note
payable on demand to the order of A in the sum of
P5,000,000.00. (a) Can A file an action successfully
against the maker B for the amount of the note?
Reasons, (b) Going further, A transfers the note to C
who pays P5,000,000.00 therefor and acquires the note
under circumstances that make him (C) a holder in
No, B may raise the defense of fraud in induce­
ment against A who is not a holder in due course.
This is specially true in this case where A was
the one who fraudulently induced B to issue the
note.
13.07. FAILURE, ABSENCE OI- OR ILLICIT CONSIDER­
ATION
PROBLEM:
1,
a)
Hence, in the absence of proof that he is not, he is
a holder in due course who is free from personal
defenses including fraud in inducement.
13,06. FRAUD
a)
51
REVIEWER ON COMMERCE A !. LAW
riot a Holder in due course,.hence, the 'presumption on
due course holding stands. As a holder in due course,
SIH is free from personal defenses of prior parties
(1993 Bar).
b)
'
YES, a holder in due course can hold the drawer
secondarily liable. Want or absence of consider­
ation is only a personal defense and cannot be
raised against a holder in due course (Sec. 28,
~
—
—
Pedro issued a negotiable note to Juan, a government
employee, to facilitate the early release of the
government approval of the application that he filed.
Juan negotiated the instrument to Pablo, a holder in
due course. When Pablo presented the instrument to
Pedro for payment, PedrO claims that he is not liable
because the consideration was illicit. Is the refusal of
Pedro justified?
M O S L E M ::
I.
1.
A:
The refusal is not justified. Illegality of consideration
is only a personal defense. Since Pablo is a holder in
due course, the illegality of the consideration cannot
be invoked?
13.08. MINORITY OR INCAPACITY OR WANT OF
AUTHORITY
a)
Minority or incapacity (i.e., insanity) may be
invoked by the minor or incapacitated as real
Where the President of a corporation issues a com­
pany check and signs it in his capacity as president
(being an authorized signatory) in payment of a car
which he purchased for his office use, but without the
approval of the Board of Directors, and the check is
dishonored by the drawee bank, may the seller of the
car recover from the drawee bank, the corporation,
and the president of the corporation?
-A:----- The drawee.bank — NO, A check 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.:;
The corporation — NO. There being no board
approval of the purchase of the car (assuming such
board approval is required) the corporation is not
liable unless it is estopped.
.
3.
NO. The drawer cannot be held secondarily
liable by the payee because while the love and
affection may be a good consideration, it is
not a valuable consideration. Want or absence
of consideration is a valid defense between a
drawer and a payee.
The fact that indorsement or issuance of an
instrument as m ulira vires act of a corporation is
a real defense. .
I
a)
b)
'M
A:
53
defense. However, other parties who are capaci­
tated cannot invoke such defense. The defense
is personal to the minor or incapacitated only.
Transfer of title by the minor is however effec­
tive negotiation.
A hill of exchange was issued because of the love and
affection of the drawer for the payee. Can the drawer
be held secondarily liable (assuming non-acceptance
by the drawee) on the instrument: (a) by the payee;
(b) by a holder in due course?
»1V'* ••«* .....
2.
PART I — NEGOTJ ABLE INSTRUMENTS lAW
(Act No. 2031)
M. V. >
52
The President— YES, he is liable. It is one of the
cases where an officer of the corporation can be held
personally liable for his official act.
: 13,09. PRESCRIpTIQN.
Real defense that may be raised against a holder
in due course. The prescriptive period for the filing
of a claim based on negotiable instruments is ten (10)
years from the time the cause of action accrued. In
I
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REVIEWER ON COMMERCIAL LAW
PART I — NEGOTIABLE INSTRUMENTS LAW
(Act No. 2031)
case of'>checksA.the action of the ..depositor age ii:si.
■his drawee bank commences to m n from the time
he is given notice of payment (Philippine Commercial
(3) admits the existence of the payee and his
capacity to indorse.
c)
International Bank v. CA, 550 SCRA 446 [2001]),
In Myron C. Papa v. AM, Valencia, ei a l (248
SCRA 643 [1998]), the payee did not encash the
check for more than ten (10) years from the issuance
thereof. The Supreme Court ruled that failure of
the payee to encash a check for more than ten (10)
years "undoubtedly resulted in the impairment of
the check through his unreasonable and unexplained
delay." The Court invoked Article 1249 of the Civil
Code stating that acceptance by the payee "of the
check implies an undertaking of due diligence in
presenting it for payment and if he from whom it is
received sustains loss by want of such diligence, it
will be held to operate as actual payment of the debt
or obligation for which it was given." However, in The
International Corporate Bank v. Sps. Gueco, 351 SCRA*1
516. the Supreme Court ruled that the eontrachiafobligation remains even if the check is not presented
for payment (Art. 1249, CC).
14. PERSONS WITH SECONDARY AND PRIMARY LIABILITY
14.01. What are the liabilities of: a) maker (Sec, 60); b)
. drawer (Sec.
an^ chacceptor (Sac. 62|
a)
b)
Maker — primary liability: (1) engages to pay
according to the tenor of the instrument; and (2)
admits the existence of the payee and his capa­
city to indorse.
Acceptor (and Drawee .....who. pays without
accepting the instrument) — primary liability:
(1) engages to pay according to the tenor of
his acceptance; ;(2)uadmits the existence of the
drawer,'the genuineness of his signature and h.:s
capacity and authority to draw the instrument;
55
Drawer — secondary liability: (1) admits the
existence of payee and his capacity to indorse;
(2) engages that the instrument will be accepted
or paid by the party primarily liable; and (3)
engages that if the instrument is dishonored and
proper proceedings are brought, he will pay to
the party entitled to be paid.
PROBLEM:
Does the payee or holder of a check have a cause of
action against the drawee bank if the latter dishonors the
check?
NO. The payee has no cause of action against the bank.
The bank is not liable to the holder unless and until it accepts
or certifies the check. The remedy of the holder is against
the drawer, provided, notice of dishonor is given to him on
the basis of the transaction that gave rise to the issuance
of the check. Once the bank certifies the check, the bank
becomes liable thereon because certification is equivalent to
acceptance and if procured by .the holder, the drawer and
all indorsers are discharged from liability (Secs. 188 and 189,
NIL),
Note: However, exceptionally, a payee may sue the
drawee based on Article 19 of the Civil Code if there was
dishonor despite the instruction of the drawer to pay (HSBC
v. Catalan, 440 SCRA 498 [2004]).
14.02. Warranties of: (a) qualified endorser (Sec. 65); (b)
general endorser (Sec. 66)
a)
Qualified Indorser and Persons negotiating by
delivery (Sec. 65) — Every person negotiating
an instrument by delivery or by a qualified
endorsement warrants:
56
REVIEWER ON COMMERCIAL LAW
1)
that the instrument is genuine and in all
respects what it purports to be; that he has
a good title to it;
2}
that all prior parties had capacity to con­
tract;
3)
that he has no knowledge of any fact which
would impair the vali dity of the instrument
or render it valueless.
PART I — NEGOTIABLE INSTRUMENTS LAW
(Act No. 2031)
;
notwithstanding such holder, at the time of taking the
instrument, knew him to be only an accommodation
party. The fourth condition in Section 52, (d) of the
NIL (Lack of notice in the infirmity of the instrument
or defect in -the title of. the person negotiating it), has
no application but only with respect to absence of
consideration...
N ote: A corporation cannot abt as an accommo­
dation party. The issue or endorsement of negotiable
instrument by a corporation without consideration
and for the accommodation of another is ultra vires
N ote: The warranty of persons negotiat­
ing by mere delivery extends to the immediate
transferee only.
b)
that he has a good title to it;34
3)
that all prior parties had capacity to
contract;
4)
that the instrument is, at the time of the
endorsement, valid and subsisting.
i ........... ........... ........... ........... .. .
The general indorser also engages that on due
presentment, it shall be accepted or paid, or both,
as the case may be, according to its tenor; and 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.
.. ........... ....... . ..... ,|UI H M " I .
2)
........ ..
that the instrument is genuine and in all
respects what it purports to be;
• “■ ' I ' M .
1)
(Crisologov.CA,117SC#ji594).
1 I '
General Indorser (Sec. 66) — Every indorser
who endorses without qualification, warrants to
all subsequent holders in due course:
14.03. Who is an accommodation party? (Sec 29, NIL)
»
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.
An accommodation party is liable to holder for value,
57
PROBLEMS:
1.
On June 1,1990, A obtained a loan of P100,000.00 from
B, payable not later than Dec. 21,1990. B required A to
issue him a check for that amount to be dated Dec. 20,
1990. Since he does not have any checking account,
---------A,-with the knowledge.criHO, requesiedHsdxieiid;' C~;
president of X Banking Corporation, to accommodate
him. C agreed. He signed a check for the aforesaid
amount, dated Dec. 20, 1990, drawn by X Banking
Corporation with the ABC Commercial Banking
Corporation as drawee. The by-laws of X Banking
Corporation requires: that checks issued by it must be
signed by the President and the Treasurer or the VicePresident. Since the Treasurer was absent, C requested
the Vice-President to co-sign the check, which the
latter reluctantly did. The check was delivered to
B. The check was dishonored upon presentation on
due date for insufficiency of funds, (a) Is X Banking
Corporation liable on the check as an accommodation
party? (b) If it is not, who then, under the above facts,
is/are liable?
:■
A:
(a)
X Banking Corporation is not liable because the
act of accommodating the check is an ultra vires
act. It Is outside the powers of a corporation to
■+
WB
58
REVIEWER ON COMMERCIAL LAW
accommodate another not in line with its own
business,
(b)
2.
A:
m
v
Yes, Reyes can recover from Santos. The relation
between Santos and Reyes is in effect that ot principal)
and surety, the accommodation party. Reyes, being
the surety, of Santos, can recover from, the latter
whatever amount that he paid to Vera (PNB v. Maza
a)
•
-
5 9
(Sec. 70, NIL). "
2)
b)
Notice of dishonor should be given, if
promissory note is dishonored by non-pay­
ment by the maker (Sec. 89, NIL).
Steps to Charge Secondary Parties in Bill of
Exchange
1)
Presentment for acceptance or negotiation
within a reasonable time after it was
acquired — should be made only in the
instances required in Section 143.
2)
If dishonored by non-acceptance:*3
________________ (i)
Notice of Dishonor should be given to
the indorsers and drawer (Sec. 89).
(ii) If the bill is a foreign bill, there must
be protest for dishonor by non-accep­
tance (Sec. 159).
If the bill is accepted:
(i)
15.01. PRIMARILY LIABLE
The maker is liable the moment he makes the
instrument Section 60 of the NIL provides
that the maker by making the promissory note
"engages to pay the instrument according to its
tenor."
acceptance."
-
Presentment for payment must be made
within the required period to the maker
1)
3)
A drawee becomes liable the moment he accepts
the instrument. Section 62 provides that the
"acceptor, by accepting the instrument, engages
that he will pay it according to the tenor of his
'
Steps to Charge Secondary Parties in Promis­
sory Note
15. HOW TO ENFORCE LIABILITY
b)
■_
15.02, SECONDARY LIABLE
and Macenas, 48 Phil. 207; Sec. 29, NIL).
a)
:
(Act No. 2031)
The president and the vice-president who si gned
for X Banking Corporation are liable to the
instrument in their personal capacities (Crisologo
Jose v. CA, Sept 15,1989). (1991)
Santos purchased Vera's car for P50,O0G.00. Not having
enough cash at hand, Santos offered to pay in check.
Vera refused to accept the check unless it is indorsed
by Reyes, their mutual friend. Reyes indorsed Santos'
check and Vera, knowing that Reyes ha&not received
any value for indorsing the check, accepted it. The
next day, Vera presented the check to the drawee bank
for payment. Payment was refused for lack of funds.
Vera gave notice of dishonor to Reyes, but Reyes
refused to pay, saying that he indorsed merely as a
friend. In the event Reyes voluntarily pays Vera, does
Reyes have a right to recover from Santos? Explain.
' V
Presentment for payment to the accep­
tor should be made.
(a)
If the bill is dishonored upon
presentment for payment.
(b)
Notice of dishonor must be given
to person secondarily liable.
(ii) If the bill is a foreign bill, protest for
dishonor by non-payment must be
made.
c)
Steps to Charge Acceptor for Honor and
Referee in case;, of Need
60
REVIEWER ON COMMERCIAL LAW
1)
PART I — NEGOTIABLE INSTRUMENTS LAW
(Act No. 2031)
Protest for non-payment by the drawee
(Sec. 165)
5)
15.03. Rules on presentment for payment
a)
WHEN NOT NECESSARY
Presentment for payment is not necessary to
charge persons primarily liable. But it is neces­
sary to charge persons secondarily liable except:
1)
2)
as to drawer, under Section 79, where he
has no right to expect or require that the
drawee or acceptor will pay the instrument;
as to indorser, under Section 80, 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;
when dispensed with under Section 82,
such as: (i) where, after the exercise of rea-------------- sonable -drligence; presentmei it cannot be"
made; (ii) where the drawee is a fictitious
person; (iii) by waiver of presentment, ex­
press or implied; and
b)
1.
Gemma drew a check on Sept. 13, 1990. The holder
presented the check to the drawee bank only on
March 5,1994. The bank dishonored the check on the
same date. After dishonored by the drawee bank, the
holder gave a formal notice of dishonor to Gemma
through a letter dated April 27,1994. (a) What is meant
by “unreasonable time" as applied to presentment?
(b) is Gemma liable to the holder?
_________
A:
(a)
when the instrument has been dishonored
by non-acceptance.
REQUISITES
1)
2)
Presentment must be by the holder, or by
some person authorized to receive pay­
ment oh his behalf;
Presentment must be at the proper place;
4)
Presentment must be to the person primari­
ly liable on the instrument, or if he is absent
or inaccessible, to any person found at the
place where the presentment is made; and
The concept of what is reasonable is relative.
"Reasonable time" has been defined as so much
time as is necessary under the circumstances
for a reasonable, prudent and diligent man to
do, conveniently, what the contract or duty
requires should be done, having a regard for the
rights and possibility of loss, if any, to the other
party (Far Realty Investment, Inc. v. CA, G.R. Nc.
L-36549,Oct.5,1998)/
However, with respect to checks, the
Supreme Court had taken cognizance of the
current banking practice that check becomes
stale after more than six (6) months or 180 days
If m.ust be made, at a reasonable hour on a
'.■^business day on the proper date;
3)
The person entitled to present the instru­
ment for payment must exhibit the
instrument to the person from whom the
payment is demanded and upon payment
must be delivered to the person paying it.
If the instrument is not surrendered and
cancelled, there is a danger that it may fall
in the hands of other persons who might
claim rights over the instrument.
PROBLEM:
3)
4)
61
(Luis S. V/ong v. Court o f Appeals, G.R. No. 117857,
Feb. 2 , 2001).
(b)
No, Gemma is no longer liable to the holder
based on the instrument. Gemma is already
discharged from secondary liability under the
REVIEWER ON COMMERCIAL LAW
PART I — NEGOTIABLE INSTRUMENTS LAW
(Act No. 2031)
What is excused is the delay in presenting
it for payment caused by presentment for
acceptance (Sec, 147, NIL).
■check, because presentment and notice of dis­
honor was made after an unreasonable length of
time of more than three (3) years, The check was
already stale at the time of presentment.
2)
Where the drawee is dead, or has abscond­
ed, or is a fictitious person or a person not
having capacity to-contract by bill.
3)
Where, after the:exercise of reasonable dili­
gence, presentment can not be made.
4)
Where, although presentment has been
However, Gemma may still be liable to
the holder if the latter is her contracting party.
Failure to present the instrument on time does
not totally wipe out all liability based on contract.
Although she may not be liable on the check, she
may be liable on their contract (1994 Bar).
irregular, acceptance has been refused on
some other ground (Sec. 149, NIL).
15.04. PRESENTMENT FOR ACCEPTANCE
a)
WHEN MANDATORY (See. M3, NIL)
Presentment for acceptance is required in
the following cases:
1)
Where the bill is payable within a fixed
period 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 drawn is payable elsewhere
th an at the residence or place of business of
the drawee.
———
15.05. ACCEPTANCE
a)
b)
WHEN EXCUSED OR DISPENSED WITH
1)
Delay is excused — A bill drawn payable
elsewhere than at the place of business or
the residence of the drawee and the holder;
with the exercise of reasonable diligence,
failed to present die bill for acceptance.
ACCEPTANCE
The signification by the drawee of his assent
to the order of the drawer. The acceptance must
be in writing and signed by die drawee. It must
not express that the drawee will perform his
promise by any other means than die payment
of money (Sec. 132, NIL).
b)
N ote: It is not necessary to present a
check for acceptance because it is not one
of those required to be presented for accep­
tance Under Section 143.
63
c)
REQUISITES
1)
The acceptance must be in writing;
2)
The written acceptance must be signed by
the drawee; and
3)
The drawee must assent to the promise to
pay a sum certain in money and not by any
other means.
Proof of Acceptance
The written acceptance may be in the
instrument itself or in a separate instrument.
However, under Section 133, "the holder of a bill
presenting the same for acceptance may require
that the acceptance be written on the bill, and,
if such request is refused, may treat the bill as
dishonored."
REVIEWER ON COMMERCIAL LAW
PAR T I — NEGOTIABLE INSTRUMENTS LAW
65
(Act No, 2031)
EFFECTS: When an acceptance Is written
on a paper other than the bill itself, it does not
f)
1)
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,
d)
'
e)
Kinds of Acceptance (Sec. 141, NIL)
Conditional; that is . to say which makes
payment by the acceptor dependent on the
fulfillment of a condition therein stated;
2)
The drawee is deemed to have accepted the
instrument under the said section in the follow­
ing instances:
Partial; that is to say, an acceptance to pay
part only of the amount for which the bill is
drawn;:
3)
Local; that is to say, an acceptance to pay
only at a particular place;
1)
The bill was delivered to the drawee and
the latter destroys the same.
4)
Qualified as to time;
5)
2)
The bill was delivered to the drawee but the
drawee refuses within twenty-four hours
or within such other period as the holder
may allow to return the bill accepted or
non-accepted (Sec. 137, NIL).
The acceptance of some, one or more of the
drawees but not of all.
When deemed accepted:
N ote: Section 136 provides that "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." On the other hand, Section
137 provides that "where a drawee to whom
a bill is delivered for acceptance destroys the
same, or refuses within twenty-four hours after
such delivery or within such other period as the
holder may allow, to return the bill accepted or
non-accepted to the holder, he will be deemed to
have accepted the same."
Future Bills
An unconditional promise in writing to
accept a bill before it is drawn is deemed an
actual acceptance in favor of every person who,
upon the faith thereof, receives the bill for value
(Sec. 135, NIL).
g)
RIGHT TO UNQUALIFIED ACCEPTANCE
The holder may refuse to take a qualified
acceptance and if he does not obtain an unqua­
lified acceptance, he may treat the bill as dis■ ______honored 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.
However, acceptance is presumed to be un­
qualified or absolute.
15.06. NOTICE OF DISHONOR
a)
Who should give:
(1) holder; (2) agent or representative of
holder; (3) any party who may be compelled to
pay like indorsers; and (4) agent of any party
who may be compelled ( Sec. 90, NIL).
REVIEWER ON COMMERCIAL LAW
66
( A d No. 203i ;
b)
Who will benefit:
1)
2)
Given by or on behalf of the holder — inures to the benefit of all subsequent holders and
all prior parties who have a right of recourse
against the party to whom it is given.
as if the indorser becomes primarily liable in the
sense that the holder need not claim payment
from the person primarily liable.
d)
1)
If the notice is given by the indorser who
may be compelled to pay, such notice inures i
to the benefit of the holder and all parties f
subsequent to the party to whom notice is
given.
Upon valid notice of dishonor, immediate
right of recourse against the indorser arises. It is
(iii) If sent by mail, it must be deposited in
the post office in time to reach him in
usual course on the day following.
2)
Where parties reside in different places.
II)
I
r
;
]
If sent by mail, it must be deposited
in the post office in time to go by mail
the day following the day of dishonor,
or if there be no mail at a convenient
hour on the last day, by the next mail
thereafter.
(ii) If given otherwise than through the
post office, then within the time that
notice would have been received
in due course of mail, if it had been
deposited in the post office within the
time specified in the last subdivision.
e)
1)
When not required, excused or dispensed
with
(i)
Effect
If given at the place of business of
the person to receive notice, it must
be given before the close of business
hours on the day following.
(ii) If given at his residence, it must be
given before the usual hours of rest on
the day following.
>
On the other hand, if D notified only C but -C, in turn, notified P, A and B, D can already hold '
P, A and B liable because notice by an indorser ;
(C in this case) inures to the benefit of the holder.
Additionally, P need not be notified by A and B
anew because the notice given by C inures to the ;
benefit of all parties subsequent to the party to :
whom notice is given (P having been given no- tice by C).
c)
Where parties reside in same place.
(i)
Examples: M, maker, issued a negotiable
note to P, the payee, payable to P or his order. P i
indorsed the instrument to A, then A to B, B to 1
C, and C to D, the present holder. If M dishonors
the instrument, D may notify C since C may be
compelled to pay D. C, in turn may notify any
person who may be secondarily liable to him,
that is, B, A and P. B may notify A and P and A
------- may notify^ —-------------------------------------------------fIf D gave notice of dishonor to P, A, B and
C, the latter (C) need not notify P, A and B again
because notice by the holder inures to the benefit
of all prior parties who have the right of recourse
against the party to whom it is given.
Time to give notice (Secs. 103 and 104 NIL)
After the exercise of reasonable dili­
gence, it cannot be given to or does not
reach the parties sought to be charged
(Sec. 112, NIL).
PART I — NEGOTIABLE i NSTKUMEn T u LAM
(Act No. 2031)
REVIEWER ON COMMERCIAL LAW
2)
Not Necessary: Drawer
(!)
(ii) When the drawee is a fictitious person
or a person not having capacity to con­
tract;
(iii) When the drawer is the person to
whom the instrument is presented for
payment;
(iv) Where the drawer has no right to ex­
pect or require that the drawee or ac­
ceptor will honor the instrument;
(v)
Where the drawer has countermanded
payment.
b)
Not necessary: Indorser
(i) When the drawee is a fictitious per-------------- son or person not having capa-city to
contract, and the indorser was aware
of that fact at the time he indorsed the
instrument;
If a stranger to a bill will accept the instru­
ment for honor (Sec. 161, NIL);
4)
If the bill will be presented for payment to
acceptor for honor or referee in case of need
(Sec. 167, NIL)’, and
5)
When the bill is dishonored by the acceptor
for honor (Sec. 170, NIL).
15.07. PROTEST
Protest is a formal declaration, drawn and signec
by a notary, that the foreign bill has been presented
for acceptance or payment and that the acceptance c
payment is refused.
a)
If a foreign bill has been dishonored by 1
non-acceotance (Sec. 152, NIL):
I
'
2)
It must be made in front of two witnesses;
3)
It must be annexed to the bill or must con­
tain a copy thereof;
4)
It must be under the hand and seal of the
notary making the protest;
5)
The protest must specify the following: (i)
time and place of presentment, (ii) the fact
that presentment was made and the man­
ner thereof, (iii) cause or reason for protest,
and (iv) demand was made and the answer
given, if any, or that the drawee or acceptor
cannot be found.
15.08. ACCEPTANCE FOR HONOR (Secs. 161-170)
When protest is NECESSARY?
A
Requisites (Secs. 153 and 154, NIL)
The protest must be made by a notary pub­
lic or any respectable resident of the place
-----------------------where the bttlis'dishonored;---------------------
(iii) Where the instrument was made or ac­
cepted for his accommodation.
1)
3)
1)
(ii) Where the indorser is the person to
whom the instrument is presented for
payment;
a)
If a foreign bill which was not previous!)
presented for acceptance lias been dishon­
ored by non-payment (Sec. 152. NILh
Note: Without protest of a dishonored foreign
bill, the drawer and indorser are not liable based on
the instrument. However, the drawer may still be
liable based on contract.
ilIL
3)
2)
Where the drawer and drawee are the
same person;
69
!
Acceptance for honor
It is an undertaking by a stranger to a bill
after protest for the benefit of any party liable
REVIEWER ON COMMERCIAL LAW
thereon or for the honor of the person for whose
account the bill is drawn which acceptance in­
ures also to the benefit of all parties subsequent
to the persons for whose honor it is accepted,
and conditioned to pay the bill when it becomes
due if the original drawee does not pay it.
b)
______c)
b)
1)
the bill must have been protested for dis­
honor by non-acceptance or for better secu­
rity;
2)
the acceptor for honor must be a stranger
and not a party already liable on the instru­
ment;
3)
bill must not be overdue;
4)
acceptance for honor must be with the con­
sent of the holder of the instrument.
c)
1)
the bill has been dishonored by non-pay­
ment;
2)
it has been protested for non-payment;
3)
payment supra protest is made by any per­
son, even by a party thereto;
4)
the payment is attested by a notarial act of
honor which must be appended to the pro­
test or form an extension of it;
5)
the notarial act must be based on the
declaration made by the payor for honor or
his agent of his intention to pay the bill for
honor and for whose honor he pays.
must be in writing;
2)
must indicate that it is an acceptance for
honor;
3)
signed by the acceptor for honor;
4)
must contain an express or imp] ied promise
5)
the accepted bill for honor must be deliv­
ered to the holder.
15.09. PAYMENT FOR HONOR (Secs, 171-177}
Payment for honor
Payment made by a person, whether a par­
ty to the bill or not, after it has been protested for
non-payment, for the benefit of any party liable
thereon or for the benefit of the person for whose
account -it was drawn.
What is the effect of non-compliance with the
formalities?
Payment will operate as a mere voluntary
payment and the payer will acquire no right to
full reimbursement against the party for whose
Formal Requisites___________________________ _
1)
71
Requisites for Payment for Honor
Requisites for Acceptance for Honor
to pay money;
a)
PART i — NEGOTIABLE INSTRUMENTS LAW
(Act No. 2031)
honor he pays.
16. BILLS IN SET (Secs. 178-183}
16.01. BILL IN SET
The only one bill that is composed of several
parts, each part being numbered and containing a
reference to the other parts.
16.02. PURPOSE
Bills in set are usually availed of in cases where
a bill had to be sent to a distant place through some
conveyance. If each part is sent by different means of
conveyances, the chance that at least one part of the
set would reach its destination would be greater.
16.03. LIABILITY OF ACCEPTOR
a)
The acceptor is bound to accept only one part of
a bill. If different parts of the bill are negotiated
PARI
REVIEWER ON COMMERCIAL LAW
b)
: —
.A y ,
73
17.03. When is a person secondarily liable discharged?
separately and both are holders in due course,
the holder whose title first accrues is considered
1
the true owner of the bill.
1
Section 120 of the f AL provides that a person
secondarily liable on the instrument is discharged:
If he accepts more than one part, he is liable to
all the holders of the parts he accepted.
1
a)
By any act which discharges the instrument;
I
b)
By the intentional cancellation of his signature
by the holder;
1
c)
By the discharge of a prior party;
I
I
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.
16.04. OBLIGATIONS OF TRANSFERORS
When the holder indorses two or more parts of
the bill in set:
a)
the person shall be liable on every such part;
b)
every indorser subsequent to him is liable on
the part he has himself indorsed, as if such parts
were separate bills.
1
DISCHARGE
§
17.01. How may a negotiable instrument be discharged?
I
______a)
By payment in due course by or in behalf of the
principal debtor;
|ft
b)
By payment in due course by the party accom­
modated, where the instrument is made or
accepted for his accommodation;
n
#>■
S|i
c)
By the intentional cancellation thereof by the
holder;
d)
By any other act which will discharge a simple
contract for the payment of money;
e)
When the principal debtor becomes the holder
of the instrument at or after maturity in his own
right (Sec. 119, NIL).
iI
1
31-
18. CHECKS
18.01. A check is a bill of exchange drawn on a bank payable
on demand (Sec. 185, NIL).
a)
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.
b)
When check operates as an assignment. 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
17.02. What is payment in due course?
Payment in due course •
— payment made at or
after the maturity of the instrument, to the holder
thereof in good faith and without notice that his title
is defective (Sec. 88, NIL).
unless ;and until it-accepts -or certifies the check
(Sec, 189, NIL).
® *1!S
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REVIEWER ON COMMERCIAL LAW
1)
18.02. KINDS
a)
Cashier's check
A bill of exchange drawn by a bank upon it­
self, and is accepted by its issuance. A manager's
check is of the same nature, although instead of
being signed by the cashier, it is the manager
who signs the same for the bank.
b)
Certified check
One drawn by a depositor upon funds to
his credit in a bank which a proper officer of the
bank certifies will be paid when duly presented
for payment.
1)
Certification is equivalent to acceptance
(Sec,187,NlL).
2)
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, NIL).
3)
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).
c)
PART I — NEGOTIABLE INSTRUMENTS LAW
(Act No. 2031)
Crossed Check
Done by writing two (2) parallel lines
diagonally on the left top portion of the checks.
The crossing is special where -the name of a bank
or a business institution is written between the
two (2) parallel lines, which means that the
drawee should pay only with the intervention
of that company. The crossing is general where
the words written between two (2) parallel lines
are "and Co." or "for payee's account only"
(Associated Bank v. CA, 208 SCRA 468).
75
Effects
The crossing of a check relates to the
mode of its presentment for payment.
Under Section 72 of the NIL, presentment
for payment, to be sufficient, must be made
by the holder or by some person authorized
to receive payment on his behalf. Who the
holder or authorized person is depends
on the instruction stated on the face of the
crossed check (Ibid.).
(i)
The check may not be encashed but
only deposited in the bank;
(ii) The check may be negotiated only
once — to one who has an account
with the bank; and
(iii) The act of crossing serves as a warning
to the holder that the check has been
issued for a definite purpose so that
he must inquire.jfheitaFTCcetwdTiTr
check pursuant to that purpose.
Memorandum check
In the form of an ordinary check, with
the word "memorandum," "memo" or "mem"
written across its face, signifying that the maker
or drawer engages to pay the bona fide holder
absolutely, without any condition concerning
its presentment. Such a check is an evidence of
debt against the drawer, and although it may not
be intended to be presented, has the same effect
as an ordinary check, and if passed to a third
person, will be valid in his hands like any other
check (People v. Nitafan, G.R. No. 75954, Oct. 22,
1992).
Traveler's checks
Instruments purchased from banks, express
companies, or the like, in various denominations,
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REVIEWER ON COMMERCIAL LAW
which can be used like cash upon second signa­
ture by the purchaser. It has the characteristics
of a cashier's check of the issuer. It requires the
PA R T I I
signature of the purchaser at the time he buys it
and also at the time he uses it — that is when he
obtains the check from the bank and also at the
time he delivers the same to the establishment
that will be paid thereby (Black's Law Dictionary,
INSURANCE CODE
(P.D. No. 1460sas amended)
5th cd., p. 1344).
18.03. STOPPING PAYMENT
1. DEFINITIONS
The drawer has the right to order the drawee
to stop payment of a check and this right flows from
the rule that the issuance of a check by itself is not an
assignment of funds by the drawee. If a bank pays a
check after it has been notified to stop payment, it pays
on its own responsibility and will not be permitted to
charge the account.
The drawer may countermand payment if he has
— — a valid defense against the ho]d^TT>fthe check.Thas;
countermanding of a check is proper where the payee
failed to deliver the goods that he was supposed to
deliver (Bataan Cigar and Cigarette Factory v. CA, supra).
1.01. A Contract of Insurance
An agreement whereby one undertakes for a
consideration to indemnify another against loss,
damage or liability arising from an unknown or con­
tingent event (Sec. 2, par. 2, Insurance Code o f the Philip­
pines, hereinafter referred to as 1CP).
1.02. A Contract of Suretyship
~
An agreement whereby a party called the surety
guarantees the performance by another called the
principal or obligor of an obligation or undertaking
in favor of a third party called the obligee. It shall
be deemed to be an insurance contract if made by a
surety who or which, as such, is doing an insurance
business (Sec. 175 and Sec. 2, par. 3, ICP).
1.03. Doing an insurance or transacting an insurance
business
A person is doing or transacting an insurance
business if he performs any of the following: a)
making or proposing to make as insurer, any insurance
contract; b) making or proposing to make, as surety
any contract of suretyship as a vocation, not as a mere
incident to any other legitimate business of a surety;
c) doing any insurance business like reinsurance and
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REVIEWER ON COMMERCIAL LAW
H
part
n — in s u r a n c e c o d e
79
(P.D. No. 1460, as amended)
However, if the terms of the contract are clear,
there is no room for interpretation and the courts are
bound to adhere to the insurance contract although
the contract may be rather onerous. Courts cannot
make a new contract for the parties where they
themselves have employed dear and unambiguous
words.
similar acts; and d) doing or proposing to do any
business equivalent to the above (Sec, 2, par, 4, ICP).
a)
Mutual Insurance Companies
An entity owned by the policyholders that
caters only to the insurance needs of the same
policyholders / members is still engaged in in­
surance business. These entities are mutual in­
surance companies which have no capital stock
and the contributions of members are the only
sources of funds to meet losses and expenses
2.03. Aleatory
The obligation of the insurer to pay the proceeds
of the insurance arises only upon the happening of
an event which is uncertain, or which is to occur at
an indeterminate time (Art. 2010, NCC). In a sense,
however, the contract of insurance is commutative
because there is still exchange of equivalents — the
amount paid by the insured is deemed the equivalent
of the protection given by the insurer based on the
insurance contract.
(Republic v. Sunlife Ins, Co., G.R. No. 158085, Oct
14, 2005; White Gold Marine Services v. Pioneer
Ins., G.RNo. 154514, July 28, 2005).
2.
c h a r a c t e r is t ic s ;
2.01. Insurance as a risk distributing device
2.04. Contract of Indemnity
The device of insurance serves to distribute the
______ risk of economic loss among as many as possible to
those who are subject to the same kind of risk. By
paying a pre-determined amount into a general fund
out of which payment will be made for an economic
loss of a defined type, each member contributes to a
small degree toward compensation for losses suffered
by any member of the group. This broad sharing of
economic risk is the principle of risk-distribution.
The contract of instiranro is a rontrarii-ol
indemnity. It is the basis of all property insurance.
It simply means that the insured who has insurable
interest over a property is only entitled to recover the
amount of actual loss sustained and the burden is
upon him to establish the amount of such loss.
2.02. Contract of Adhesion or Fine Print Rule
Insurance is a contract of adhesion considering
that most of the terms of the contract do not result
from mutual negotiations between the parties as they
are prescribed by the insurer in printed form to which
the insured may "adhere" if he chooses but which he
cannot change. Hence, in case of doubt, the contract
shall be interpreted strictly against, the insurer and
liberally in. favor of the insured (Rizal Surety and
a)
Applicable only to property insurance, except
creditor insuring the life of his debtor.
b)
Life insurance is not a contract of indemnity.
There is no over insurance in life insurance. There
is over insurance: only in property insurance and
if this is present, the insurer is only liable up to
the extent of the loss.
c)
Insurance contracts are not wagering contracts
(Sec. 4, ICP).
2.05. Uherrimae Tides Contract
The contract of insurance is one of perfect good
faith not for the-insured alone, but equally so for the
Insurance Co. v. CA, 336 SCRA12 12000]).
I.
-ifcM
f
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REVIEWER ON COMMERCIAL LAW
promises to represent suck clients Its all suits for or
against them are not insurance contracts (Philippine
Health Care Providers, Inc. v. CIR, G.R. No. 167330, Sept.
18,2009).
Insurer; in fact, It is more so foi we latter since its
dominant bargaining position car; es with it stricter
responsibility.
Insurance policies are traditionally contracts
uberrimae fidae, that is, contracts of utmost good faith.
It requires the parties to the contract of insurance to
disclose conditions affecting the risk of which he is
aware, or material fact, which the applicant knows,
and those, which he ought to know. This doctrine
is essential on account of the fact that the full
circumstances of the subject matter of insurance are,
as a rule, known to the insured only and the insurer,
in deciding whether or not to accept a risk, must rely
primarily upon the information supplied to him by
the applicant.
2.06. Personal contract
The law presumes that the insurer considered the
personal qualifications of the insured in approving
_________ th£insurance..ap-p.licaliQrL__________________________
3. ELEMENTS OF INSURANCE
a)
existence of an insurable interest (Secs. 12-14,
ICP);
b)
risk of loss (Sec. 51, par. 9, ICP);
c)
assumption of risks (Sec. 2, ICP);
d)
scheme to distribute losses; and
e)
payment of premiums (Sec. 77, ICP) (Philamcare
Health Systems, Inc. v. CA, G.R. No. 125678, March
18, 2002; Gulf Resorts, Inc. v. Phil. Charter Insur­
ance Corp., G.R. No. 156167, May 16, 2005).
Examples:
1)
Not Insurance
Contracts of law firm with clients whereby in
.consideration of periodical payments, the law firm
2)
Considered Insurance Business
A contract by which a corporation, in consider­
ation of a stipulated amount, agrees at its own expense
to defend a physician against ail suits for damages for
malpractice is one of insurance, and the corporation
will be deemed as engaged in the business of insur­
ance (Philippine Health Care Providers, Inc. v. CIR, G.R.
No. 167330, Sept. 18,2009).
PROBLEM:
Q:
The P Corporation, a health maintenance organization
(HMO), entered into a health care agreement with Mr.
A. Under the agreement with the HMO, Mr. A pays
the HMO a predetermined consideration in exchange
---------for-the-hospilal, medical;-and professional services
rendered by the HMD's physician or affiliated
physician to him. In case of availment by a member
of the benefits under the agreement, HMD does not
reimburse or indemnify the member as the latter
does not pay any third party. Instead, it is the HMO
who pays the participating physicians and other
health care providers for the services rendered at pre­
agreed rates. The member does not make any such
payment. According to the agreement, a member can
take advantage of the bulk of the benefits anytime,
e.g., laboratory services, x-ray, routine annual
physical examination and consultations, vaccine
administration as well as family planning counseling,
even in the absence of any peril, loss or damage on his
or her part. In case of emergency, the HMO is obliged
to reimburse the member who receives care from a
non-participating physician or hospital. However,
this is only a very minor part of the list of services
REVIEWER ON COMMERCIAL LAW
available. The assumption of the expense by the HMO
is not confined to the happening of a contingency but
includes incidents even -in the absence of illness or
injury. Can the contract between Mr. A and the HMO
be considered an insurance contract?
No. The contract is not an insurance contract. Not all
the necessary elements of a contract of insurance are
present in HMD's agreements. To begin with, there is
no loss, damage or liability on the part of the member
that should be indemnified by HMO. In other words,
there is nothing in agreement that gives rise to a
monetary liability on the part of the member to any
third party-provider of medical services which might
in turn necessitate indemnification from the HMO.
The terms "indemnify" or "indemnity" presuppose that
a liability or claim has already been incurred. There is
no indemnity precisely because file member merely
avails of medical services to be paid or already paid in
advance at a pre-agreed price under the agreements.
Indemnity of the member was not the focal point
of the agreement but the extension of medical services
to the member at an affordable cost; the agreement did
not partake of the nature of a contract of insurance.
Although risk is a primary element of an insur­
ance contract, it is not necessarily true that risk alone
is sufficient to establish it. Almost anyone who under­
takes a contractual obligation always bears a certain
degree of financial risk. Consequently, there is a need
to distinguish prepaid service contracts (like those of
the HMO) from the usual insurance contracts.
Indeed, the HMO undertakes a business risk
when it offers to provide health services: the risk
that it might fail to earn a reasonable return on its
investment. But it is not the risk of the type peculiar
only to insurance companies. Insurance risk, also
known as actuarial risk, is the risk that the cost of
FART II — INSURANCE CODE
(P.IJ. No. 1460,. as amended)
S3
insurance claims might be higher than the premiums
paid. The amount of premium is calculated on the
basis of assumptions made relative, to the insured.
However, assuming that the HMD's commitment
to provide medjcai services to its members can be
. construed as an. acceptance of the risk that it will shell
out more than the prepaid fees, it still will not qualify
as an insurance contract because the HMD's objective
is to provide medical services at reduced cost, not to
distribute risk like an insurer (Philippine Health Care
Providers, Inc. v. CIR, G.R. No. 167330, Sept 18,2009).
4. PERFECTION
a)
An insurance contract is a consensual
contract and is therefore perfected the moment there
is a meeting of minds with respect to the object and the
cause or consideration (See Arts. 1315,1318 and 1319,
CO. What is being followed in insurance contracts is
_________ what is known as the "cognition theory."
_______
b)
Generally, the insured is the one making
the offer by submitting an application to the insurer
and the latter accepts the offer by approving the
application. Thus, mere submission of the application
without the corresponding approval of Hie policy
does not result in the perfection of the contract of
insurance (Great Pacific Life Assurance Corp. v. CA, 89
SCRA 543; See Exception: Eternal Gardens Memorial
Park v. PhilAmLife, April 9,2008).
c)
Delivery of Policy
Since the contract of insurance is consensual
(and not a formal or real contract), delivery of the
policy is not necessary for its perfection.
Note: Prof. Agbayani opined that delivery of
the p o h ^ is necessary to make file policy binding.
However, he also said that this requirement of
delivery is satisfied if the parties intention is to be
REVIEWER ON COMMERCIAL LAW
bound by the insurance. In effect even under this
view, mere consent is enough to bind the parties.
d)
Delay in Approval of Policy
Mere delay in acceptance of the insurance
application will not result in a binding contract. Court
cannot impose upon the parties a contract if they did
not consent However, in proper cases, the insurer
may be liable for tort.
N ote: See exceptional case of Eternal Gardens
Memorial P$rk Corp. v. PM. American Life Ins. Corp.,
G.R. No. 166245, April 9, 2008, where there is a prior
agreement fixing the date of effectivity, that is, one
year starting from the party's purchase of a memorial
lot on installment from the memorial park.
PROBLEMS,*
1.
A:
On Sept. 24, 2002, KC applied for a life insurance
policy with SLInsurmce Company, KC submitted...the..
application to the branch manager of SL and paid the
required premium. The manager then forwarded the
application to the head office for approval. On Nov.
26, 2002, SL's head office sent a notice of acceptance
to KC. However, KC died before receiving the notice
of acceptance. KC's heirs now want to recover
the premium that was paid. Can they recover the
premium?
Yes, the heirs may recover the premium because no
contract of insurance was perfected in this case. Article
1319 of the Civil Code provides that acceptance of an
offer by letter does not bind the offerer except from
the time it came to his knowledge. In this case, KC did
not receive the letter of acceptance, hence, the contract
was never perfected and the obligation of the insurer
which was supposed to be covered by the premium
did not materialize. Consequently, the insurer is
.bound to return the consideration that it received
!;•. ET C — INSURANCE COPE
{P.D, No. a460, as amended)
85
.-:
iru."xr.v 'Enriquez v. Sun Life Assurance Co. of
Canadc. 41 PM 269; See also Sec. 79[a]>.
from
t y
DBF rxcendec ? loan in favor of JD secured by a
real estate mortgage. One of the requirements of
DBF was for. JD to obtain a Mortgage Redemption
Insurance with DBF MRI Pool, hence, JD filed the
corresponding application. Although JD was more
than 60 years of age at that time, DBF accepted the
application for the Pool without disclosing to JD the
fact that it is authorized to accept an application for
the Pool only if the applicant is not more than 60 years.
When the loan was released, DBF already deducted
the premium from the loan proceeds The premium
was credited to the savings account of DBF and DBF
MRI Pool was advised accordingly. No approval of
the insurance application had been received by JD
as of said date. JD died of cardiac arrest twenty days
thereafter. When the beneficiaries tried to recover
from DBF MRI Fobl, the latter refused to pay. The
beneficiaries then sued DBP MRI Pool and DBP itself.
Will the action prosper?
The action against DBP MRI Pool for non-payment of
the proceeds of the insurance will not prosper but the
action against DBP will prosper.
The power to approve the insurance application
rests with DBF MRI Pool Since the Pool did not
approve the application, no insurance contract was
perfected. The fact that the premium was deducted
from the loan proceeds is not material because it
does not appear that the Pool accepted the premium
payment. Hence, there is no contractual obligation to
pay the insurance proceeds.
However, the claim against DBP should prosper.
DBP was wearing two hats in the transactions — as
a lender and as an insurance agent. As an insurance
agent, DBP made JD go through the motion of
applying for an insurance and led him to believe that
all the requirements were fulfilled. JD was also made
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REVIEWER ON COMMERCIAL LAW
to believe that the approval is already forthcoming
although in truth, no such approval can be expe •-^
because the authority of DBF is to accept an applies .a
only if the applicant is less than 60 years old. Under
the Civil Code, an agent is liable to third per:, v a
(like JD's beneficiaries) if they are unaware of the
limit of the authority of the agent and they have h -:e-;
deceived by the non-disclosure thereof by the agent.
However, DBF is not liable for the entire value of the
insurance policy because the loss of such amount is
speculative in nature. To assume that were it not for
DBF's concealment of the limits of its authority, Dans
would have secured an insurance coverage from
another company is highly speculative (Development
Bank of the Philippines v. CA, 231 SCRA 370).
4.01. COVER NOTES
f)
The sixty (60 )-day peri od mar he ex tend ed *«>vox ■
written approval of the Insurance Commission,
and
g)
The written approval of the Insurance Com­
mission is dispensed with upon the certification
of the president, vice-president or general
manager of the insurer that the risk involved, the
values of such risks and premium therefor, have
not as yet been determined or established and
the extension or renewal is not contrary to or is
not for the purpose of violating the ICP or any
rule (Ins. Memo. Circ. No. 3-75).
4.02. THE POLICY
a)
It is a written instrument where the terms
and conditions of the contract of insurance are
set forth (Sec. 49, ICP).
Persons who wish to be insured may get protec­
tion before the perfection of the insurance contract —
notice of approval of the application — by securing a
--------- cover note. The cover note issued by thefirtsutrer shall be deemed an insurance contract as contemplated
under Section 1(1) of the ICP subject to the following
The policy is not necessary for the perfection
of the contract. However, the law provides that
no policy of insurance shall be issued or delivered
unless in the form previously approved by the
Insurance Commission (Sec. 226, ICP).
rules (Sec. 52, ICP):
a)
b)
c)
The cover note shall be issued or renewed only
upon prior approval of the Insurance Commis­
sion;
The cover note shall be valid and binding not
more than sixty (60) days from the date of its
issuance;
No separate premium (separate from the policy
or main contract) is required for the cover note
Policy of Insurance
The Code does not provide for prescribed
forms but requires certain provisions to be
included in the policy (Secs. 227-229, ICP).
b)
Basic Contents of a Policy (Sea 51, IC P)
1)
parties;
2)
amount of insurance, except in open or run­
ning policies;
3)
rate of premium;
4)
property or life insured;
5)
interest of the insured in the property if he
is not the absolute owner;
(Pacific Timber Export Corp. v. CA, 112 SCRA 199);
d)
y
The cover note may be cancelled by either party
upon prior notice to the other of at least seven (7)
x days;
•
e)
The policy should be issued within sixty (60)
days after the issuance of the cover note;
REVIEWER ON COMMERCIAL LAW
risk insured agaii
7)
c)
prior notice to the insured, ana lb; any oi
the following grounds:
fid
the period during which the insurance • c
continue.
Rider
An attachment to an insurance policy . .-A
modifies the conditions of the policy by expand­
ing or restricting its benefits or excluding cer­
tain conditions from the coverage (Black's Law
non-payment of premium;
(ii)
conviction of a crime out of acts in­
creasing the hazard insured against;
(iii) fraud or material misrepresentation;
(iv) willful or reckless acts or omissions
increasing the risk insured against;
Dictionary, 5th ed., p. 1189).
1)
(i)
(v)
Riders, together with other attachments to
the policy like clause, warranty or endor­
sements, are not binding on the insured
unless the descriptive title or name thereof
(vi) determination by the Insurance Com­
missioner that the policy would vio­
late the Insurance Code.
is mentioned and written on the blank
spaces provided in the policy (Sec. 50, ICP);
Riders and the like shall be countersigned
by the insured or owner unless he was the
___ _______one who applied for the rider, clause, warranty, etc. (Sec. 50, ICP);
2)
Requisites fo r Cancellation (Sec. 65, ICP)
(i)
2)
3)
d)
Cancellation of NON-LIFE Policy
1)
Grounds (Sec. 64, IC P)
Cancellation by the insurer of an in­
surance policy other than life requires: (a)
prior notice of cancellation to insured;
(ii)__notice must be based on the occurrence
___________ after effective date of the policy of one
or more of the grounds mentioned;
(iii) notice must be in writing, mailed or
delivered to the insured at the address
shown in the policy; and
When the requirements for a rider are com­
plied with (including clause, warranty, or
endorsement), it is considered part of the
policy. Thus, a rider containing an "auto­
matic increase clause" — one that increases
the coverage subject to the attainment of a
certain age of the insured — is not a sepa­
rate contract. It is part of the original policy
which is in the nature of a conditional ob­
ligation (Commissioner o f Internal Revenue
v, Lincoln Philippine Life Insurance Company,
G.R. No. 119176, March 19, 2002).
physical changes in the property
insured making it uninsurable; and
(iv) notice must state the grounds relied
upon provided in Section 64 of the
Insurance Code and upon request
of insured, to furnish facts on which
cancellation is based (Sec. 65, ICP;
Philamcare Health Systems v. CA, G.R.
No. 125678, March 18,2002).
e)
Kinds of Policies
Property insurance policies are classified
into:
1)
open policy — value of thing insured is not
agreed upon, but left to be ascertained at
time of loss (Sec. 60);
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REVIEWER ON COMMERCIAL LAW
2}
3}
valued policy —•definite '.-aiuatior. ig agreed
by both parties,, and written on the face of
poliq/ (Sec. 61); and
be typewritten (Sec. 50, Iasi paragraph, ICP)
but the law prescribes the contents of such
policy (Sec. 228, ICP); and
running policy — contemplates successive
3)
insurances and which provides that the
subject of the policy may from time to time
be defined (Sec. 62).
Life insurance policies are always valued
policies.
f)
Reinstatement of the Policy
The stipulation in a life insurance policy
giving the insured the privilege to reinstate
it upon written application does not give the
insured absolute right to such reinstatement by
the mere filing of an application. The insurer
has the right to deny the reinstatement. After
the death of the insured, the insurance company
cannot be compelled to entertain an application *1
---------------- :— for reinstatement of the policy because ~the~
conditions precedent to reinstatement can no
longer be determined and satisfied (Lalican v. The
b)
c)
2)
Fire (Secs. 167-173, ICP); and
3)
Casualty (Sec. 174, ICP).
Contract of Suretyship (Secs, 175=173}--------------
a)
Insurers may be individuals, partnerships, asso­
ciations or corporations who are duty authorized
by the Insurance Commission to engage in
insurance business (Secs. 184-187, ICP).
b)
Insurance Corporation
Individual life — insurance on human lives
and insurance appertaining thereto or con­
nected therewith (Sec. 179, ICP);
Group life — a blanket policy covering a
number of individuals. Its most common
form is an insurance that provides life or
health insurance coverage for the employ­
ees of a single employer (See Pineda v. CA,
226 SCRA 754, 45 SCAD 30 [1993]). The
policy need not be in printed form and may
Marine (Secs. 99-166, ICP);
The person who undertakes to indemnify
another.
Life insurance
2)
1)
6.01. Insurer
5. TYPES OF INSURANCE CONTRACTS UNDER THE SCP
1)
Non-life insurance
6. PARTIES TO INSURANCE CONTRACT
Insular Life Assurance Co., Ltd., G.R. No. 183526,
Aug. 25,2009).
a)
industrial life — a 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 five hundred 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 (Sec.
229, ICP).
a
-
Corporations formed or organized to save
any person or persons or other corporations
harmless from loss, damage, or liability aris­
ing from any unknown or future or contingent
event, or to indemnify or to compensate any
person or persons or other corporations for any
such loss, damage, or liability, or to guarantee
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REVIEWER ON COMMERCIAL LAW
the performance of or compliance with contrac­
tual obligations or the pavment of debt of others
(Sec. 185, 1CP).
1)
2)
c)
It must have sufficient capital and assets
required under the Insurance Code and
the pertinent regulations issued by the
Commission (Sec. 186, ICP).
It must have a certificate of authority to
operate issued by the Insurance Com­
mission which should be renewed every
year (Sec. 187, ICP).
entered into before the war automatically
loses its binding effect the moment the insurer
becomes a public enemy (Ibid.).
b)
Minors can no longer enter into insurance
contracts. The exception under the Insurance
Code is no longer controlling because the age of
majority is now 18 years (R.A. No. 6809).
c)
Married women can enter into insurance con­
tracts without the assistance of their husbands
Foreign insurance corporations
They maybe authorized by the Commission
to engage in insurance business in the Philip­
pines. The requirements, among others, include:
1)
appointment of a resident of the Philippines
as general agent on whom any notice or
proof of loss may be served and on whom
summons other processes may be served;
2)
It must possess paid-up unimpaired assets
or capital and reserve not less than that
required of domestic corporation;
3)
It must deposit for the benefit and security
of policyholders, securities satisfactory to
the Commission; and
4)
Its investments should not exceed 20% of
the net worth of the foreign corporation or
20% of the capital of the registered enter­
prise.
6.02. Insured
The person with capacity to contract and having
an insurable interest in the life or property of the
insured; and
a)
or subjects, with whom the Philippines is at war.
With respect to corporations, the nationality
is determined by the controlling stockholders
irrespective of the place of incorporation
(Pilipinas Cia de Seguras v. Chrisiern Henefeld and
Co., 89 Phil. 54 [1951]). The property insurance
A public enemy may not be insured (Sec. 7, ICP).
A public enemy is a nation, including its citizens
(R.A. No. 7192).
Beneficiary
------- gerson-designated4Q-r€€ewe-^pgQ€eeds-of-poli€ywhen risk attaches.
a)
Designation of the beneficiary
1)
When one insures his own life, he may des­
ignate any person as the beneficiary, wheth­
er or not the beneficiary has an insurable
interest in the life of the insured.
Exceptions: Persons specified in
Article 739 (in re Art. 2012) of the Civil Code
cannot be designated: (a) those made bet­
ween persons who were guilty of adultery
or concubinage at the time of donation; (b)
those made between persons found guilty of
the same criminal offense, in consideration
thereof; (c) those made to a public officer
or his wife, descendants or ascendants by
reason of his office. In par. (a), conviction is
not a condition precedent.
94
REVIEWER ON COMMERCIAL LAW
PART II — INSURANCE CODE
(P.D. No. 1460, as amended)
The reason tor the apr cation of Ar­
ticle 739 is that in essence, r :fe insurance
policy is no different from a ~onation inso­
far as the beneficiary is concerned. Both are
founded on liberality. A beneficiary is like
a donee because from the premiums of the
(Hi)
5)
6)
the proceeds.
If a person will insure the life of another
payable to himself, he must have insurable
3)
In property insurance, the beneficiary must
have insurable interest on the property.
4)
The designation is revocable unless the
right to revoke is expressly waived in the
policy (Sec. 11, ICP). Note: Section 64 of the
Family Code, allows the innocent spouse to
revoke the designation of the other spouse
as irrevocable beneficiary after legal sepa­
ration.
(i)
(ii)
The insured cannot assign the policy
if the designation of the beneficiary
is irrevocable. The irrevocable benefi­
ciary has a vested right.
If there is no waiver of the right to
revoke under Section 181, assignment
of the policy may be deemed as
implied revocation.
If premiums are paid out of the conjugal
funds, the proceeds are considered con­
jugal. If the beneficiary is other than the
insured's estate, the source of premiums
would not be relevant (Del Val v. Del Val, 29
Phil. 534; BPI v. Posadas, 56 Phil 215).
Note, however, that the designation
of persons mentioned in Article 739 is void
but the policy is binding. The estate will get
interest on the life of the person whose life
he is insuring.
If the insured refuses to pay the pre­
miums, the designated irrevocable
beneficiary may continue the policy by
paying premiums that are due.
policy which the insured pays out of liberal­
ity, the beneficiary will receive the proceeds
of the insurance (The Insular Life Assurance
Co. v. Ebrado, 80 SCR A 181 [1977]).
2)
95
If the insured or beneficiary is a minor,
and the amount involved does not exceed
P50,000.00, the father, in the absence of a
judicial guardian, or in his absence or inca­
pacity, the mother, may exercise the minor's
rights under the policy, without the need of
a court authority or a bond (Sec. 180, ICP;
Art. 225, PC).
__________ 7)
The designation of the illegitimate children as beneficiaries in the deceased
father's insurance policy is valid because
no legal proscription exists in naming
as beneficiaries the children of illicit
relationships by the insured (Heirs o f Loreto
Maramag v. Maramag, G.R. No. 181132, June
5, 2009).
INSURABLE INTEREST
7.01. Basic Concepts
a)
Life Insurance
Every person has an insurable interest in
the life and health:
1)
of himself, of his spouse, and of his chil­
dren;
2)
of any person on whom he depends wholly
or in part for education or support, or in
whom he has a pecuniary interest;
REVIEWER ON COMMERCIAL LAW
3)
4)
of any person under a legal obligation to
him for the payment of money, or respect­
ing property or services, of which death or
illness might delay or prevent the perfor­
mance; and
of any person upon whose life any estate
The law does not distinguish between a married child,
or a minor child. Besides, the obligation to support
under the Family Code remains even if one reaches
majority age.
3.
Mr. A insured the life of his wife Mrs. B. Later, they
were legally separated pursuant to a judgment of a
court, a) B dies after the legal separation, can Mr. A
recover? b) Will your answer be the same if Mr. A
insured the life of B when they were already legally
separated?
A:
a)
or interest vested in him depends (Sec. 10,
1CP).
N otes; (i) In general, the test is whether or
not the person is interested in the preservation of
the insured life despite the insurance.
(ii) In paragraph (a) of Section 10, mere
relationship is sufficient while the rest (pars, b,
c, and d) requires pecuniary interest. Thus, the
interest of the creditor over the life of the debtor
ceases upon full payment.
A can recover because he has insurable interest
over the life of B at the time he obtained the
insurance. One has insurable interest over the
life of one's wife (Sec. 10, ICP).
b)
PROBLEMS; _______
My answer would be the same. A decree of
legal separation does not remove the insurable
interest of a spouse over the other. Section 10 of
__________ the Insurance Code does not distinguish._______
1.
On July 14, 1985, X, a homosexual, took an insurance
policy on the life of his boyfriend, Y. In the insurance
application, X misrepresented that Y was in perfect
health although he knew all the time that Y was
afflicted with AIDS. On Oct. 18,1987, Y died in a motor
accident. Shortly thereafter, X filed his insurance
claim. Should the insurer pay? Reasons.
4.
On May 12, 2002, Mr. X insured the life of his debtor,
Mr. Y, for P100,000.00 for a period of one year. At that
time he took the policy, Mr. Y owes him P I00,000.00
payable on May 12,2003. Mr. Y paid his debt to Mr. X
in full on March 1, 2003. Mr. Y died on May 10, 2003.
Can Mr. X recover the insurance proceeds? Can the
heirs of Mr. Y recover from the insurer?
A;
The insurer has no obligation to pay. A person has
insurable interest over the life of another only if he has
pecuniary interest over the life of such person except
if the person insured is his spouse or child. Friendship
alone is not the insurable interest contemplated in life
insurance.
A:
Mr. X cannot recover because he has no insurable
interest at the time of Mr. Y's death because the
amount owed to him was fully paid. Neither can
the heirs of Y recover because there is no privity of
contract between them and the insurer.
2.
Can a parent insure the life of his son who is no longer
a minor and who is now married?
A;
YES, Section 10 of the Insurance Code provides that
one has insurable interest over the life of his children.
b)
In what
does
insurable
interest in property
consist?
1)
Insurable interest in property is any inter­
est therein, or liability in respect thereof,
and it may consist in an existing interest.
98
REVIEWER ON COMMERCIAL LAW
an inchoate interest founded on an existing
interest or any expectancy coupled with an
existing interest (Secs. 13 and 14, ICP).
2)
Is mere hope or expectancy insurable?
A:
NO. In order for hope or expectancy to be incurable,
it must be coupled with existing interest out of which
the expectancy arises. It must be founded on ait actual
right to the thing or upon a valid contract.
3.
Can a depositary insure the things deposited to him?
A:
YES. A depositary is responsible for the property
deposited to him and he will be liable in case of
damage or destruction to the thing. Hence, he has
insurable interest over the thing deposited because
he will be damnified by its loss.
In general, a person has an insurable inter­
est in the property, if he derives pecuniary
benefit or advantage from its preservation
or would suffer pecuniary loss, damage or
prejudice by its destruction whether he has
or has no title in, or lien upon, or possession
of the property (Filipino Merchants insurance
Co., Inc. v. CA, 179 SCRA 638).
Hence, pecuniary interest over the
property is always necessary.
3)
2
4)
Existence of insurable interest is a matter of
public policy. Hence, the principle of estop­
pel cannot be invoked.
PROBLEMS:
1.
A:
______________ ___________________ _
A piece of machinery was shipped to Mr. Pablo on
the basis of C & F, Manila. Mr. Pablo insured said
machinery with the Talaga Merchandise Insurance
Corp. (TAMIC) for loss or damage during the voyage.
The vessel sank en route to Manila. Mr. Pablo then
filed a claim with TAMIC which was denied for
the reason that prior to delivery, Mr. Pablo had no
insurable interest. Decide the case.
The case should be decided in favor of Pablo.
Although delivery is a mode of transferring owner­
ship in a contract of sale, it does not mean that the
buyer had no existing insurable interest over the
goods that he purchased. A purchaser of goods
under a perfected contract of sale already acquires
interest on the property pending delivery. Hence,
Pablo had insurable interest over the machinery even
before actual receipt of the goods (Filipino Merchants
Insurance Co. v, CA, 179 SCRA 638).
A person having a mere right of possession
of the property may insure its full value in
his own name, even when he is not respon­
sible for its safekeeping and even if he is not
even paying rentals. He stands to benefit
from its continued existence or to be preju­
diced by its destruction. The insurance on
such interest would not be a wager, wheth­
er the interest was an ownership, in or a
right to possession of, the property or sim­
ply an advantage of a pecuniary character
having legal basis but depended upon the
continued existence of the subject (Ang Ka
Yu v. Phoenix Assurance Co. Ltd., CA-G.R. No.
27881-R, Sept 28, 1961, 1 CAR2s 704; Harvardian Colleges of San Fernando v. Country
Bankers Ins. Corp., CA-G.R. CV No. 03771,
Jan. 6,1986,1 CARA 1).
5)
An heir has no insurable interest over pro­
perties that he will inherit. The execution of
a last will and testament does not vest to
an heir, even a compulsory heir, insurable
interest over the property that he will
inherit as stipulated in the will.
100
PART II — INSURANCE CODE
(P.D. No. 1460, as amended)
REVIEWER ON COMMERCIAL LAW
6)
An owner whose property was levied upon
by a judgment creditor and who lost the
same in an execution sale retains insurable
interest thereon during the redemption pe­
riod. He is still the owner of the property
during that period. However, the buyer
during the auction sale also has an inter­
est over the subject property subject to the
condition that the property will not be re­
deemed. Hence, the purchaser acquires in­
surable interest at the time of the purchase.
7.02. Insurable interest in property vs. insurable interest
in life
a)
As to extent'
Insurable interest in life is unlimited (save
in life insurance effected by a creditor on the life
of the debtor); insurable interest in property is
limited to the actual value of the interest there-
-------------------- 0m -------:----------------------------:------- ;---------------------------:------- —
b)
c)
As to time when insurable interest must exist
PROBLEMS:
1.
Does the buyer of the goods, after the perfection of the
contract and before delivery of the articles purchased,
have insurable interest in the goods?
YES. A buyer of goods has an insurable interest in
the goods purchased after perfection of the contract
and before delivery of the goods. The shipping
arrangement, F.O.B., C.I.F., or C.F. is immaterial in
determining whether the vendee has an insurable
interest or not in the goods in transit. The perfected
contract of sale, even without delivery, vests in the
~------- vendee an equitable title, an existing interest over the
goods sufficient to be the subject of insurance.
A:
In life insurance, it is enough that the insur­
able interest exists at the time the policy takes
effect and need not exist at the time of the loss;
while in property insurance, it is necessary that
the insurable interest exists when the insurance
takes effect and when the loss occurs, but need
not exist in the meantime.
2.
"N " owns a condominium unit presently insured with
Holy Insurance Company for PI Million. "N" later
sells the condominium unit to "O." Somehow, "O"
fails to obtain the transfer of the insurance policy to
his name from "N ." Subsequently, a fire of unknown
origin destroys completely the condominium unit.
Who may collect the insurance?
As to expectation of benefit to be derived
A:
Both "N " and "O" may not collect from the insurer.
In property insurance, the insured must have
insurable interest over the property at the time of the
perfection of the contract and at the time of the loss.
"N " cannot recover because he had already sold the
condominium unit at the time of the loss. Although
"N " had insurable interest over the unit at the time of
the inception of the policy, he did not have insurable
interest on the insured property at the time of the loss.
In life insurance, the expectation of the
benefit to be derived need not have any legal
basis; in property insurance, there must be a
legal basis.
d)
In life insurance, the beneficiary need not have
insurable interest over the life of the insured if
the insured himself secured the policy. However,
if the life insurance was obtained by the benefi­
ciary, the latter must have insurable interest over
the life of the insured.
As to the beneficiary's interest
The beneficiary must have insurable inter­
est over the thing insured in property insurance.
102
REVIEWER ON COMMERCIAL LAW
"O" cannot also recover because he is not a party
to the insurance contract. The transfer of the property
PARTII — INSURANCE CODE
(P.D. No. 1460, as amended)
riage with the insured
103
will not prevent recovery on
the policy.
does not include the transfer of the insurance policy.
3.
In a civil suit, the court ordered Benjie to pay Nat
P500,000.00. To execute the judgment, the sheriff
levied upon Benjie's registered property (a parcel of
land and the building thereon), and sold the same
at a public auction to Nat, the highest bidder. The
latter, on March 18,1992, registered with the register
of deeds the certificate of sale issued to him by the
sheriff. Meanwhile, on Jan. 27, 1993, Benjie insured
with. Garapal Insurance for PI Million the same
building that was sold at public auction to Nat. Benjie
failed to redeem the property by March 18, 1993.
On March 19, 1993, a fire razed the building to the
ground. Garapal Insurance refused to make good
its obligation to Benjie under the insurance contract.
Is Garapal Insurance legally justified in refusing
payment to Benjie?
payment to Benjie. Although Benjie had insurable
interest over the insured property when he took out
an insurance policy thereon, he lost his insurable
interest when he failed to redeem the property on
March 18,1993. Hence, Benjie did not have insurable
interest over the property at the time of the loss. The
Insurance Code requires in property insurance that
he has insurable interest at the time of the issuance of
the policy and also at the time when the loss occurs.
4.
A:
Can there be recovery of the insurance proceeds
where the husband took out a life insurance on the
life of his wife who (wife) died a few days after the
decree of their annulment became final?
Yes, in life insurance, it is only necessary that the
person who took out the insurance on the life of
another has insurable interest on such life at the time
the policy takes effect. He need not have insurable
interest thereafter. Thus, the annulment of the mar-
7.03. Insurable interest of mortgagor and mortgagee over
mortgaged property
Both the mortgagor and mortgagee have an
insurable interest in the property mortgaged and
this interest is separate and distinct from the other.
They may take out separate policies at the same or at
separate times (Rizal Commercial Banking Corporation
v. CA, 289 SCRA 292 [19981).
a)
Mortgagor
The mortgagor of property, as owner, has
an insurable interest to the extent of its value,
even though the mortgage debt equals such
value. The reason is that the loss or destruction
of the property insured will not extinguish his
mortgage debt. The Supreme Court explained in
Armando Geagonia v. Court o f Appeals (24JF 5CKA
152,161 [1995]) that when the mortgagor secures
the insurance, the mortgagee may he made the
beneficial payee in the following ways:
1)
He may become the assignee of the policy
with the consent of the insurer;
2)
He may be the pledgee without the consent
of the insurer;
3)
The original policy may contain a mortgage
clause;
4)
A rider making the policy payable to the
mortgagee as his interest may appear, may
be attached (loss payable clause);
5)
A standard mortgage clause containing a
collateral independent contract between
the mortgagor and the insurer, may be
attached;
104
PART II — INSURANCE CODE
(P.D. No. 1460, as amended)
REVIEWER ON COMMERCIAL LAW
6)
b)
the contract itself. This kind of policy covers
only such interest as the mortgagee has at the
issuance of the policy (Armando Geagonia v. CA,
The policy, though by its terms is absolutely
payable to the mortgagor, may have been
procured by a mortgagor under a contract
duty to insure for the mortgagee's benefit,
in which case the mortgagee acquires an
equitable lien upon the proceeds.
Mortgagee
The mortgagee as such has an insurable
interest in the mortgaged property to the extent
of the debt secured; such interest continues until
the mortgage debt is extinguished.
A mortgagee may procure a policy as a con­
tracting party in accordance with the terms of
an agreement by which the mortgagor is to pay
the premiums upon such insurance. It has been
noted, however, that although the mortgagee is
himself the insured, as where he applies for a
policy, fully informs the authorized agent of his
ihCROBLEM;
To secure the payment of a loan of P3M, D mortgaged
his house worth P5M in favor of C, the creditor, a)
Who has an insurable interest in the house? What
is the extent of said insurable interest? b) Will an
insurance of said house procured by D in his own
name and for his own benefit inure to the benefit of
C? c) If C insures the house for P3M, in his own name
and for his own interest only and the loss occurs after
the full payment of the loan, who can recover under
the policy?
a)
intereslwpays-pimmimn^^
on the assurance that it insures him, the policy
is in fact in the form used to insure a mortgagor
with "loss payable clause" (Armando Geagonia v.
CA, 241 SCRA 152,161 [1995]).
c)
Standard or union mortgage clause vs. open or
loss payable mortgage clause
In a standard or union mortgage clause, the
subsequent acts of the mortgagor cannot affect
the rights of the mortgagee. While in an open
or loss payable mortgage clause, the mortgagor
does not cease to be a party to the contract (Secs.
8 and 9, ICP).
In the policy obtained by the mortgagor with
loss payable clause in favor of the mortgagee as
his interest may appear, the mortgagee is only a
beneficiary under the contract, and recognized
as such by the insurer but not made a party to
105
Both the mortgagor and the mortgagee have
insurable interest in the house. D's insurable
interest will still be up to the value of the house
despite the mortgage thereon, simply because
the loss of the house will not extinguish the loan.
C's insurable interest is P3M that is the extent he
shall be damnified by the loss of the house (Secs.
8 and 17, ICP).
b)
NO. An insurance procured by either the mort­
gagor or mortgagee will not inure to the benefit
of the other. Insurance is a personal contract
and just like any Other contract it takes effect
only between the contracting parties, their heirs,
successors and assignees, unless it contains
a stipulation in favor of a third person (Art.
1311, NCC and Sec. 53, ICP). However, while an
insurance procured by a mortgagor does not
inure for the benefit of the mortgagee, the latter
has a lien on the proceeds of the policy under
Article 2127, NCC.
PART II — INSURANCE CODE
(P.D. No. 1460, as amended)
REVIEWER ON COMMERCIAL LAW
c)
be parties to the contract. Consequently, if DBF
(mortgagee) already recovered the total amount
of the obligation by resorting to foreclosure, it
Neither D nor C may recover under the policy,
C cannot recover because the law (Sec. 19, ICP)
requires that insurable interest in property
must exist when the insurance takes effect and
when the loss occurs. While C had an insurable
interest in the house when the insurance took
effect, he did not have the interest when the loss
occurred, the loan having been paid in full. D
cannot recover because he was not a party to the
contract.
can no longer recover under the group insurance
policy. However, the heirs of the mortgagors can
recover because the mortgagors did not cease to
be parties to the contract.
c)
-
7.04. When interest retained by mortgagor
a)
b)
Section 8 of the Insurance Code provides that
''unless the policy otherwise provides, where a
mortgagor of property effects insurance in his
own name providing that the loss shall be pay­
able to the mortgagee, or assigns a policy of in­
surance to a mortgagee, the insurance is deemed
to be upon the interest of the mortagor, who
does not cease to be a party to the original contract and any act of his, prior to the loss, whicFT
would otherwise avoid the insurance, will have
the same effect, although the property is in the
hands of the mortgagee, but any act which, un­
der the contract of insurance, is to be performed
by the mortgagor, may be performed by the
mortgagee therein named, with the same effect
as if it had been performed by the mortgagor."
Where the mortgagor takes out an insurance
over the mortgaged property and endorsed the
same to the mortgagee, Section S3 of the Insur­
ance Code ordains that the insurance proceeds
of the endorsed policy shall be applied exclu­
sively to the proper interest of the person for
whose benefit it was made — the mortgagee.
Hence, creditors of the mortgagor cannot gar­
nish or levy upon the proceeds up to the extent
of the debt to the mortgagee (Rizal Commercial
Banking Corporation v. CA, 289 SCRA 292 [1998]).
7.05. Insurable interest of beneficiary and assignee of the
policy
a)
Property Insurance
The beneficiary and the assignee must have
insurable interest. Consent of the insurer must
be secured before the assignment.
b)
Life Insurance
If the insured takes the insurance on his
own life, he can designate anybody who does
not have insurable interest. If a third person
takes the policy, the beneficiary must have insur­
able interest. In case of assignment, the assignee
need not have insurable interest.
The above-quoted provision was applied in Great
Pacific Life Assurance Corp. v. Court of Appeals (316
SCRA 677). The case involved a group insurance
policy known as a mortgage redemption
. insurance whereby the insurer insured the lives
of the eligible housing loan mortgagors of the
Dev. Bank of the Phils. The mortgagors paid the
premiums but the losses were made payable
to the mortgagee, DBF. Hence, the insurance
policies were held to be on the mortgagors'
interests and that the mortgagors continue to
107
PROBLEMS:
1.
Spouses NC and SC leased the property of CKS. The
lease contract provides that the lessees (the spouses)
shall not insure against fire the goods, placed at the
108
REVIEWER ON COMMERCIAL LAW
leased premises without the consent of CKS and if
an insurance is obtained ’without the consent of CKS,
the policy is deemed assigned and transferred to the
lessor (CKS). The spouses insured their goods without
the consent of CKS. On the day the lease contract was
to expire, fire broke out inside the leased premises
destroying the goods of the spouses. CKS learned
about the insurance and promptly demanded that the
insurer pay the proceeds directly to CKS. The insurer
refused to pay. Does CKS have the right to demand
payment of the proceeds?
A:
No. CKS cannot demand payment of the insurance
proceeds from the insurer. CKS cannot be validly a
beneficiary of the fire insurance policy because he
did not have insurable interest over the goods. The
automatic assignment of the policy to CKS under
the provision of the lease contract is void for being
contrary to law and/or public policy (Cha v. CA, 277
SCRA 690 [1997]).2
2.
Blanco took out a PI Million life insurance policy
naming his friend and creditor, Montenegro as his
beneficiary. When Blanco died, his outstanding loan
to Montenegro was only P50,000.00. Blanco's executor
contended that only P50,000.00 out of the insurance
proceeds should be paid to Montenegro and the
balance of P950,000.00 should be paid to Blanco's
estate. Is the executor's contention correct? Reason
out your answer.
A:
The executor's contention is incorrect. The insured
took out an insurance policy over his own life. Hence,
he can designate any person as his beneficiary and
such beneficiary can recover the full amount. The
conclusion would have been different had it been
Montenegro who took out the life insurance policy
on the life of Blanco because a creditor's insurable
interest extends only up to the amount of the credit.
Thus, had it been Montenegro who secured the
PART II ~ INSURANCE CODE
(P.D. No. 1460, as amended)
policy, he
would have been allowed to recover
P50,000.00, the extent of his insurable interest.
109
only
7.06. Expectancy not insurable unless coupled with an
interest in the thing from which it shall arise
Insurable interest in property need not be an
existing interest. It may exist merely in an inchoate
interest or as an expectancy. However, the expectancy
must be coupled with an existing interest in that out
of which such expectancy arises. Example: An owner
of a business can insure against a contingency which
may cause loss of profits resulting from the cessation
or interruption of his business (See Sec. 14, ICP).
7.07. Effect of change of interest in thing insured
unaccompanied by a change of interest in insurance.
Exceptions.
.
a)
General Rule: A change of interest in any part of a
thing insured unaccompanied by a correspond-*1
ing change of interest in the insurance suspends
the insurance to an equivalent extent, until the
interest in the thing and the interest in the insur­
ance are vested in the same person (Sec. 20, ICP).
Exceptions:
1)
in life, health and accident insurance (Sec.
20, ICP);
2)
a change of interest in the thing insured
after the occurrence of an injury which
results in a loss (Sec. 21, ICP);
3)
a change of interest in one or more of
several distinct things, separately insured
by one policy (Sec. 22, ICP);
4)
a change of interest by will or succession on
the death of the insured (Sec. 23, ICP);
5)
a transfer of interest by one of several part­
ners, joint owners, or owners in common,
110
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REVIEWER ON COMMERCIAL LAW
credit or time to pay the premium and consider
the policy binding before actual payment."
However, the petitioner filed a Motion for
Reconsideration and the same was granted by
the Supreme Court. On April 4, 2001, the Court
reversed its earlier Decision. The April 4, 2001
Resolution of the High Court enumerates five (5)
exceptions to the general rule stated in Section
77 —■that the Insurance Policy is not valid and
binding until actual payment of premium:
who are jointly insured,- to the others' (Sec,
24, ICP);
6)
b)
when a policy is so framed that it will inure
to the benefit of whomsoever, during the
continuance of the risk, may become the
owner of the interest insured (Sec, 57, ICP).
When there is an express prohibition against
alienation in the policy, in case of alienation, the
contract of insurance is not merely suspended
but avoided (Art. 1306, NCC).
Exceptions:
8. RISKS INSURED AGAINST
The risk insured against may be any contingency or
unknown event the happening of which will damnify a
person having insurable interest or will create liability
against him (Sec. 3, ICP). Even fortuitous events may be
insured against.
General Rule; A future event is the only event that can
be covered by an insurance contract.
Exception; A past event may be covered by a marine
insurance — if the loss of the vessel in the past could not
have been known by ordinary means of communication.
9.
1)
In case of life and industrial life whenever
the grace period provision applies (Sec. 77).
2)
Where there is an acknowledgment in the
contract or policy of insurance that the pre­
mium had already been paid (Sec. 78, ICP).
The rule laid down in Makati Tuscany Condo­
minium v. Court of Appeals to the effect that
------:--------Section 77 may not apply if the parties have
agreed to the payment of the premium in
installments and partial payment has been
made at the time of the loss.
3)
4)
Where a credit term was agreed upon like
the agreement in UCPB General Insurance,
Inc. v. Masagana Telamart where the insurer
granted a 60-90-day credit term for the pay­
ment of the premiums despite full aware­
ness of Section 77. -
5)
Where the parties are barred by estoppel.
PREMIUM (S e c s . 77 a n d 78, ICP)
Premium is the consideration paid to an insurer for
undertaking to indemnify the insured against a specified
peril.
9.01. General Rule: No insurance policy issued or
renewed is valid and binding until actual payment
of the premium. Any agreement to the contrary is
voi & (Sec. 77, ICP)
v
:
a)
The Supreme Court observed in UCPB General
Insurance Co., Inc. v. Masagana Telamart, Inc.
(308 SCRA 259) that "the parties may not agree
expressly or impliedly on the extension of
HI
b)
Note, however, the rule that where an insurer
■authorizes an insurance agent or broker to de­
liver a policy to the insured, it is deemed to have
authorized said agent to receive the premium
in its behalf (Ibid., citing Section 306, Insurance
Code). The insurer is also bound by its agent's
acknowledgment of receipt of payment of pre­
mium (American Home Assurance Co. v. Chua).
M KT II — INSURANCE CODE
(P.D. No. 1460, as amended)
REVIEWER ON COMMERCIAL LAW
112
9.02- What is the effect of the payment of the premium by }
a post-dated check?
The payment of a premium by a post-dated
check at a stated maturity subsequent to the loss is ;
insufficient to put the insurance into effect. Payment,
however, by means of a check or a note, accepted by
the insurer, bearing a date prior to the loss, assuming
an availability of the funds thereof, would be sufficient
even if it remains unencashed at the time of the loss.
The subsequent effects of encashment would retroact ;
to the date of the instrument and its acceptance by the
creditor (Vitug, Pandect on Commercial Law).
9.03. When the Insured is Entitled to Return of Premiums
Paid
.
a)
If thing insured was never exposed to the risks
insured against (Sec. 79, ICP);
b)
Contract is voidable due to the fraud or misrep­
resentation of insurer;
--------- e)---- festtrer-neveHnem r^
d)
e)
SlyiCPf,-------
When the insurance is for a definite period and
the insured surrenders his policy before the ter­
mination thereof;
Contract is voidable because of the existence of
facts of which the insured was ignorant without
his fault;
f)
When there is over-insurance (Sec. 82, ICP); and
g)
When rescission is granted due to the insurer's
■ breach of contract.
9.04. Suretyship
Premium is also necessary in order for the
contract of suretyship or bond to be binding.
Exception: where the obligee has accepted the
bond it is binding even if the premium has not been :
paid subject to the right of the insurer to recover the
premium from its principal (Sec. 177, ICP; Phil. Pryce
Assurance Corp. v. CA, 230 SCRA164 [1994]).
113
9,05. Non-Default Options in Life Insurance
(1)
To prevent the lapse of life insurance policy, the
insured may avail of:
a)
Grace period, (2) automatic policy loan
from the policies' cash surrender value, (3)
application of dividend, arid (4) restate­
ment clause.
b)
Reinstatement of a Lapsed Policy of Life
Insurance
Policy holders in life insurance shall
have the policy reinstated at any time with­
in three (3) years from the date of default of
premium payment unless the cash surren­
der value has been duly paid to the insurer
or the extension period has expired. How­
ever, there must be (1) proof of insurability,
and (2) payment of overdue premiums and
any indebtedness plus interest (Sec. 227[j],
:---------------------- ICF7.
'
10. TRANSFER OF POLICY
U . 10.01. May the policy be transferred without the consent
of the insurer?
YES in life insurance but NO in property
insurance. Transfer of the life insurance policy even
without the consent of the insured is allowed in
Section 181 of the Insurance Code.
On the other hand, property insurance cannot be
transferred without the consent of the insurer because
the insurer approved the policy based on the personal
qualification and the insurable interest of the insured.
10.02. What is the effect of the transfer of the property
insurance policy without the consent of the insurer?
The insurance policy is suspended and will
not be avoided until the interest in the thing and
REVIEWER ON COMMERCIAL LAW
114
M K T II — INSURANCE CODE
(P.D, No. 1460, as amended)
the interest in the insurance are vested in the same
to whether the insurer was in fact prejudiced
by such untruth or nonfulfillment render the
policy voidable by the insurer. The same may be
- expressed, implied, affirmative, or promissory.
person,:.
11
DEVICES USED FOR ASCERTAINING AND CONTROL­
LING RISK AND LOSS
d)
11.01. What are the four primary concerns of the insurer?
a)
Correct estimation of risk which enables insurer
to determine if he will approve the policy appli­
cation and if so at what premium rate;
b)
Delimitation of the risk;
c)
' Control of risk to guard against increase of risk;
Determine if loss occurs and if so, the amount
thereof.
e)
a)
Concealment;
c)
Warranty;
e)
Exception.
b)
Representation:
d)
Condition; and
"
CONCEALMENT
The burden of proving that the loss was
caused by an excepted peril rests with the insurer.
Thus, in Country Banker's Insurance Corporation
A neglect to communicate that which a
party knows and ought to communicate (Sec. 26,
v. Lianga Bay and Community Multi-purpose
Cooperative (G.R. No. 136914, Jan. 25, 2002),
the insurer denied the claim on the insurance
covering the insured's stocks-in-trade on the
ground that they were set fire by the NPA, an
excepted peril. The Court rejected the position of
the insurer because the latter failed to prove that
the ground for non-coverage or that the peril
that caused the loss falls within the exemption
or exception clause.
ICP).
b)
REPRESENTATIONS
Factual statements made by the insured at
the time of or prior to the issuance of the policy
to give information to the insurer and otherwise
induce him to enter into tine insurance contract.
c)
EXCEPTIONS
Exceptions make more definite the cover­
age indicated by the general description of the
risk by excluding certain specified risks that oth­
erwise would be included under the general language describing the risks assumed.
11.02. What are the devices used by the insurer for ascer­
taining and)controlling, risks and loss?
a)
CONDITION
The insurer must also protect himself
against fraudulent claims of loss and attempts
to do by inserting in the policy various condi­
tions which take the form of either conditions
precedent or subsequent. For instance, there are
conditions (subsequent) requiring immediate
notice of loss or injury and detailed proofs of
loss within a limited period.
•a and: ■-■•
•
•
d)
113
WARRANTIES
Statements or promises 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
11.03. CONCEALMENT
a)
Test of Materiality
Materiality is determined not by the event,
but solely by the probable and reasonable influ-
116
PART II — INSURANCE CODE
(P.D. No. 1460, as amended)
REVIEWER ON COMMERCIAL LAW
ence of the facts upon the party to whom the
communication is due, in forming his estimate
of the disadvantages of the proposed contract,
or in making his inquiries or in fixing the pre­
mium rate (Sec. 3 1 , 1CP; Vda. De Canilang v. CA,
223 SCRA 443 [1993]).
1)
For instance, matters relating to the health
of the insured are material and relevant.
Hence, the waiver of a medical examina­
tion in a non-medical insurance contract
renders even more material the information
required of the applicant concerning previ­
ous conditions of health and diseases suf­
fered (Sunlife Assurance Company o f Canada
v. CA and Rolando and Bernarda Bacani, 246
SCRA 268; See also Sec. 31, ICP). Matters
relating to health would affect the insurer
either by approving it with the correspond­
ing adjustment for a higher premium or rejecting the same (Ibid.).
:
’
2)
The Supreme Court ruled in Philamcare
Health Systems, Inc. v. Court of Appeals and
Julita Trinos (G.R. No. 125678, March 18,
2002) that answers of the applicant, who
is not a doctor, regarding the medical his­
tory of his wife largely depends on opinion
rather than fact. 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. In this case, the insured an­
swered "NO" to the following question but
no concealment was ascribed: "Have you or
any of your family members ever consult­
ed or been treated for high blood pressure,
heart trouble, diabetis, peptic ulcer, cancer,
. liver disease or asthma?"
b)
117
Effects of .Concealment
It 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, ICP).
c)
Cause of Loss
The matter concealed need not be the cause
of the loss.
In Sunlife Assurance Company of Canada v.
Court of Appeals (G.R. No. 105135, June 22, 1995,
245 SCRA268), the insured who applied for a life
insurance policy was asked the following ques­
tions: "Within the past five (5) years have you:
a) consulted any doctor or other health prac­
titioner? b) submitted to ECG? X-rays? blood
tests? other tests? c) attended or been admitted
to any hospital or other medical facility? Have
_____ you_ev£xJiad..or-.s.o.u.ght.....a.d¥ice....ioi.U£ine,._kidrney or bladder disorder?" The insured disclosed
the fact that he consulted a doctor but only for
cough and flu complications and answered in
the negative all other questions although two
weeks prior to his application he was confined
at a hospital for renal failure. The insured died in
a plane crash after the issuance of the policy. The
Supreme Court sustained the denial of the poli­
cy on the ground of material concealment. The
fact that the matter concealed had no bearing to
the cause of death of the insured 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 non-disclosure
misled the insurer in forming his estimates of the
risks of the proposed insurance policy or in mak­
ing inquiries (citing Henson v. The Phil American
. Life Ins. Co., 56 O.G. No. 48 [I960]).
FART fi — INSURANCE CODE
(P.D. No. 1460, as amended)
i; HVIBWER ON COMMERCIAL iMVv
!i 8
d)
(Vda. de Canilang v. CA, supra).
e)
insurance agent in collusion with die medical
examiner. When the insured signed the applica­
tion in blank and authorized the soliciting agent
an d /or the medical examiner to write for him,
he made them his own agents for that purpose
and he was responsible for their acts in that con­
nection (The Insular Life Ltd. v. Serafin D. Feliciano,
Is good faith a defense in concealment?
NO. Good faith is no defense in conceal­
ment. Section 27 of the Insurance Code of the
Philippines clearly provides that, "the conceal­
ment whether intentional or unintentional en­
titles the injured party to rescind a contract of
insurance." Indeed, the materiality of the facts
concealed does not depend on the state of mind
of the insured but rather to the probable and rea­
sonable influence of the facts upon the party to
whom communication should have been made
Waiver and-Estoppel
An insurer may be deemed estopped from
raising concealment (as well as exclusionary
conditions or warranties) as a defense if it
accepts the premium payments and issued the
policy even if the insured already supplied the
-------msu^er-suehHfaets or informah tm~whfdh^^
hardly be overlooked in the application form
considering its prominence and its materiality
to the coverage applied for (Edillon v. Manila
74. Phil 4.68 [1943] but note the dissenting opinion
therein and the original Decision in 73 Phil. 201).
PROBLEMS:
X applied for Life Insurance with Metropolitan Life
Insurance Company. The application contained this
question: "Have you ever had any ailment or disease
of x x x (b) the stomach or intestines, liver, kidney
or genitourinary organ?" X, a laundry woman, who
has no medical knowledge answered "No." The
application was approved, premium was paid and
six months later, X died from cancer of the stomach.
--------- The post-medical examination of X shows that she
had the cancer at the time she applied for a policy.
Can the beneficiary of X collect on the policy?
1.
A:
The beneficiary of X cannot collect from the insurer on
the policy. X was guilty of concealment of a material
fact because she did not disclose her illness. The fact
that X had no medical knowledge does not excuse her
concealment because Section 27 of the Insurance Code
makes concealment available as a defense against
liability by the insurer, whether the concealment was
intentional or unintentional.
2.
Juan procured a "non-medical" life insurance from
Good Life Insurance. He designated his wife, Petra,
as the beneficiary. Earlier in his application in
response to the question as to whether or not he had
ever been hospitalized, he answered in the negative.
He forgot to mention his confinement at the Kidney
Hospital. After Juan died in a plane crash, Petra filed
a claim with Good Life. Discovering Juan's previous
Bankers Life Insurance Co., 117 SCRA 187 [1982]).
This may also be true if the insured already
supplied such information that requires further
inquiries from the insurer but it failed to do so.
However, the insurer is not estopped from
raising concealment as a defense if there was
connivance between the insured and the so­
liciting insurance agent as well as the medical
examiner. Thus, there was concealment in one
case where the insured was suffering from an
advanced state of pulmonary tuberculosis but
he still answered in the negative when asked in
the policy whether he suffered any ailment of
the lungs. The insured signed the application in
blank and the false answer was supplied by the
119
REVIEWER ON COMMERCIAL LAW
whom communication is due, in forming Ms
estimate of the contract, risks and premium (Sec.
hospitalization, Good Life rejected Petra's claim on
the ground of concealment and misrepresentation.
Petra sued Good Life, invoking good faith on the part
of Juan. Will Petra's suit prosper? Explain.
A:
No, Petra's suit will not prosper. Juan was guilty of
concealment of a material fact. Matters relating to the
health of the insured are material and relevant. Hence,
the waiver of a medical examination in a non-medical
insurance contract renders even more material the
information required of the applicant concerning
previous conditions of health and diseases suffered
31).
d)
Effects of Misrepresentation
The injured party is entitled to rescind from
the time when the representation becomes false.
11.05. WARRANTY
a)
Warranty
It is a statement or promise set forth in
the policy or by reference incorporated therein,
the untruth or nonfulfillment of which in any
respect, and without reference to whether the
insurer was in fact prejudiced by such untruth
or nonfulfillment, renders the policy voidable.
(Sunlife Assurance Company of Canada v.CAand Rolando
and Bernarda Bacani, 246 SCRA 268;, See also Sec. 31,
ICP).
The answer would be different if the policy of
life insurance has been in force for a period of two
years or more from the date of its issue (on which
the given facts are vague) then Good Life can no
longer prove that the policy is void ab initio or is
---------rescindable by reason of the fraudulent concealment
or misrepresentation of Juan (Sec. 48, ICP).
b)
________
Kinds (Sec, 67)*2
34
1)
Express;_________________________________
2)
Implied — warranties that are deemed
included in the contract, although not
expressly mentioned. They are found only
in marine insurance;
3)
Affirmative — asserts the existence of a fact
or condition at the time it is made; and
4)
Promissory — the insured stipulates that
certain facts or conditions shall exist or
thing shall be done or omitted.
11.04. REPRESENTATION
a)
Representation
,,..,11 is ^n qrai pr written statement of a fact or
condition affecting the risk, made by insured to
- . insurer, tending to induce insurer to. assume risk
(Sec. 36, ICP).
b)
Kinds (Sec. 39, ICP)
V)' affirmative -— affirmation of a fact when the
2)
,.
promissory — promise to be performed
after the policy was issued.
121
PART II — INSURANCE CODE
(P.D. No. 1460, as amended)
c)
Effect of Breach of Warranty
It gives the insurer the right to rescind (Secs.
74-76).
Exceptions;
performance
c)
Test of Materiality -
1)
J
" Tt is determined by the probable and reasoMaBle ' inluerice 'of the facts on the party on
loss occurs before the time of
of the warranty;
2)
the performance becomes unlawful;
122
REVIEWER ON COMMERCIAL LAW
3)
d)
PART JI - INSURANCE CODE
(P.D. No. i4f»U, as amended)
performance becomes impossible (Sec, 73).
a) The "other insurance clause " may be subject to
waiver but the waiver must either be express or if it is
to be implied from conduct mainly, said conduct must
be clearly indicative of a clear intent to waive such
right. There must be clear showing that the insurer
knew about the violation of the clause (Ibid., see also
Immaterial Provisions
Not all breach of the provisions in the
policy may give the right to rescind the policy.
Immaterial provisions do not avoid the policy
(Sec. 75, ICP).
Exception: When the parties stipulate
that violation of particular provision, though
normally immaterial, shall avoid the policy.
In effect, the parties converted the immaterial
provision into a material one.
Gonzales La O v. Yek Tong Lin, 55 Phil 386).
PROBLEMS:
1.
Jose insured his two-storey commercial building
with XX Insurance Co. There is a warranty in the
policy that Jose will not store flammable substances
like gasoline or kerosene on the insured premises.
Later, .fire destroyed the second floor of the insured
building. However, the first floor remained intact but
it was discovered that there are several unopened
cans that contain gasoline. Can the insurer invoke
breach of warranty?
A:
Yes, breach of warranty.mayJaeJiivQked-hy. liteJii^
surer. Although it appears that the breach (storage
of gasoline) was not the cause of the damage to the
second floor, the insurer may still raise breach of war­
ranty as a defense. The ICP provides that the nonful­
fillment of the warranty renders the contract voidable
whether or not the insurer was in fact prejudiced.
2.
Afire insurance policy in favor of the insured contained
a stipulation that the insured shall give notice to the
company of any insurance already effected or which
may subsequently be effected, covering the property
insured, and unless such notice be given before the
occurrence of any loss, all benefits shall be forfeited.
The face of the policy bore the annotation "Coinsurance declared." The things insured were burned,
it turned out that several insurance were obtained on
the same goods for the same term. The insurer refused
to pay on the ground of concealment.
11.06. DISTINCTIONS
a)
Warranty vs. Representation
1)
A warranty is part of the contract while rep­
resentation is a collateral inducement.
2)
A warranty is written on the policy or in a*34
valid rider or attachment while a reprcsen •
tation need not be written.
3)
A warranty is generally conclusively pre­
sumed to be material while representation
: should be established to be material.
4)
The fact warranted must be strictly com­
plied with while representation requires
only to be substantially true.
11.07. OTHER INSURANCE CLAUSE
A clause in the policy that provides that the
policy shall be void if the insured procures additional
insurance without the consent of the insurer. The
purpose is to prevent over-insurance and thus avert
the possibility of perpetration of fraud (Pioneer
Insurance and Surety Corp. v. Yap, 61 SCRA 426 [1974]).
It is a warranty fhat entitles the insurer to rescind in
case of breach (General Ins. and Surety Corp. v. Ng Hua,
106 Phit. 1117).
123
May the insured recover? Reason.
M K T II ~ INSURANCE CODE
(P.D. No. 1460, as amended)
REVIEWER ON COMMERCIAL LAW
A:
Yes, the insured may recover, since there is noviolatic
of the "other insurance clause." The face of the poli<
contains a notation "Co-insurance declared."
means that the insurer is deemed notified of tl;
existence of other insurance contracts on the proper- ■
insured (See General Insurance and Surety Corporation
Ng, G.R. No. L-14373, Jan. 30,1960).
3.
Julie and Alma formed a business partnership. Unde
the business name Pino Shop, the partnership -s
engaged in the sale of construction materials. Jul c
insured the stocks in trade of Pino Shop with WG'
Insurance Company for P350,000.00. Subsequently,
she again got an insurance contract with RSI £c,.
P I million and then from E1C for P200,000.00. A fire oi
unknown origin gutted the store of the partnership
Julie filed her claim with the three insurance compa
nies. However, her claim was denied separately foi
breach of policy condition which required the insured
to give notice of any insurance effected covering the
__________ stocks in trade. Julie went to court andjcontended-lli.it
she should not be blamed for the omission, alleging
that the insurance agents for WGC, RSI and EIC knew
of the existence of the additional insurance coverages
and that she was not informed about the requirement
that such other ■or additional insurance should l '
stated in the policy.
:
A
>
1
No, Julie's contention is not tenable. The condition i ’■
the policy requires the insured to disclose the othc-insurances covering the subject matter of the insuance being applied for and a violation thereof bars
recovery of the insured. The fact that the agents of
the insurer were aware of the other insurance is not -■
:valid -defense. : -
12. INCONTESTABILITY CLAUSE
12.01. After a policy of life insurance made payable an th;
death of the insured shall have been in force durirr-
the lifetime of the insured for a period of two (2) years
. from the -date of its issue or of its last reinstatement,
foe insurer cannot prove that the policy is void ab
initio or is rescindible by reason of the fraudulent
:concealment dr misrepresentation of the insured or
his agent (Sec. 48, ICP; Florendo v. Philam Plans, G.R.
No. 186983, Feb. 22,2012)..
12.02. REQUISITES
a)
The insurance is a life insurance policy payable
on the death of the insured.
b)
It has been in force during the lifetime of the
insured for at least two (2) years from its date
of issue or of its last reinstatement (Sec. 48, ICP).
The period of two (2) years may be shortened
but it cannot be extended by stipulation.
:
PROBLEMS!1
1.
A life lnsnrmic&.jpcdk.ymim^
A on Nov. 6, 2001 and the insured died on April
26, 2002. The insurer rescinded the contract on the
ground, of material concealment and returned the
premium on Sept. 11, 2002. The beneficiary claims
that the insurance policy can no longer be rescinded
under the incontestability clause because the insured
died within the two-year period without the insurer
having rescinded the same. Is the argument of the
beneficiary tenable?
A:
The argument of the beneficiary is not tenable. The
insurer has two (2) years from the date of issuance
of the insurance contract or of its last reinstatement
within which to contest the policy, whether or not,
the insured still lives within such period. The phrase
"during the lifetime" found in Section 48 of the
Insurance Code simply means that the policy is no
longer considered in force after the insured has died.
The beneficiary's interpretation would give rise to
Is the contention of Julie tenable? Explain.
A:
125
PART II — INSURANCE CODE
(P.D. No. 1460, as amended)
d)
insured who dies right after taking out and paying for
a life insurance policy, would be allowed to collect on
the policy even if the insured fraudulently concealed
material facts (Tan v. CA, 174 SCRA 403, June 29,1989).
2.
On May 15, 1982, Juan applied for a life insurance
policy with Acme Life Insurance Company. The
policy was issued to Juan on June 1, 1982, the date
of his application. Juan subsequently realized that
some of his answers in the insurance application were
erroneous. Accordingly, he supplied the insurance
company with the correct replies. However; his letter
to the insurance company giving the correct answers
was lost in the mails. Juan died on July 1, 1984.
The insurance company now refuses to pay Juan's
beneficiaries contending that he (Juan) misrepresent­
ed the state of his health at the time of his application.
Is the insurance company liable? State your reason.
Ai
Yes, the insurance company is liable. Although there
--------- was material misrepresentation or concealment, the
insurer is now barred from questioning the policy on
those grounds because of the incontestability clause.
The policy of life insurance of Juan had been in force
for a period of more than two (2) years from its
issuance, hence, the policy has become incontestable
under Section 48 of the Insurance Code.
12.03. DEFENSES THAT ARE NOT BARRED BY INCON­
TESTABILITY CLAUSE
The following defenses are not barred by the
incontestability clause:
a)
That' the person taking the insurance lacked
insurable interest as required by law;
b)
That the cause of the death of the insured is an
excepted risk;
c)
That the premiums have not been paid (Secs. 77,
227[b], 2281b], 23Q[b], 1CP);..
That the conditions of the policy relating to mili­
tary or naval service have been violated (Secs.
227[b], 228[b], 1CP);
e)
That the fraud is of a particularly vicious type;
f)
. That the beneficiary failed to famish proof of
death or to comply with any condition imposed
by the policy after the loss has happened; or
g)
That the action was not brought within the time
specified.
13. DOUBLE INSURANCE AND REINSURANCE
13.01. DOUBLE INSURANCE
.
It exists where the same person is insured by
several insurers separately in respect to same subject
and interest (Sec. 93,1CP). It is not prohibited by law
but it may be prohibited by "other insurance clause."
Requisites of-double insurance
a)
The person insured is the same;
b)
There are two or more insurers insuring sepa­
rately;
c)
The subject matter is the same;
d)
The interest insured is also the same;
e)
The risk or peril insured against is likewise the
same.
13.02. EFFECTS OF DOUBLE INSURANCE AND OVER­
INSURANCE
When there is double insurance and over insur­
ance results, the insured can claim in case of loss only
up to the agreed valuation or up to the full insurable
value from any, some or all insurers, without prejudice
to the insurers ratably apportioning the payments.
128
REVIEWER ON COMMERCIAL LAW
PART II — INSURANCE CODE
(P.D. No. 1460, as amended)
Insured can also recover before or after the loss, front
both insurers the excess premium, he has paid (Sec, 94,
1CP).
b)
involves same interest
It is a contract through which the insurer pro­
cures a third person to insure Mm against loss or
liability by reason of such original insurance (also
known as Reinsurance Cession) (Sec, 95, ICP). In every
reinsurance, the original contract of insurance and the
contract of reinsurance are separate and distinct from
Reinsurance may be through a treaty (where
there is a prior agreement for the re-insurer to accepr
the insurance ceded by the re-insured/original
insurer) or facultative (where the reinsurer maj
refuse to accept the ceded policy).
1)
:
and stipulations of the contract of insurance
between the insured and insurer.
insured in the 1st
contract is a party in
interest in the 2nd
contract
original insured has no
interest in reinsurance
contract
subject of insurance is
property
subject of insurance is
the original insurer's
risk
Policy of insurance is a formal writtei
instrument evidencing the contract or
insurance. In every reinsurance, the original
contract of insurance and the contract
of reinsurance are covered by separate
policies.
'
consent of original
J.X1C?%TTv>»CLf ilvl i LvCvSBuXj
BAR PROBLEMS:
1.
Reinsurance, on the other hand, ii:
defined under Section 95, which provides
that it is any contract by which an insure:
procures a third person to insure him
against loss or liability by reason of aroriginal insurance.
2)
insurance of differentinsurer becomes an
insured in relation to
reinsurer
"~~
Section 49 defines the policy of insurance as
the written document embodying the terms
(Sec. 95)
insurer remains in such
capacity
insured has to give his
13.04. DISTINCTIONS1
Policy of Insurance vs. Reinsurance
Reinsurance
interests
each other and covered by separate policies.
a)
Double insurance vs. Reinsurance
Double Insurance
(Sec. 93)
13.03. REINSURANCE
129
Suppose that Fortune owns a house valued at
P600,000.00 and insured the same against fire with
three insurance companies as follows:
X — P400,000.00
Y — P200,000.00
Z — P600,000.00
In the absence of any stipulation in the policies,
from which -insurance company or companies may
Fortune recover in case of fire should destroy his
house completely ?
A:
Fortune may recover from any, any two or all of
the insurers provided that the total amount that he
will recover does not exceed his loss (Sec. 94, ICP).
130
PART II — INSURANCE CODE
(P.D, No. 1460, as amended)
REVIEWER ON COMMERCIAL LAW
value of the property was P600,000.00, hence, if he
collected P200,000.00 from Y and P600,000.00 from
Z, there is an excess of P200,000.00. Fortune can only
be indemnified for his loss. Fortune must hold the
excess amount of his insurable interest in the house,
P200,000.00, in trust for the insurers Y and Z (par. [d],
Fortune may demand Indemnity from Z alone for
P60G,000.00. In the alternative, Fortune may recover
from all insurers P200,000.00 each. Fortune may also
opt to recover P4QQ,000.00 from X and recover the
balance from any or both Y or Z.
2.
If each of the policies obtained by Fortune in
problem (1) is an open policy and it was immediately
determined after the fire that the value of the house
was P2.4 Million, how much may he collect fromX, Y,
andZ?
A:
-
Fortune may recover the full amount of the coverage
from each insurer if all policies are open policies.
The value of the property to be considered is the
actual value of P2.4 Million. Since the total amount
of the insurance coverage is less than the actual loss,
Fortune may recover P400,000.00 from X, P200,000.00
from Y and P600,000.00 from Z or a total amount of
P1.2 Million.
------ If each of the fire insurance policies obtained by
Fortune in problem (3) is a valued policy and the value
of his house was fixed in each policies at PI Million,
how much would Fortune recover from X if he has
already obtained full payment from the insurance
policies issued by Y and Z?
A:
Fortune can only recover P200,000.00 from X. The
valuation of the property (in this case PI Million) is
binding on the parties and it is no longer necessary to
determine the actual value thereof. The valuation in
the policy is deemed the actual value of the property
Sec. 94, ICP).
5.
In problem (1) what is the extent of the liability of the
insurance companies among themselves?
A:
Each insurer is bound to contribute ratably to the loss
in proportion to the amount for which he is liable
under his contract (par. [e], Sec. 94, ICP). The ratable
contribution of each insurer will be determined based
on the following formula:
Amount of policy
Supposing in problem (1), Fortune was able to collect
from both Y and Z, may he keep the entire amount
he was able to collect from the said two (2) insurance
companies? Explain your answers.
A:
NO. Fortune may not keep the amount that he
collected from Y and Z, -In problem (1), the total
x joss _ liability of insurer
Total insurance taken
Using the foregoing formula, the extent
---------of liability of each insurer out of the total loss
of P600,000.00 are as follows: X - P200,000.00
(400,000.00/1,200,000.00 x 600,000.00), Y - P100,000.00
(200,000.00/1,200,000.00 x 600,000.00) and Z P300,000.00 (600,000.00/1,200,000.00 x 600,000.00)
m , LOSS AND CLAIMS SETTLEMENT
14.01. Proximate Cause and Immediate Cause
a)
The insurer is liable if:
1)
loss, the proximate cause of which is the
peril insured against (Sec. 84);
2)
loss, the immediate cause of which is the
peril insured against except where the
proximate cause is an excepted peril;
3)
loss through negligence of insured except
where there was gross negligence amount­
ing to willful act; and
(par. [b], Sec. 94, ICP).
4.
131
132
PARTII — INSURANCE CODE
(P.D, No. 1460, as amended)
REVIEWER ON COMMERCIAL LAW
4)
b)
89, ICP).
In fact, even if there is a provision in
the policy specifying the kind of proof that is
necessary, substantial compliance will always
be deemed sufficient(Finman General Assurance
Corporation v. Court of Appeals, G.R. No. 138737,
The insurer is not liable
loss by insured's willful act or gross negli­
gence;
2)
loss due to connivance of the insured (Sec.
87, ICP); and
3)
c)
deuce he has in his power to present and need
not submit proof that is necessary in court (Sec.
loss caused by efforts to rescue the thing
from peril insured against — if during the
course of rescue, the thing is exposed to a
peril not insured against, which perma­
nently deprives the insured of its posses­
sion, in whole or in part (Sec. 85, ICP).
1)
July 21,2001).
c)
Liability of Insurer if insured was committing
a felony
YES. The stipulation is valid, the purpose of
which is to avoid collusion between the insured
__________ and the claimant (Perla Compania De Seguros v.
CA, 185 SCRA 741).
14.03. CLAIMS SETTLEMENT
a)
14.02. NOTICE AND PROOF IN FIRE INSURANCE
a)
Life Insurance (Sec. 242, ICP)
1)
The proceeds shall be paid immediately
upon the maturity of the policy if there is
such a maturity date.
2)
If the policy matures by the death of the in­
sured, within sixty (60) days after presenta­
tion of the claim and filing of the proof of
the death of the insured.
Notice
In case of loss upon an insurance against
fire, notice of loss should be given without
unnecessary delay, otherwise, the insurer is exo­
nerated (Sec. 88, ICP).
' b)
Notice of Settlement
Is a stipulation in a policy of insurance re­
quiring that the consent of the insurer must first
be obtained before any payment by the person
responsible for the loss in the settlement of the
claim against the insured can be made, valid?
loss where the excepted peril is the proxi­
mate cause.
Liabilities arising out of acts of negligence,
which are also criminal, are also insurable on
----------------the ground that such acts aie accidental. Thus,
a motor insurance policy covering the insured's
liability for accidental injury caused by his
negligence, even though gross and attended
by criminal consequences such as homicide
through reckless imprudence, will not be void as
against public policy. But liability consequences
of deliberate criminal acts are not insurable.
Proof
• ' - - -
If proof of loss is required under the policy,
it is sufficient that-the insured-give the best evi-
133
b)
Property Insurance (Sec. 243, ICP)
1)
proceeds shall be paid within thirty (30)
days after proof of loss is received by the
insurer and ascertainment of the loss or
damage is made either by agreement or by
arbitration.
134
REVIEWER ON COMMERCIAL LAW
2)
c)
PART II — INSURANCE CODE
(P.D, No. 1460, as amended)
135
if no ascertainment is made within sixty
? 15. PERIOD OF PRESCRIPTION (Secs, 63, 364, ICP)
(60) days after receipt of proof of loss, the
loss shall be paid within ninety (90) days
after such receipt.
-r
In the absence of an express stipulation-in the policy,
it being based on a written contract, the action prescribes in
ten (10) years. However, the parties may validly agree on a
shorter period provided it is not less than one (1) year from
the time the cause of action accrues. The cause of action
accrues from the final rejection of the claim of the insured
and not from the time of loss.
.
15,01. Where a policy of insurance provides for a prescriptive
period of one (1) year from the time the cause of
: action accrues, when should the period of one (1)
year commence to run if the insured files a motion for
Effects of Delay of Insurer
If the prescribed period for both life and
property insurance (a and b above) are not
complied with, the beneficiary is entitled to
payment of: (a) interest for the duration of
the delay at the rate of twice the legal interest
(ceiling prescribed by the Monetary Board); (b)
attorney's fees and other litigation expenses; (c)
appropriate damages under the Civil Code like
moral and exemplary damages when requisites
are present (Sec. 244, ICP; Zenith Insurance Corp.
v. CA, 185 SCRA 389 [1990]; Tio Kho Chio v. CA,
202 SCRA 119 [1991]).
d) When is an insurer liable to pay damages and
-------interest-ittttderSectretts-£4-3-a:aid:-244^of-''tlie~f€ P?'
Sections 243 and 24.4 shall apply only when
the Court or Commissioner finds that there was
unreasonable delay or refusal by the insurer in
the payment of the claim. The legal rate is 6%, as
provided under Article 2209, NCC. The adjusted
rate under Central Bank Circular 416, pursuant
to Pres. Decree No. 116 refers only to loans and
forbearance of money, goods or credit and court
judgments thereon (Tio Kho Chio v. CA, 202 SCRA
119).
N ote: While the legal rate in judgments
based on actions for damages is 6%, from the
time of the finality of the judgment up to actual
payment, the rate is 12%, because during said
period, it partakes of the nature of a forbearance
for the use of money.
reconsideration upon the initial denial of his claim?
It shall commence to run from the denial of
the claim, not from the resolution of the motion for
reconsideration filed by the insured, otherwise, it can
be used by the insured as a scheme or device to waste
time until the evidence which may be used against
------------------- him is destroyed. Furthermore, the "contract o f
adhesion" or "fine print rule" does not apply where the
terms of the contract are clear (Sun Insurance Office,
Ltd. v. CA, 195 SCRA 193).
In the absence of a stipulation or when it is void,
the prescription of actions based on written contract
(10 years from accrual) under Article 1144, NCC, shall
apply.
[Note: Under Section 384, ICP, notice of claim must
be filed within six (6) months from the date of accident,
otherwise the claim shall be deemed waived. Action or suit
must be brought in proper cases, with the Commission or
the courts within one (1) year from the denial of the claim,
otherwise, the claimant's right of action shall prescribe
(Jacqueline Jimenez Vda. De Gabriel v. CA, G.R. No.
103883, Nov. 4,1996).]
136
PART II — INSURANCE CODE
(P.D. No, 1460, as amended)
REVIEWER ON COMMERCIAL LAW
16. RIGHT OF SUBROGATION
16.01. The principle of subrogation is a normal inci
of indemnity property insurance as a legal effect uf
payment; it inures to the insurer without any formal
assignment or any express stipulation to that effect in
the policy. Said right is not dependent upon nor does
it grow out of any privity of contract. Payment to the
insured makes the insurer an assignee in equity (Art.
2207, CC; Pan Malayan Ins. v. CA, 184 SCRA 54 [1990]).
a)
No need of a formal assignment or an express
stipulation in the policy. It is a legal effect of pay­
ment.
b)
The insurer can only recover from the third
person what the insured could have recovered.
Thus, there can be no recovery if the insurer vol­
untarily paid even if the loss is not covered by
the policy.
c)
The insured can no longer recover from the
offending party what was paid to him by the
insurer but he can recover any deficiency, that
is, if his damages is more than what was paid.
The deficiency is not covered by the right of
subrogation.
d)
The insurer must present the policy as evidence
to determine the extent of its coverage (Wallen
Phil. Shipping, Inc. v. Prudential Guarantee Assur­
ance, Inc., G.R. No. 152158, Feb. 7, 2003).
16.02. CASES WHEN THERE IS NO RIGHT OF SUB­
ROGATION
a)
The insured by his own act releases the wrong­
doer/third person liable for the loss;
b)
Where the insurer pays the insured for a loss
or risk not covered by the policy (Pan Malayan
Insurance Co. v. CA, 184 SCRA 54);
13?
c)
In life insurance;
d)
For recovery of loss in excess of insurance cover­
age.
17. MARINE INSURANCE
17.01. COVERAGE
Traditionally, marine insurance includes policies
that covers risks 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. However,
under the present laws, it also covers inland marine
insurance (Sec. 99, ICP). Thus, Section 99 of the
Insurance Code provides:
Section 99. Marine Insurance includes:
(1)
Insurance against loss of or damage to:
___________________ (a) Vessels, craft, aircraft, vehicles.
goods, freights, cargoes, merchandise, effects,
disbursements, profits, moneys, securities,
choses in action, evidences of debts, valuable
papers, bottomry, and respondentia interests
and all other kinds of property and interests
therein, in respect to, appertaining to or in con­
nection with any and all risks or perils of navi­
gation, transit or transportation, or while being
assembled, packed, crated, baled, compressed
or similarly prepared for shipment or while
awaiting shipment, or during any delays, stor­
age, transhipment, or reshipment incident
thereto/ including war risks, marine builder's
risks, and all personal property floater risks;
•(b) Person or property in connection with
or appertaining* to a marine, inland marine,
transit or transportation insurance, including
liability for loss of or damage arising out of
REVIEWER ON COMMERCIAL LAW'
EARTII — INSURANCE CODE
139
(P.D. No. 1460, as amended)
or in connection with the construction, repair,
operation, maintenance, or use of the subject
matter of such insurance (but not including
life insurance or surety bonds nor insurance
against loss by reason of bodily injury to any
person arising out of ownership, maintenance,
or use of automobiles);
(c) Precious stones, jewels, jewelry, pre­
cious metals, whether in course of transporta­
tion or otherwise;
(d) Bridges, tunnels and other instru­
mentalities of transportation and communica­
tion (excluding buildings, their furniture and
furnishings, fixed contents and supplies held
in storage); piers, wharves, docks and ships,
and other aids to navigation and transporta­
tion, including dry docks and marine railways,
dams and appurtenant facilities for the control
of waterways._____________________ _________
(2)
"Marine protection and indemnity insur­
ance," meaning insurance against, or against legal
liability of the insured for loss, damage, or expense
incident to ownership, operation, chartering, main­
tenance, use, repair, or construction of any vessel,
craft or instrumentality in use of ocean or inland
waterways, including liability of the insured for
personal injury, illness or death or for loss of or
damage to the property of another person.
a)
Cargo can be the subject of marine in­
surance, and once it is entered into, the implied
warranty of seaworthiness immediately attach­
es to whoever is insuring the cargo, whether he
be the shipowner or not. Although he has no
control over the vessel, the shipper has control
in the choice of vessel (Roque v. LAC, 139 SCRA
596),
-.7.02. Implied warranties in marine insurance
a)
b)
That the ship is seaworthy at the inception of the
insurance (Sec. 113, ICP);
That the ship will not deviate from the agreed
voyage unless deviation is proper (Secs. 123,124.
125, ICP);
c)
That the ship will not engage in an illegal ven­
ture;
d)
Warranty of possession of documents of neut­
rality: that the ship will carry the requisite
documents of nationality or neutrality of the ship
or cargo where such nationality or neutrality is
expressly warranted;
e)
Presence of insurable interest.
17.03. Insurable interest in marine insurance
a)
Shipowner*2
----------------t)— over the value of the vessel (even if char~
tered and the charterer agreed to pay the
shipowner the value of the vessel in case of
loss, however, the shipowner can recover
only the amount not recoverable from the
charterer [Sec. 100, ICP]). However, if the
ship is hypothecated by a bottomry loan,
the insurable interest is only up to the
excess of the value of the vessel over the
loan (Sec. 101, ICP).
2)
over expected freightage.
b)
Cargo owner/Shipper — over the cargo and
expected profits (Sec. 105, ICP).
c)
Charterer
1)
over the vessel up to the extent of the
amount he is liable to the shipowner, if the
ship is lost or damaged during the voyage
(Sec. 106, ICP).
140
REVIEWER ON COMMERCIAL LAW
2)
over his expected profits or freightage if he
accepts cargoes from other persons for a
fee. ■■
3)
over his own cargo or his client's cargo.
PART II — INSURANCE CODE
(P.D. No. 1460, as amended)
v. CA.179 SCRA 638 [1989); Choa Tiek Seng v. CA,
183 SCRA 223 [1990]).
e)
17=04. Perils of the sea vs. perils of the ship
a)
b)
c)
Perils of the sea or perils of navigation include
only those casualties due to the unusual violence
or extraordinary causes connected with naviga­
tion. It has been said to include 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.
Perils of the ship is a loss which in the ordinary
course of events, results:1
23
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 ordi­
nary conditions.
In the absence of stipulation, the risks insured
against are only perils of the sea (Go Tiaco Y Her-
manos v. Union Insurance Society o f Canton, 40 Phil
40). Thus, the insured is bound to prove that the
cause of the loss is a peril of the sea.
d)
However, in an "all risk policy," all risks are cov­
ered unless expressly excepted. The burden rests
: oh iEHie;
that the loss is caused by
a risk that is excluded (Filipino Merchants Ins. Co.
141
Barratry — willful misconduct on the part of the
master or crew in pursuance of some unlawful or
fraudulent purpose without the consent of own­
ers, and to the prejudice of owner's interest. This
may be expressly covered by the policy. When
so covered, proof of wilfull and intentional act is
necessary. No honest error of judgment or mere
negligence, unless criminally gross, can be bar­
ratry (Roque v, IAC, 139 SCRA 596 [1985]).
17.05. Concealment
a)
Opinions and Beliefs
Belief and expectation of a third person in
reference to a material fact is material and must
be disclosed in marine insurance (Sec. 108, ICP).
The rule is different from the general rule where
matters of belief, judgment or opinion of third*1
---------------- persons (except experts) are not material (Sec. 35,
ICP).
b)
Ordinarily, the matters concealed need not be
the cause of the loss. In marine insurance, there
are instances when matters, although concealed,
will not vitiate the contract except when they
caused the loss (Sec. 110, ICP):
1)
national character of the insured;
2)
liability of insured thing to capture or
detention;
3)
liability to seizure from breach of foreign
laws;
4)
want of necessary documents; and
5)
use of false or simulated papers.
17.06. General average loss vs. particular average loss
The insurer of the vessel or cargo that are saved
is liable for general average contribution and not for
142
REVIEWER ON COMMERCIAL LAW
PART II — INSURANCE CODE
(P.D. No. 1460, as amended)
particular average. Only the insurer of the damaged
cargo or vessel is liable for particular average if
covered by the policy.
a)
GENERAL AVERAGE LOSS includes damages
and expenses which are deliberately caused by
the master of the vessel or upon his authority in
order to save the vessel, her cargo, or both at the
same time from a real or known risk. It must be
borne equally by all of the interests concerned
in the venture. Under this, the requisites to the
right to claim general average contribution are:
1)
There must be a common danger to the
vessel or cargo;
2)
Part of the vessel or cargo was sacrificed
deliberately;
3)
The sacrifice must be for the common safety
or for the benefit of all;
authority;
b)
c)
5)
It must be successful, i.e., resulted in the
saving of the vessel or cargo; and
6)
It must be necessary
PARTICULAR AVERAGE LOSS includes all
damages and expenses caused to the vessel or to
her cargo which have not inured to the common
benefit and profit of all persons interested in
the vessel and her cargo. It refers to those losses
which occur under such circumstances as do not
entitle the unfortunate owners to receive contri­
bution from other owners concerned in the ven­
ture as where a vessel accidentally runs aground
and goes to pieces after the cargo is saved (Sec.
143
by him as the loss bears to the value of the whole
interest of the insured in the property insured.
PROBLEM:
1.
The vessel owned by "A " valued at P5 Million, is on
the way to Singapore to deliver the goods belonging
to X, Y and Z. The value of the cargoes belonging to
each of them (X, Y, and Z) are valued at PI Million
each (a total of P3 Million worth of cargoes are on
board the vessel). Later, a strong tyhoon placed the
vessel at peril forcing the captain and its crew to
lighten its lpad by jettisoning the cargoes belonging
to X. As a result, the vessel and the cargoes of Y and
Z safely reached Singapore. The vessel is insured
with RR Insurance company for its full value while
the cargoes of Z are fully insured with SS Insurance
company? Can X recover from RR and SS?
A:
YES, X can recover from RR and SS. The case involves
-------- a general average, hence, those who benefited from
the loss incurred by X are liable for general average
contribution. The facts show that A, Y and Z are liable
for contribution because their properties were saved
when the cargoes of X were jettisoned. Consequently,
the insurers of A and Z are also liable.
17.07. W hat do you understand by the co-insurance
clause?
a)
Where the property is insured for less than its
value, the insured is considered a co-insurer for
the difference between the amount of insurance
and the value of the property In marine insur­
ance, there is co-insurance by virtue of Section
157, ICP, as long as the requisites are present,
namely:
136,1CP).
1)
the loss is partial; and
A marine insurer is liable upon a partial loss,
only for such proportion of the amount insured
2)
the amount of insurance is less than the
value of the property insured.
V
;V
•' V— W MN'WVW
144
PART II — INSURANCE CODE
(P.D. No. 1460, as amended)
REVIEWER ON COMMERCIAL LAW
b)
In fire insurance, there has to be an express slip- '
ulation to that effect.
c)
The formula to determine the extent of the
insurer's liability is;
■
,17.08. SEAWORTHINESS
a)
Value
Caliex [Phils.], Inc. v. Sulpicio Lines, Inc., 315 SCRA
709(1999]).
PROBLEMS:
A vessel valued at PI Million owned by X was insured
for only P800,000.00 with A Insurance Corp. The vessel
was damaged because of a storm and the extent of
the damage was determined to be P200,000.00. How
much can X recover from A Insurance Corp.?
A:
X can recover only P160,000.00 (200,000.00/
1,000,000.00 x 800,000.00). The co-insurance clause
operates in this case because the vessel was insured*23
--------- for less than the value of the properly and there wasonly partial loss. Under the Insurance Code, a ma­
rine insurer is liable upon a partial loss, only for such
proportion of the amount insured by him as the loss
bears to the value of the whole interest of the insured
in the property insured (Sec. 157,1CP).
2.
Suppose the vessel was totally destroyed in problem
No. 1, how much can X recover from his insurer?
A:
X can recover the full amount of the policy
(P800,000.00). The co-insurance clause cannot apply
because the loss is total.
3.
Will your answer to problem No. 1 be the same if the
insurance is fire insurance and the property involved
is a building?
A:
NO. If there is no co-insurance clause provided for in
the policy. There is no co-insurance in fire insurance
unless it is expressly stipulated in the policy.
A ship is seaworthy, when reasonably fit to per­
form the service, and to encounter the ordinary
perils of the voyage, contemplated by the parties
to the policy (Sec. 114, ICP). There should be
due consideration to the nature of the ship, the
voyage and the service to be performed (See
■Loss
---------- x Insurance = Insurer's Liability
1.
145
A warranty of seaworthiness extends not
only to the condition of the structure of the ship
itself, but requires that it be properly laden, and
provided with a competent master, a sufficient
number of competent officers and seamen, and
the requisite appurtenances and equipment,
such as ballasts, cables and anchors, cordage and
sails, food, water, fuel, and lights, and other nec­
essary or proper stores and implements for the*1
------- voyage (Sec. 116, ICPj:------------------ ---------- -------b)
When ship should be seaworthy
An implied warranty of seaworthiness is
complied with if the ship be seaworthy at the
time of the commencement of the risk, except in
the following cases:
1)
Time policy — When the insurance is made
for a specified length of time, the implied
warranty is not complied with unless the
vessel is seaworthy at the commencement
of every voyage it undertakes during that
time (Sec. T15[a]);
2)
When the insurance is upon the cargo
which, by the terms of the policy, descrip­
tion of the voyage, or established custom of
the trade, is to be transhipped at an inter­
mediate port, at the commencement of each
' particular voyage (Sec. 115[b]);
PART II — INSURANCE CODE
(P.D. No. 1460, as amended)
REVIEWER ON COMMERCIAL LAW
3)
Where different portions of the voyage are
carrier which keeps its vessel in seaworthy con­
ditions. The shipper of the cargo may have no
control over the vessel, but it has full control in
the choice of the common carrier that will trans­
port its goods (Roque v. IAC, 139 SCRA 596).
contemplated, at the commencement of
each portion (Sec, 117, ICP);
4)
When the ship was seaworthy at the com­
mencement of the voyage but becomes unseaworthy during the voyage to which an
insurance relates, an unreasonable delay in
repairing the defect exonerates the insurer
on ship or shipowner's interest from liabil­
ity from any loss arising therefrom (Sec, 118,
e)
Payment made by the insurer to the insured
the insurer's right to enforce the implied war­
ranty of seaworthiness. However, this waiver
extends only in favor of the insured. There is no
waiver in favor of the carrier that transported
the cargo. The insurer can still claim payment
against the carrier for breach of contract based
on the insurer's right of subrogation (Delsan
Applicability of implied warranty of seawor­
thiness to cargo owners
The fact that the unseaworthiness of the
ship was unknown to the insured is immaterial
in ordinary marine insurance and may not be
used by him as a defense in order to recover on
the marine insurance policy.
Transport Lines, Inc. v. CA, G.R. No. 127897, Nov.
15,2001).1
17.09. Deviation_______________________________ ________
-------------- Since the law provides for an implied warranty of seaworthiness in every contract of ordi­
nary marine insurance it becomes the obligation
of a cargo owner to look for a reliable common
carrier which keeps its vessels in seaworthy con­
ditions. The shipper may have no control over
the vessel but he has full control in the choice
of the common carrier that will transport his
goods. Or the cargo owner may enter into a con­
tract of insurance which specifically provides
that the insurer answers not only for the perils
of the sea but also provides for coverage of perils
of the ship (Roque v. IAC, 139 SCRA 596).
d)
If a vessel is unseaworthy, is the insurer of the
cargo liable even if the owner of the cargo was
not even aware of the unseaworthiness of the
vessel?
NO. The insurer is not liable. It is the obli­
gation of the cargo owner to look for a common
Effect of Payment
for the latter's lost cargo operates as waiver of
ICP).
c)
147
Departure of vessel from course of voyage, or
an unreasonable delay in pursuing voyage, or the
commencement of an entirely different voyage (Sec.
123, ICP).
a)
Deviation is:proper when (Sec. 124, ICP)
1)
if due to circumstances outside the control
of the ship captain or ship owner;
2)
if done to comply with a warranty;
3)
if made in good faith to avoid a peril;
4)
if made to save human life or another dis­
tressed vessel.
PROBLEM:
1.
X, the master of MV Strongwind, received an advice
from PAGASA that there is an approaching typhoon
along the course that was being pursued by his vessel.
PARTII — INSURANCE CODE
(P.D. No. 1460, as amended)
REVIEWER ON COMMERCIAL LAW
merit-to the insurer of his interest in the thing
insured (Sec. 138, ICP}.
X thereafter changed the course of Ills voyage because
of his belief that -the information given by PAGASA
was true. The vessel was damaged thereafter. Can
the insurer deny the claim on the ground of improper
A:
( c l ) Requisites for valid abandonment
deviation?
1)
NO, the insurer cannot deny the claim. There was
proper deviation in this case so long as the master
acted in good faith in relying on the information of
PAGASA.
There must be an actual relinquish­
ment by the person insured of his in­
terest in the thing insured (Sec. 138,
ICP);
2)
There must be a constructive total loss
(Sec. 139, ICP);
17.10. LOSS AND ABANDONMENT
a)
Dj
1)
total destruction;
2)
loss by sinking;
3)
damage rendering the thing valueless; or
4)
total deprivation of owner of possession of
thing insured.
(constructive total loss {bee. id i, m relation to
Sec. 139, ICP)
1)
actual loss of more than three-fourths (3/4)
of the value of the object;
2)
damage reducing value by more than threefourths (3/ 4) of the value of the vessel and
of cargo; and
3)
expenses of shipment exceed three-fourths
(3 /4 ) of value of cargo.
In case of constructive total loss,
insured may abandon the goods or vessel
to the insurer and claim for whole insured
value, or he may, without abandoning
vessel, claim for partial actual loss.
c)
3) . The abandonment be neither partial
nor conditional (Sec. 140, ICP);
Actual total loss (Sec. 130, ICP)
Abandonment t
The act of the insured by which, after a con­
structive total loss, he declares: the relinquish-
4)
It must be made within a reasonable
time after receipt of reliable informa­
tion of the loss (Sec. 141, ICP);
5)
It must be factual (Sec. 142, ICP);
6) It must be made by giving notice there■A--------------------------------- of to the insurer which may-be done
orally or in writing (Sec. 143, ICP); and
7)
The notice of abandonment must be
explicit and must specify the particu­
lar cause of the abandonment (Sec.
144, ICP).
18. FIRE INSURANCE
■
18.01. Fire Insurance
It is a contract of indemnity by which the insurer
for a consideration agrees to indemnify the insured
against loss of, or damage to, property by fire, but
may include loss by lightning, windstorm, tornado,
or earthquake and other allied risks, when such risks
are covered by extension to fire insurance policies or
under separate policies (Sec. 167, ICP).
150
REVIEWER ON COMMERCIAL LAW
PART II — INSURANCE CODE
(P.D. No. 1460, as amended)
18.02. What is the extent of liability of an insurer under art
open policy?
a)
b)
3)
The alteration is made without the consent
of the insurer;
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
4)
The.alteration is made by means within the
5)
The alteration increases the risk; and
Insurance Corporation v. IAC, 143 SCRA 62).
6)
There must be a violation of a material
policy provision.
Suppose A constructed a house in 1987 at a cost
of P200,000.00, which he insured against fire for
the said amount. The policy for P200,000.00 was
renewed every year. This year, when the said
house was already P400,000.00, one-fourth of the
house was destroyed by fire. How much can A
recover from the insurer?
control of the insured;
18.04. Friendly Fire vs. Hostile Fire
a)
18.03. ALTERATION
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 the insurer to rescind a contract of fire
insurance (Sec. 168, ICP).
In fire insurance, what is the effect of an altera­
tion in the use or condition of a thing insured
from that which it is limited by the policy?
The insurer may rescind a contract of fire
insurance provided the following requisites are
present:
1)
The use or condition of the thing insured isp
specially limited or stipulated in the policy;
2)
Such use or condition is altered;
Friendly Fire — fire that bums in a place where
it is supposed to burn (e.g., Gas stove, fire place,
etc.).
b)
It depends. If the policy is a valued pol­
icy (valued at P200,000.00), A can recover only
P50,000.00. If the policy is an open policy, A can
recover his actual loss of P100,000.00.
a)
151
Hostile Fire — fire that escapes and bums in a
place where it is not supposed to be. It may also
refer to fire that started out as a friendly fire but
escapes from its original place or it becomes too
strong as it becomes out of control.
19. CASUALTY INSURANCE
19.01. Casualty Insurance
An insurance covering loss or liability arising
from accident or mishap, excluding those falling
under other types of insurance such as fire or marine
(Sec. 174).
19.02. "Intentional" vs. "Accidental" as used in insurance
a)
Intentional as used in an accident policy except­
ing intentional injuries inflicted by the insured
or any other person implies the exercise of the
reasoning faculties, consciousness and volition.
Where a provision of the policy excludes inten­
tional 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 a third person, the
insurer is relieved from liability as stipulated
REVIEWER ON COMMERCIAL LAW
152
part h
—
in s u r a n c e c o d e
153
(ED, No. 3460, as amended/
(Biagtan v. The Insular Life Assurance Co, Ltd., 44
c)
SCRA 58 (19721),
b)
The terms " accident" and " accidental" as used in
insurance contracts, have not acquired any tech­
nical meaning. They are construed by the courts
in the ordinary and common acceptation. Thus,
the terms have been taken to mean that which
happens by chance or fortuitously, without in­
tention or design, which is unexpected, unusual
and unforeseen. The terms do not, without qual­
ification, exclude events resulting in damage
or loss 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 (Pan
Malayan Insurance Corp. v. CA, 184 SCRA 54).
19.03. THIRD-PARTY LIABILITY
Casualty Insurance may provide for third party
liability (in the nature of stipulation pour autrui
for personal injury and even damage to prop­
erty), in which case, the third party may directly
sue the insurer upon the occurrence of the loss.
However, the insurer is not solidarily liable with
the insured or the tortfeasor for the latter's obli­
gation (First Integrated Bonding and Ins. Co., Inc. v.
Liability of insurer if insured was committing
a felony
Liabilities arising out of acts of negligence,
which are also criminal, are also insurable on
the ground that such acts are accidental. Thus,
a motor insurance policy covering the insured's
liability for accidental injury caused by his negli­
gence, even though gross and attended by crimi­
nal consequences such as homicide through
reckless imprudence, will not be void as against
public policy But liabil ity consequences of delib­
erate criminal acts are not insurable.
PM. COMPULSORY MOTOR VEHICLE LIABILITY INSURANCE (CTPL)
;
20.01. Mandatory Insurance
The Insurance Code makes it unlawful for any
--------------land transportation operator or owner of a motor
vehicle to operate the same in public highways unless
there is an insurance or guaranty to indemnify the
death or bodily injury of a third party or passenger
arising from the use thereof ( Sec. 374, ICP). Registration
of any vehicle will not be made or renewed without
complying with the requirement (Sec. 376, ICP).
a)
er pays the third person, the right of subrogation
operates.. .
The protection may be complied with using any
of the following: (1) insurance policy; (2) surety
bond; (3) cash bond.
b)
If there is no stipulation in favor of third person
but the insurance is an insurance against liability
to third persons, any third person who might be
injured may not sue the insurer (Guingon v. Del
Monte, 20 SCRA 1043 [1991]). Only the insured
(sought to be held liable by the third person) can
recover from the insurer.
"Motor Vehicle" is any vehicle as defined in Sec­
tion three, paragraph (a) of Republic Act No.
4136, otherwise known as the "Land Transporta­
tion and Traffic Code."
c)
"Passenger" is any fare paying person being
transported and conveyed in and by a motor
vehicle for transportation of passengers for
compensation, including persons expressly
Hernando, 199 SCRA 769 [1991]; Vda. de Maglana
v. Consolacion, 212 SCRA 268 [1992]). If the insur­
154
REVIEWER ON COMMERCIAL LAW
authorized by law or by the vehicle's operator c.■
his agents to ride without fare.
d)
PART II — INSURANCE CODE
(P.D. No. 1460, as amended)
b)
of the family within the second degree of con
sanguinity or affinity, of a motor vehicle own­
er or land transportation operator, as likewise
defined herein, or his employee in respect c'
death, bodily injury, or damage to property ark
ing out of and in the -course of employment.
e)
The following proofs of loss, when submitted
under oath, shall be sufficient evidence to sub­
stantiate the claim:
"Third-Party" is any person other than a passer
- 1)
ger as defined in this section and shall also a
elude a member of the household, or a members
"Owner" or "Motor vehicle owner" means the
actual legal owner of a motor vehicle, in whose
name such vehicle is duly registered with the'
Land Transportation Commission.
"Land transportation operator" means the own­
er or owners of motor vehicles for transports
tion of passengers for compensation, including
__________ school buses,------------------- ,------------------------------
c)
Liability ‘Insurance?
To give immediate financial assistance to victims
of motor vehicle accidents and / or their dependents,
especially if they are poor regardless of the financia
capability of motor vehicle owners or operator';
responsible for the accident sustained (Shafer v. Judge,
3)
Medical report and evidence of medical or
hospital disbursement in respect of which
refund is claimed.
Claim may be made against one motor vehicle
only.
b)
If not an occupant, claim shall lie against the
insurer of the directly offending vehicle.
c)
In all cases, the right of the party paying the
claim to recover against the owner of the vehicle
responsible for the accident shall be maintained.
20.05. TIME TO FILE AND PROCESS CLAIM UNDER
CTPL
a)
Period to File Notice
The written notice of claim (setting forth
the nature, extent and duration of the injuries as
certified by a duly licensed physician) must be
presented within six (6) months from the date
of :the accident otherwise the claim is deemed
-The injured third party or passenger is given the
option to file a claim for death or injury without the
necessity of proving fault or negligence of any kino
under the following conditions;
(Insurance Memo. Circular 4-2006);
Death certificate and evidence sufficient to
establish the proper payee; or
In the case of an occupant of a vehicle, claim shall
lie against the insurer of the vehicle in which the
occupant is riding, mounting or dismounting
from.
20.03. NO FAULT CLAUSE (Sec. 378, ICP)
The total indemnity in respect of any person shall
not exceed fifteen thousand pesos (P15,000.00!
2)
a)
RTC, 167 SCRA 386; First Integrated Bonding and Ins.
Co., Inc. v. Hernando, 199 SCRA 746).
a)
Police report of accident; and
20.04. From whom should the injured recover?
f)
20.02. What is the purpose of Compulsory Third Party
155
. waived (Sec. 384, ICP; Traveller's Insurance Surety
Corporation v. CA, 272 SCRA 536 [1997]).
b)
Prescriptive Period
The action must be filed in court or the In­
surance Commission within one (1) year from
FART II — INSET;. -.NICE CODE
(P.D. No. 1 4 6 0 , . amended)
REVIEWER ON COMMERCIAL LAW
156
denial of the claim (Sec. 384, ICP; Via. de Gabriel
cl
v. CA, 264 SCRA137 [1996]; Country Bankers Ins.
Corp, v. Travellers Ins. and Surety Corp., 176 SCRA
523 [1989]; Summit Guaranty v. Arnaldo, 158 SCRA
332 [1988]).
c)
If there is an agreement, the insurance company
concerned shall forthwith ascertain the truth and
extent of the claim and make payment within
five (5) working days after reaching an agree­
ment (Sec. 385, ICP).
d)
If no agreement is reached, the insurance com­
pany shall pay only the "no-fault" indemnity
without prejudice to the claimant from pursuing
his claim further, in which case, he shall not be
required or compelled by the insurance compa­
ny to execute any quit claim or document releas­
ing it from liability under the policy of insurance
or surety bond issued (Sec. 385, ICP).
20.iML.3h_ May a thirdqpegson sue the Insurer directly?__ _
It is not necessary that summons be served
upon the insurer, the writ of garnishment is
enough. By such service, the garnishee becomes
a "virtual party" or a "forced intervenor" in this
case (Perla Compania de Seguros, Inc. v. Ramolete,
203 SCRA 487).
d)
~
-
Coverage — P I00,000.00 (plus additional
P100,000.00 if what is involved is used as
public utility). (Insurance Memo. Circular
4-2006).
(2)
Death Indemnity — P70,000.00
P30,000.00 funeral expenses (Ibid.).
plus
Notes: The insurer's maximum liability will
not exceed P I00,000.00 (plus another P100,000.00
if common carrier or P200,000.00) regardless of
the number of passengers killed or injured (First
Is the insurer solidarity liable with the in­
sured?
Corporation v. CA, 184 SCRA 54).
Coverage and Extent of Liability.
(1)
Brothers v. Mora, 20 SCRA 261).
No. While the insurer's liability may be
direct, it does not mean that the insurer can
be held solidarily liable with the insured. The
insurer's liability is based on contract; that of
- the insured is based on torts; Furthermore, the
insurer's liability is limited to the amount of
the insurance coverage (Pan Malayan Insurance
May the proceeds of a third party liability
insurance be garnished?
Yes. In a third party liability insurance, the
insurer assumes the obligation of paying the
injured party to whom the insured is liable. The
insurer becomes liable as soon as the liability
of the insured attaches. From the moment the
insured becomes liable to the third person,
the insured acquires interest in the insurance
contract, which interest may be garnished just
like any other credit.
It depends. If the policy provides for
indemnity against liability, the insurer can be
sued directly by a third person. However, if the
policy provides for "reimbursement after actual
payment by the insured," or for the indemnity
against loss, a third person has no cause of
action against the insurer (Sec. 53, ICP; Bonifacio
b)
157
Quezon City, Co., Inc. v.CA, 218 SCRA 525).
20.07. OTHER RULES CONCERNING MOTOR VEHI­
CLES
a)
AUTHORIZED DRIVER CLAUSE
A stipulation in a motor vehicle insurance
which provides that the driver, other than the
M K T II — INSURANCE CODE
(P.D. No. 1460, as amended)
REVIEWER ON COMMERCIAL LAW
the owner's consent or knowledge, such taking
constitutes theft, and therefore, it is the "theft
clause" and not the "authorized driver's clause"
that should apply. The fact that the driver using
the car before it was carnapped had an expired
license is of no moment (Perla Compania de Segu­
insured owner, must be duly licensed to drive
the motor vehicle, otherwise the insurer is
excused from liability (Villacorta v. I.C., 100 SCRA
467 [1980]).
The clause means that the insurer indemni-;
fi.es the insured owner against loss or damage to
the car but limits the use of the insured vehicle
ros, Inc. v. CA, 100 SCRA and Palermo v. Pyramids
Ins., 161 SCRA 677).
to the insured himself or any person who drives
on his order or with his permission.
1)
Thus, there is theft if an employee (or any
person without juridical possession) took the
vehicle of his employer without the latter's
consent-and is'therefore liable to the insured
for damage to the vehicle even if the employee
did not have a driver's license. The theft clause
operates (this is present in a comprehensive
policy unless theft is excepted) and not the
"authorized driver clause." This is also true if
an employee of a repair shop took the car that
is being repaired for a "joy ride." (Villacorta v.
The insured need not prove that he has a
driver's license at the time of the accident if
he was the driver.
2)
If the claimant was able to present a driv­
er's license the same is presumed to be gen­
uine. Thus, even if it was established that
the driver does not know how to read and
write, the license will still be sustained in
the absence of proof that it was not validly*3
------- issued (CCC Insurance Corp. v. CA, 31 SCRA
■^nsttrmtce-GmnmTi^0^6RA-46^T^ssl7r^Bnptist~
for World Evangelism, Inc. v, Fieldmen's Ins. Co.,
Inc., 124 SCRA 618; See also Paramount Insurance
v. Remondeulaz, G.R. No. 173773, Nov. 28,2012).
264).
3)
A driver (not the insured himself) who
holds an expired driver's license is not an
authorized driver (Gutierrez v. Capital Ins.
Co., 130 SCRA 618).
THEFT CLAUSE
The risks insured against in the policy may
include theft. If there is such a provision and the
vehicle was unlawfully taken, the insurer is li­
able 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
(Perla Compania de Seguros, Inc. v. CA, 208 SCRA.
487 [1992]).
In other words, where the motor vehicle
is unlawfully and wrongfully taken without
21. SURETYSHIP
gi;;: 21.01. Suretyship
Agreement whereby the surety guarantees the
performance by another of an undertaking or an
obligation in favor of a third party (Sec. 175,1CP).
a)
Fidelity Bond — contract of insurance against loss
from misconduct.
b)
Fidelity Guaranty Insurance — a contract whereby
one, for a consideration, agrees to indemnify
ihesassured‘;againsbloss arising from the want"
of integrity, fidelity or honesty of employees or
other persons holding positions of trusts.
REVIEWER ON COMMERCIAL LAW
160
22. LIFE INSURANCE
PART II — INSURANCE CODE
(P.D. No. 1460, as amended)
e)
22.01. Life Insurance
Insurance on human life and insurance apper­
taining thereto or connected therewith which
includes every contract or pledge for the payment of
endowments or annuities (Sec. 179, ICP).
22.02. Effect of death of insured through suicide
The insurer in a life insurance contract shall be
liable in case of suicide by the insured if:
a)
suicide was committed after the policy has been
in force for a period of two (2) years from the
date of its issue or its last reinstatement, unless
the policy provides a shorter period;
b)
suicide committed in a state of insanity; it shall
make the insurer liable regardless of the date of
the commission of the suicide (Sec. 180-A, ICP).
a)
Ordinary Life, General Life or Old Line Policy —
insurer pays a premium every year until he dies.
Surrender value after three (3) years.
b)
c)
Any policy or contract on either a group or individual
basis issued by an insurance company providing for benefits
or other contractual payments or values thereunder to vary
so as to reflect investment results of any segregated portfolio
of investment.
POWERS OF THE INSURANCE COMMISSIONER
24.01. ADJUDICATORY OR QUASI-JUDICIAL POWERS
a)
Concurrent Jurisdiction (with regular civil
courts) — cases where any single claim does not
exceed P100,000.00 involving liability arising
from the following: (1) insurance contract; (2)
contract of suretyship; (3) reinsurance contract;
— :------------an^44)-membembip-Geffifi€ate4ssuedr-by-ffl^jw
bers of mutual benefit associations (Sec. 416,
ICP).
b)
Primary and exclusive Jurisdiction — claim for
benefits involving pre-need plans where the
amount of benefits does not exceed P100,000.00
(Sec. 55, Pre-Need Code, R.A. No. 9829).
c)
Endowment Policy — pays premium for specified
period. If he outlives the period, the face value oi
the policy is paid to him; if not, his beneficiaries
receives the benefit.
d) =•Term Insurance — insured pays premium only
once, and he is insured for a specified period,
' If he dies within the period/ his beneficiaries
benefits. If he outlives the period, no persor
benefits from the insurance.
Industrial Life ■
— life insurance entitling the
insured to pay premiums weekly, or where
premiums are payable monthly or oftener.
VARIABLE CONTRACT
Limited Payment Policy — insured pays premium
for a limited period. If he dies within the period,
his beneficiary is paid; if he outlives the period,
he does not get anything.
161
For the purpose of any proceeding under Section
416 of the ICP, the Commissioner or any officer
thereof designated by him, is empowered to
administer oaths and affirmation, subpoena
witnesses, compel their attendance, take evi­
dence and require the production of any books,
papers, documents or contracts or other records
which are relevant or material to the inquiry
(Sec. 416, par. 9, ICP).
d)
Does the Insurance Commission have jurisdic­
tion to decide the legality of a contract of agen-
162
EEVlEWElx ON CQMMEP.G a :
PART 11 — INSURANCE CODE
(P.D. No. 1460, as amended)
cy entered into between an insurance company
and its agent?
NO. The same is not covered by the term
"doing or transacting insurance business" under
Section 2 of the Insurance Code, neither is it
covered by Section 416 of the same Code which
grants the Commissioner adjudicatory powers.
24.02. REVOCATION OF CERTIFICATE OF AUTHORITY
a)
The Certificate of Authority issued to the do­
mestic or foreign company by the Commission
may be revoked or suspended by the Insur­
ance Commissioner for any of the following
grounds (Sec, 247, ICP):
1)
The company is in an unsound condition;
2)
That it has failed to comply with the provisions
of law or regulations obligatory upon it;
3)
That its condition or method of business is such*45
public or to its policyholders;
4)
That its paid-up capital stock, in the case of a
domestic stock company, or its available cash
assets, in the case of a domestic mutual company,
or its security deposits, in the case of a foreign
company, is impaired or deficient;
5)
That the margin of solvency required of such
company is deficient.
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
agent in the Philippines while such suspension,
revocation, or disability continues or until
its authority to do business is restored by the
Commissioner.
163
Before restoring such authority, the Com­
missioner shall require the company concerned
to submit to him a business plan showing the
company's estimated receipts and disburse­
ments, as well as the basis therefor, for the next
succeeding three (3) years.
b)
Insolvency
If the company is determined by the Com­
missioner to be insolvent or cannot resume busi­
ness, he shall, if public interest requires, order its
liquidation (Sec. 249, ICP).
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
deemed adequate to protect the policyholders
and creditors. The conservator will take charge
------- of the management of the insurance company
(Sec. 248, ICP).
PART III — BUSINESS ORGANIZATIONS
transaction; and any billboard conspicuously
exhibited in plain view in or at the place of her/
his business or elsewhere, announcing her/his
PART III
BUSINESS ORGANIZATIONS
business.
b)
A. BASIC TYPES OF BUSINESS ORGANIZATION;
Persons who are engaged in business use different business
organizations and business arrangements as vehicles therefor.
These include: (1) Sole Proprietorship, (2) Partnership, (3) Joint
Account or Cuentas en Participation, (4) Business Trust, (5) Joint
Venture, (6) Cooperative, and (7) Corporation.
1.
INDIVIDUALS AND SOLE PROPRIETORSHIP
A person personally conducts business under his
name or a business name. The business is an organization
------- composed of the proprietor himself and his employees W b-4—
has no personality separate and distinct from the proprietor.
a)
A sole proprietorship does not possess a juridical
personality and has no legal personality to file or
defend an action in court (Anita Mangila v. CA, G.R.
A proprietor is required to register his business
name other than his true name with the Bureau
of Trade Regulation and Consumer Protection
of the Department of Trade and Industry (Sec.
1, Act No. 3883). The requirement also includes
firm name or style. If not registered he cannot:
1)
use or sign the business name in connection
with his business on any written or printed
receipts or any evidence of agreement or
other documents;
2)
he cannot exhibit the business name or sign
thereof in plain view.
c) Juridical persons need not register the names
_____that are registered with the Securities and Ex*change Commission. However, if they are us­
ing different names for their business, they must
register the same.
d)
Prohibited Names
The following BNs are not registrable:
No. 125027, Aug. 12, 2002).
1,01. BUSINESS NAME (Act No. 3883)
a)
Definition of Business Name. A Business Name
(BN) refers to any name that is different from
the true name of an individual which is used
or signed in connection with her/his business
on any written or printed receipts including
receipts for business taxes, duties and fees and
withdrawal or delivery receipts; any written or
printed evidence of any agreement or business
164
165
1)
2)
The name or the nature of business itself is
illegal, offensive, scandalous, or contrary to
propriety;
Names which are identical or resemble a
BN already registered with the DTI, the
Securities and Exchange Commission,
Cooperative Development Authority, Inte­
llectual Property Office, Food and Drug
- - , Administration, Department of Labor and
Employment or any other government
office authorized by law to register names,
as likely to cause confusion or mistake
PART III — BUSINESS ORGANIZATIONS
REVIEWER ON COMMERCIAL LAW
in the minds of the public taking into
Commerce. Although the concept of merchants is
(iii) location/place of business;
now rendered obsolete by the provisions of law that
provide for different qualifications and requirements,
it is important to note such term in so far as they are
still referred to in the Code of Commerce provisions
that are still in force.
(iv) dominant word;
a)
consideration the following:
(i)
nature of the business;
(ii)
product/service handled;
(v)
3)
use of descriptive words; and
Code of Commerce).
Names composed of purely generic or
Note: Corporations and partnerships (orga­
nized for business) are also merchants from the
time they are registered with the Securities and
Exchange Commission.
4)
Names which by law or regulation cannot
be appropriated;
5)
Names, words, or terms or expressions
used to designate or distinguish or sugges­
tive of quality of any class of goods, articles,
merchandise, or service;
b)
The names or abbreviation ot names used
by the government in its governmental
•
MERCHANTS — as to individuals, they are
those who having capacity to engage in com­
merce, habitually devote themselves to it (Art 2,
(vi) spelling, sound and / or meaning;
geographic words;
6)
167
functions;
7)
The names or abbreviation of names of any
nation, inter-governmental or international
organization; and
8)
Names which are deceptive, misleading or
which misrepresent the nature of the busi­
ness (DTI Department Order No. 16-01 as
QUALIFICATIONS OF MERCHANTS:
1)
at least 18 years;
2)
must have free disposition of his property;*1
^
3]
must habitually involve themselves in commerce.
c)
HABITUALITY
1)
Habituality — repetition and continua­
tion of commercial acts in such manner that
they are related to each other by reason of
the commercial purpose or end which they
tend to have, which is the exchange or cir­
culation of products. However, it may be
shown by a single act of commerce if he
manifests the intention to engage habitu­
ally in commerce.
2)
When Habituality is Presumed —- the mo­
ment a person who intends to engage in
commerce announces through circulars,
newspapers, handbills, posters exhibited
to the public, or in any other manner what-
amended).
Note: There must be a separate registration of
a BN for a branch or satellite office. The BN of the
branch or satellite office should be the same as the
registered BN for the main office.
1.02;' MERCHANTS (CODE OF COMMERCE)
Private individuals or single proprietors may
also be considered merchants under the Code of
REVIEWER ON COMMERCIAL LAW
168
PART III — BUSINESS ORGANIZATIONS
1)
Those serving the penalty of civil interdic­
tion;
2)
Those judicially d e c la r e d insolvent until
they would have obtained a discharge;
MCIj-02-1443, July 31, 2002) that judges are still
disqualified from engaging in commerce within
their jurisdiction despite the abrogation of Article
14. Rule 5.02 of the Code of Judicial Conduct
supplies the void created by the abrogation.
Under such rule, a judge is enjoined to refrain
from financial and business dealings that tend
to reflect adversely on the court's impartiality,
interfere with the proper performance of judicial
activities or increase involvement with lawyers
or persons likely to come before the court.
3)
Those who are absolutely disqualified under
special laws (Art. 13, Code o f Commerce).
1.04. DISQUALIFICATIONS UNDER THE CONSTITU­
TION
soever, an establishment which has for its
object some commercial acts,
1,03, DISQUALIFICATION TO ENGAGE IN COM­
MERCE (CODE OF COMMERCE)
a)
b)
ABSOLUTE DISQUALIFICATIONS
RELATIVE DISQUALIFICATIONS
apply in specified te rrito r ie s such as
where they exercise their functions,
certain circumstances or for s p e c ific
only12345
— these
in places
or under
activities
1)
Justices, judges and prosecutors;__________
2)
Administrative, economic or military heads
of districts, provinces or posts;
3)
Those employed in the collection and
administration of funds of the State;
4)
Stock and commercial brokers of whatever
a)
14, Constitution).
b)
Those disqualified under special laws (Art.
14, Code of Commerce).
c)
The Supreme Court ruled in Macariola v. Asuncion
(114 SCRA 7 7 [19821) th a t A r tic le 14 of the Code
of Commerce is in the nature of p o litic a l law
- and since it was extended to this country by
' Spain, it was necessarily abrogated upon the
-■ change of sovereignty from Spain to the United
States. However, the Supreme Court explained
in
josie Berin v. judge Feiixberto R Barte (G.R. No.
The President, Vice-President, Members o f the
Cabinet, and their Deputies or Assistants — shall
not, during his tenure, practice any profession,
participate in any business, be financially
interested in any contract or franchise granted
by the Government. They shall avoid conflict of
interest in the conduct of their office (Art. VII,
c la s s ; a n d . -
5)
Senators and Congressmen — they shall not,
directly or indirectly, be interested financially in
any contract with, or in any franchise or special
privilege granted by the Government during
his term of office. He shall not intervene in any
matter before any office of the Government for
his pecuniary benefit or where he may be called
upon to act on account of his office (Art. VI, Sec.
Sec. 13, Constitution).
c)
Member of the Constitutional Commission —•shall
not engage in the practice of any profession or
active management of any business which may
be affected: by The functions of his office, nor
shall he be financially interested wifii'’a n y ^ n -
tract or franchise with the Government (Art. IX,
Sec. 2, Constitution).
170
REVIEWER ON COMMERCIAL LAW
d;
PART III — BUSINESS ORGANIZATIONS
President, Vice-President, Members o f the Cabinet,
Congress, Supreme Court and the Constitutional
Commission, Ombudsman during their tenure —
commonly called an accidental partnership: and there
is no- indication to the public that there is an existing
arrangement because only the ostensible partner is
conducting the business. ;
no loan, guaranty, or other form of financial
accommodation for any business purpose may
be granted by any government-owned or con­
trolled bank (Art. XI, Sec. 16, Constitution).
e)
3.02. DISTINGUISHED FROM PARTNERSHIP
a)
As to juridical personality. A joint account has
no juridical personality while a partnership has
a personality separate a n d distinct from the part­
ners.
b)
As to business name. No commercial name
common to all participants can be adopted in
joint accounts (Art. 241, Code o f Commerce). A
partnership can adopt a partnership name.
c)
As to management. The general partners are
all managers in the partnership while only
the ostensible partner manages and transacts
business in his own name and under his
individual liability (Art, 241, Code of Commerce).*4
5
d)
As to parries in eases. Only the ostensible partner
— the person carrying on the joint business —can be sued by and is liable to persons transacting
with the former. In partnership, all general
partners may be liable even up to the extent of
their personal properties and may therefore be
sued by third persons.
Practice o f Profession — Foreigners are disquali­
fied. The practice of profession (engineering,
medicine and allied professions, accountancy,
etc.) is limited to Filipinos (Art XII, Sec. 14, Con-
2. PARTNERSHIPS
; 2.01. PARTNERSHIP — tw o . or more persons bind
themselves to contribute money, property, or industry
to a common fund with the intention of dividing the
profits among themselves (Art. 1767, CO.
2.02. REGISTRATION — Registration with the Securities
— ----------and Exchange Commission (SEC) is~necessary wherethe capital of the partnership is P3,000.00 or more
(Art. 1772, CO. When so registered with the SEC, its
partnership name need not be registered anew under
the Business Names Law.
a)
Registration with the SEC is not necessary for a
partnership to acquire juridical personality. Even
an unregistered partnership has a personality
separate and distinct from its partners.
4. BUSINESS TRUSTS
I t is a legal relation whereby one person, called the
trustor, conveys a property to andther for the benefit
of a person called the beneficiary. The person in whom
confidence is reposed as regards the property is called the
trustee (Art. 1440, CC).
3. JOINT ACCOUNTS (CUENTAS EN PARTICIPACION)
3. 01. CONCEPT
■
An arrangement whereby merchants may inter­
est themselves in the transaction of other merchants,
contributing thereto the amount of capital they may
~ agree upon, and participating in the favorable and
unfavorable results thereof in the proportion they
may determine (Art 239, Cods o f Commerce). This is
171
5 . JOINT VENTURE
5.01.
* .
JOINT VENTURE — an association of persons or
companies jo in tly u n d e rta k in g : some co m m e rc ia l
PART III — BUSINESS ORGANIZATIONS
RE.VIEWER ON COMMERCIAL LAW
172
enterprise;-generally all contribute assets and share
risks. It requires a community interest in the perfor­
mance of the subject, a right to direct and govern the
policy connected therewith, and duty, which may be
altered by agreement to share both in profit and- loss­
es (Kilosbayan, Inc. v. Guingona, 232 SCRA. 110 [1994]).
a)
A joint venture is actually a form of partnership
and should thus be governed by the laws of part­
nership (Aurbach v. Sanitary Wares Manufacturing
Carp., 180 SCRA130 [1989]).
b)
Corporations can enter into joint venture agree­
ments (Ibid.).
c)
Joint Ventures may result in a formation of joint
venture corporation. In such case, it must com­
ply with the applicable nationalization laws (JG
Summit v. CA, G.R. No. 124293, Nov. 20, 2000).
6. COOPERATIVES
A cooperative is an autonomous and duly registered
association of persons with a common bond of interest,
who have voluntarily joined together to achieve their social,
economic, and cultural needs and aspirations by making
equitable contributions to the capital required, patronizing
their products and services and accepting a fair share of the
risks and benefits of the undertaking, in accordance with
universally accepted cooperative principles (Art. 3, R.A. No.
1.01. What are the attributes of a corporation?
a)
It is an artificial being with separate and distinct
personality;
b)
It is created by operation of law;
c)
It has the right to succession; and
d)
It has powers and attributes conferred by law or
incident to its existence.
;2. DISCUSSION OF ATTRIBUTES
? 2.01. ARTIFICIAL BEING WITH SEPARATE PERSON­
ALITY
a)
Consequences of Separate Personality
1)
Property. It is entitled to own properties
in its own name and its properties are not
the properties of its stockholders, direc­
tors and officers (Wise v. Man Sung Lung, 69
__________________ Phil. 309). Consistently, the properties of its
stockholders, directors and officers are not
the properties of the corporation. The inter­
est of the stockholders over the properties
of the corporation is merely inchoate (Saw
v. CA, 195 SCRA 740 [1991]).
2)
Obligations. It can incur obligations and
its obligations are not the obligations of its
stockholders, directors and officers (Vasquez
v. De Borja, 74 Phil 560). As corollary to this
rule, obligations of the stockholders, direc­
tors and officers are not the obligations of
the corporation.
3)
Rights. Rights belonging to the corpora­
tion cannot be invoked by the stockholders
(or directors and officers) even if the latter
owns substantial majority of the shares in
that corporation and rights of the stock­
holders, directors and officers cannot be
9520).
B. CORPORATION CODE OF THE PHILIPPINES
(B.P. BLG. 68, CCP)
1. WHAT IS A CORPORATION?
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.
173
174
REVIEWER ON COMMERCIAL LAW
invoked by the corporation (Stonehill v. Dio~
kno, G.R. No. 19550, June 19, 1967). Exam­
ple: The constitutional right of individuals
against unreasonable searches and seizure
is personal to him and cannot be invoked
by the corporation. Tax exemptions in favor
of the corporation cannot likewise be used
by its stockholders (Manila Gas Corp. v. Col­
PART III — BUSINESS ORGANIZATIONS
(it) Investment purposes. ■
— The Foreign
Investment Act of 1991 (R.A. No. 7042
as amended) gives the definition of a
"Philippine National" —(1)
a corporation organized under
Philippine laws of which 60%
of the capital stock outstanding
and entitled to vote is owned and
held by Filipino citizens;
(2)
a corporation organized abroad
and registered as doing business
in the Philippines under the Cor­
poration Code of which 100% of
the capital stocks entitled to vote
belong to Filipinos.
lector of Internal Revenue, 62 Phil 895 [1936]).
4)
Constitutional rights. Corporations are
entitled to certain constitutional rights.
Example: Right against unreasonable
searches and seizure. It is also considered
a person under the due process clause (Art.
Ill, Sec. 1, Constitution).
However, it is not entitled to certain
constitutional right not only because it is an
artificial being but also because it is a mere*56
------- creature of law. Example: The right against
self~incrimination particularly production
of corporate documents.
5)
6)
Torts. It is liable for tort (PNB v. CA, 83
SCRA 237 [1978]). It is liable when the
act was committed by the officer or agent
under express direction or authority from
the stockholders or members acting as a
body or generally from the directors as the
governing body (Ibid.).
Nationality. Generally, the corporation is
considered a national of the country where
it was incorporated (Place of Incorporation
Test; Sec. 123, CCP).
- (i)
Public Enemy — in times of war, the
nationality of a corporation is deter­
mined by the nationality of the con­
trolling stockholders (Control Test).
175
Note: Where a corporation and its
non-Filipino stockholders own stocks in a
SEC-registered enterprise, at least 60% of
the capital stock outstanding and entitled
to vote of each of both corporations must
be owned and held by citizens of the Philip­
pines and at least 60% of the members of the
Board of Directors of each of both corpora­
tions must be citizens of the Philippines, in
order that the corporation shall be consid­
ered a Philippine national (Sec. 3[a], R.A. No.
7042 as amended by R.A. No. 8179). Example:
X corporation owns 65% of the outstanding
shares, entitled to vote in "A " corporation.
The 70% shares outstanding entitled to vote
in X corporation are owned by Pedro, a Fili­
pino and four of its five directors are also
Filipinos. “A" corporation is a Philippine
national in this example. However, "A"
corporation is not a Philippine national if
70% of the shares outstanding entitled to
vote in X corporation (which owns 65% of
A corporation) belong to aliens. The same
REVIEWER ON COMMERCIAL LAW
conclusion will be reached even if only 55%
of the shares outstanding entitled to vote in.
X belong to aliens but more than 60% of its
directors are aliens (e.g., 4 of 5 directors are
aliens).
7)
What is your understanding: of the "Grand­
father Rule?"
Grandfather Rule is a method of de­
termining the nationality of a corporation
which in turn is owned by another corpora­
tion by breaking down the equity structure
of the shareholders of the corporation. The
percentage of shares held by the second
corporation in the first is multiplied by the
latter's own Filipino equity and the prod­
uct of these percentages is determined to be
the ultimate Filipino ownership of the sub­
sidiary corporation. This applies only if the
Filipino equity is less than 60% of the outstanding capital of a corporation that owns
shares in a partly nationalized enterprise at least 60% must be owned by Philippine
nationals (See Aquino, Philippine Corporate
PART III — BUSINESS ORGANIZATIONS
cannot be imposed. However, the corpora­
tion may be dissolved for violations of one
Corporation Code (Sec. 144).
If the crime is committed by a corpora­
tion or other juridical entity the directors,
officers, employees or other officers thereof
responsible for the offense shall be charged
and penalized for the crime, precisely be­
cause of the nature of the crime and the
penalty therefor. A corporation cannot be
arrested and imprisoned; hence, it cannot
be penalized for a crime punishable by im­
prisonment. However, a law may be passed
to specifically provide that a corporation is
criminally liable. There can be a criminal
statute under which corporation may be
charged and prosecuted for a crime if the
imposable penalty is fine. Even if the stat_____ute...pj£scrib£sdM3tLfinaaiad- imprisonment
as penalty a corporation may be prosecut­
ed and, if found guilty may be fined (Ching
v. Secretary of Justice, G.R. No. 164317, Feb. 6,
2006).
Law Compendium).
b)
Artificial Being
It exists by fiction of law only hence, it is
subject to limitations that are inherent because of
its nature. .
1)
Actions. It can act only through its direc­
tors, officers and employees.
2)
Criminal Liability. Corporations are inca­
pable of intent, hence, they cannot com­
mit felonies that are punishable under the
Revised Penal Code. They cannot commit
crimes that are punishable under special
laws because crimes are personal in nature.
In addition, the penalty of imprisonment
177
3)
Moral Damages. It cannot be awarded in
favor of corporations because they do not
have feelings and mental state. They may
not even claim moral damages for be­
smirched reputation. Mental suffering can
be experienced only by one having a ner­
vous system and it flows from real ills, sor­
rows, and griefs of life— all of which cannot
be suffered by an artificial person (National
Power Corporation v. Philipp Brothers Oceanic,
Inc., G.R. No. 126204, Nov. 20, 2001; See dis­
senting opinion for the contrary view).
The Supreme Court clarified in ABS~
CBN Broadcasting Corporation v. Honorable
178
REVIEWER ON COMMERCIAL LAV/
Court o f Appeals (C.R, No. 128690, Jan. 21,
1999) that moral damages are awarded to
enable the injured party to obtain means,
diversion, or amusements that will serve to
obviate the moral suffering he has under- ;
gone. The statement in People v. Manero and
Mambulao Lumber Co. v. PNB that a corpora­
tion may recover moral damages if it "has
a good reputation that is debased, resulting
in social humiliation" is an obiter dictum.
However, the Supreme Court ruled
in Pilipinas Broadcasting Network, Inc. v. Ago
Medical and Educational Center (G.Rt No.
141994, Jan. 17, 2005) that a corporation
can recover moral damages under Article
2219(7) if it was the victim of defamation.
c)
What do you understand by the doctrine of
piercing the veil of corporate entity?
-----------------------------The doctrine that a corporation is a legal----entity distinct from the persons composing it. It
is a theory introduced for the purposes of conve­
nience and to serve the ends of justice. But when
the veil of corporate fiction is used as a shield to
perpetuate fraud, to defeat public convenience, justify
wrong or defend crime, this fiction shall be disre­
garded and the individuals composing it will
be treated identically. This is a judicial function
(Cruz v. Dalisay, AM No. R-181-P, July 31,1987).
Also, the corporate veil cannot be used to
shield otherwise blatant violation of the prohi­
bition against forum shopping (First Philippine
International Bank v. CA, G.R. No. 115849, Jan. 4,
1996).
1)
Obligations of Directors, Officers, etc.
Although there are instances when
a corporation may be held liable for the
PART m ...BUE1NE5;> ORvMTAVATICAN
179
obligations of stockholders or officer under
the doctrine of piercing the veil of corporate
fiction, in some instances, the doctrine
cannot be used to support an action for the
enforcement of the personal obligations of
the directors, officers and incorporators.
In Francisco Motors v. Court o f Appeals
(309 SCRA 72), a lawyer was hired by the
directors and officers of a corporation (all
members of the same family) to represent
them in an intestate proceedings. Later, the
said lawyer sought to recover the fees for
such services in a counterclaim against the
corporation. The Supreme Court rejected
this move ruling that the doctrine cannot
be applied to make the corporation liable
for the personal obligations of directors,
officers or shareholders. According to
the High Court, it is far fetched to allege
that the corporation is protecting fraud or
promoting injustice. It was also pointed out
that the doctrine is normally invoked to make
the directors, officers and shareholders liable for
the obligations of the corporation. What the
lawyer sought was the reverse.
However, in Bank of America NT &
SA, et al. v. Court of Appeals, et al. (G.R. No.
120135, March 31,2003), the Supreme Court
allowed the filing of a complaint by the
stockholders of a corporation asking the
petitioner bank to render an accounting of
the income of the vessels that are registered
in the name of the said corporations (which
the said stockholders wholly-owned). The
Supreme Court ruled that such course
would preclude multiplicity of suits and
would result in the definitive determina­
tion and termination of the dispute.
180
REVIEWER ON COMMERCIAL LAW
2)
PART ID — BUSINESS ORGANIZATIONS
(viii) The parent corporation uses the prop­
erty of the subsidiary as its own.
What are the circumstances that may be
considered to -justify the application of the
doctrine to make the parent corporation li­
able for the obligations of Its subsidiary?
(ix) The directors or executives of the sub­
Any a combination of or all of the
following may be considered (Philippine
National Bank v. Ritratto Group, Inc., G.R. No.
142616, July 31, 2001, cited in MR Holdings
Ltd. v. Sheriff Carlos P. Bajar, G.R. No. 138104,
April 11, 2002):
(i)
The parent corporation owns all or
most of the capital stock of the subsid­
iary.
(ii)
The parent and subsidiary corpora­
tions have common directors or offi­
cers.
181
.
(x)
3)
sidiary do not act independently in the
interest of the subsidiary but take their
orders from the parent corporation.
The formal legal requirements of the
subsidiary are not observed.
Examples of cases when doctrine was
applied.
The separate personality may be disre­
garded if such personality is:
(i)
used to evade obligations to employees
or used as a pretext to dismiss emplo­
yees;
(iii) The parent company finances the sub­
sidiary
(ii) used to evade lawful obligations or a
money judgment;
(iv) The parent company subscribed to all
the capital stock of the subsidiary or
otherwise causes its incorporation.
(iii) dominated by officers or stockholders
or other person or entity to the extent
that the corporation is a mere alter
ego, adjunct, or business conduit;
(v)
The subsidiary has grossly inadequate
capital.
(vi) The subsidiary has substantially no
business except with the parent cor­
poration or no assets except those con­
veyed to or by the parent corporation.
(vii) The papers of the parent corporation
or in the statements of its officers, the
subsidiary is described as a depart­
ment or division of the parent cor­
poration, or its business or financial
' responsibility is referred to as the par­
ent corporation's own.
(iv) used to defeat public convenience;
(v)
used to justify wrong;
(vi) used to protect fraud;
(vii) used to defend crime;
(viii) used to confuse legitimate legal or ju­
dicial issues; or
(ix) used to perpetrate deception or other­
wise circumvent the law (Land Bank o f
the Philippines v. CA, G.R. No. 127181,
Sept. 4, 2001; Luisiio Padilla v. CA, G.R.
No. 123893, Nov. 2 2 , 2001).
182
REVIEWER ON COMMERCIAL LAW
4|
PAILf HI — BUSINESS ORGANIZATIONS
Is ownership of substantial portion o
the outstanding capital in a corpor.
enough justification to apply the docfc
the corporate entity as to this transac­
tion had at the time no separate mind,
will or existence of its own;
NO. Mere ownership by a s.
?
stockholder or by another corporation of alor nearly all of the capital stock of the c-.
poration does not justify the application o.'
the doctrine. There must be other circum­
stances that must be present (Francisco t
(ii)
Mejia, G.R. No. 141617, Aug. 14, 2001; PNB
v. Ritratto Group, Inc., G.R. No. 142616, juiu
31, 2001).
(iii) The said control and breach of duty
must have proximately caused the in­
jury or unjust loss complained of (PNB
Thus, the mere fact that a corporator
owns all of the stocks of another corpo­
ration, taken alone, is not sufficient 10
justify their being treated as one entity. If
the subsidiary is used to perform legitii nate
functions, a subsidiary's separate existence
shall be respected and the liability of the*5
------- parent company as well as the subskhaia—
will be confined to those arising from their
respective business (MR Holdings Ltd. v.
v. Andrada Electric & Engineering Com­
pany, G.R. No. 142936, April 17, 2002).
Thus, in one case, one corporation
was considered a mere alter ego or
adjunct, or instrumentality of the
____________________ other because the s tockholders are the...
same, the manager (and the person in
control of operations) is the same, they
have the same customers, they hold
office in the same building owned
by the majority stockholders, and
the business operations of the two
corporations are merged. Hence, the
adjunct corporation's obligations are
considered the obligations of the other
corporation and the latter's properties
were made to answer for the said
obligations (Estelita Burgos Lipat v.
Sheriff Carlos P. Bajar, supra).
The general rule will be followed ever
if the new corporation was the result of a
"spin-off" of a former division of the parent
company (San Miguel Corp. Employees Union
v. Confessor, 262 SCRA 81 '[1996]).
5)
What are the elements that must be pre­
sent to justify the piercing of the veil ol
corporate fiction on the ground that the
corporation is a mere alter ego?
(i)
Control — not mere stock control but
complete domination — not only ol
finances, hut of policy and business
practice in respect to the transaction
attacked and must have been such.that
Such control must have been used by
the defendant to commit a fraud or
wrong to perpetuate the violation of a
statutory or other positive legal breach
of duty, or a dishonest and an unjust
act in contravention of the plaintiff's
legal right; and
Pacific Banking Corporation, et a l, G.R.
No. 142435, April 30, 2003).
2.02. CREATED BY OPERATION OF LAW
j
a)
CONCESSION THEORY
'
It is a principle in the creation of corpora­
tions, under which a corporation is an artifi-
REVIEWER ON COMMERCIAL LAVE
PART III — BUSINESS ORGANIZATIONS
cial creature without any existence until it has
received the imprimatur of the State acting ac­
cording to law, through the SEC. The life of the
corporation is a concession made by the State.
b)
the appropriate Articles of Incorporation
with the Securities and Exchange Commis­
sion; the life of the corporations starts from
the issuance of the Certificate of Incorpora­
tion.
FRANCHISES OF CORPORATION
1)
2)
Primary, corporate or general franchises —
the franchise to exist as a corporation. The
primary franchise of a corporation, that is,
the right to exist as such, is vested 'in the
individuals who compose the corporation
and not in the corporation itself' (JRS Busi­
ness Corp. v. Imperial Insurance, Inc., 11 SCRA
634 [19641).
(i)
2)
cannot be transferred without approv­
al of Congress.
Special or secondary franchises —■certain
rights and privileges conferred upon exist­
ing corporations, such as the right to use
the streets of a municipality to lay pipes
of tracks, erect poles or string wires, or the
right to engage in delivery service (Ibid.).
(i)
2.04. POWERS, ATTRIBUTES AND PROPERTIES
_________ a)
c)
HOW ARE THEY CREATED
1)
General Law — private corporations are
generally created under the provisions of
the Corporation Code. This is done by filing
Theory of Special Capacities/Limited Capacity
Doctrine
No corporation, under this Code, shall pos­
sess or exercise any corporate powers, except
those conferred by law, its Articles of Incorpo­
ration, those implied from express powers and
those as are necessary or incidental to the exer­
cise of the powers so conferred. The corpora­
tion's capacity is limited to such express, implied
and incidental powers.
b)
(ii) is subject to levy and sale on execution
together and including all the proper­
ty necessary for the enjoyment thereof.
Special Law — public corporations are
created through special laws. Private
corporations cannot be created by special
laws. Exceptions: Government-owned or
controlled corporations which are actually
private corporations.
2.03. RIGHT OF SUCCESSION — capacity to have con­
tinuity of existence despite the changes on the per­
sons who compose it. Thus, the personality continues
despite the change of stockholders, members, board
members or officers.
the special or secondary franchises of a
corporation are vested in the corpora­
tion and may ordinarily be conveyed
or mortgaged under a general power
granted to a corporation to dispose of
its property, except such special or sec­
ondary franchises as are charged, with
a public use.
185
If the act of the corporation is not one of those
express, implied or incidental powers, the act is
ultra vires.
3. CLASSIFICATIONS AND DISTINCTIONS
3.01. What are the classes of corporation?
a)
As to organizers;
1)
public ~~ by State only; and
■
PART III — BUSINESS ORGANIZATIONS
REVIEWER ON COcvIMEROAL LAV-7
2)
strength of such appearance cannot be permit­
ted to deny its existence in an action under said
contract (Sec, 21, CCP),
private ■
— by private persons alone or with
the State.
b)
As to functions:
1)
Note: This is actually not a real corporation.
public — government of a portion of the
State; and
1)
Those who assume to act as a corporation
knowing it to be without authority to do so
shall be liable as general partners (meaning
up to th e ir personal properties). Those who
were not aware of the defect are liable only
up to their investment.
2)
The Supreme Court ruled in one case that
all those who d e riv e d benefit from the
tra n s a c tio n made by the ostensible corpo­
ration, d e s p ite knowledge of its legal de­
fects, may be held liable for contracts they
impliedly assented to or took advantage
of (him v. Philippine Fishing Gear Industries,
Inc., 317 SCRA 728 [1999]).________________
2) . private — usually for profit-making func­
tions.
c)
As to governing law:
1)
public — Special Laws and Local Govern­
ment Code; and
2) ■ private — Law on Private Corporations.
d)
As to legal status.
1)
de jure corporation — corporation orga­
nized in accordance with requirements of
law;
2)
de fa c to corporation — a corporation where
there exists a flaw in its incorporation. The
requisites for its existence are:
(i)
The existence of a valid law under
which it may be incorporated; and
(ii)
An attempt in good faith to incorpo■rate; -
(iii) Use of corporate powers.
N ote: Issuance of certificate of in­
corporation by the SEC is a minimum
requirement of continued good faith.
If there is substantial compliance,
de jure corporation is resulted; only
colorable compliance results in de facto
corporation.
e)
corporation by estoppel — group of persons
which holds itself out as a corporation and en­
ters into a contract with a third person on the
f)
corporation b y prescription — a corporation
that was not fo rm a lly organized as such but has
been d u ly r e c o g n iz e d b y im m e m o ria l usage as a
corporation, with rig h ts and duties maintainable
at law. Example: Roman Catholic Church.
g)
As to existence of stocks:
1)
Stock corporation — a corporation in
which capital s to c k is divided into shares
an d is authorized to distribute to h o ld e rs
thereof of such shares dividends or allot­
ments of the surplus profits on the basis o f
the sh a re s h e ld
(Sec. 3, CCP).
In Collector of Internal Revenue v. Club
Filipino de Cebu (5 SCRA 321 [1962]), the
Supreme Court ruled that even if there is a
statement of capital stock, the corporation
is sMITnot a stock corporation if dividends
REVIEWER ON COMMERCIAL LAW
188
PART III — BUSINESS ORGANIZATIONS
are not supposed to be declared, that is,
k)
there is no distribution of retained earning,
2)
h)
Domestic
corporation
2)
3.02. DISTINGUISHED FROM PARTNERSHIP
a)
1)
Close Corporation________________________
2)
Special Corporation
3)
Educational Corporation
a.
* b.
b)
_____ c)
As to powers. — A corporation is more restricted in its powers because of its limited personal­
ity while a partnership is subject only to what
may be agreed upon by the partners.
d)
Authority of those who compose. — There is
mutual agency in partnership and each general
partner can represent and bind the partnership
while stockholders are not agents of the corpora­
tion in the absence of express authority.
e)
Transfer of interest. — Corporate shares are
freely transferable without the consent of other
Religious Societies
A corporation is deemed to be "going-pub­
lic" when it decides to list its shares in the stock
exchange. This includes corporations that will
make initial public offering of its shares.
. A corporation is said to be "going private"
when it would restrict the shareholders to a cer­
tain group. In a sense, this also includes close or
closely held corporation.
As to the number of organizers. — Even two
persons may form a partnership while a corpo­
ration needs at least five (5) incorporators.
Corporation Sole
Corporations going public vs. Corporations go­
ing private
As to manner of creation. — Partnership is
created by mere agreement while the existence
of the corporation commences only from the
issuance of a Certificate of Incorporation by the
SEC or in proper cases, passage of a special law.
Other Corporations:
4 ) . Religious Corporation
j)
fee], R.A. No. 9856).
Foreign Corporation — a corporation
formed, organized or e x is tin g under any
laws other than th o s e of the Philippines
and whose laws allow Filipino citizens and
corporation to do b u s in e s s in its own coun­
try or state (Sec. 123, CCP).
i)
pines and the rules and regulations promulgated
by the SEC principally for the purpose of own­
ing income-generating real estate assets. (Sec. 3
—■ corporation
formed, organized or existing under Philip­
pine laws.
Real Estate Investment Trust (REIT)
A stock corporation established in accor­
dance with the Corporation Code of the Philip­
Non-stock corporation — a corporation
which does not issue stocks and does not
distribute dividends to their members.
As to laws of incorporation:
1)
189
stockholders (unless there is a stipulation) while
interest in the partnership cannot be transferred
without the consent of the other partners.
£)
Succession. — There is no right of succession in
partnership as death of a general partner dis­
solves the partnership.
REVIEWER ON COMMERCIAL LAW
190
3.03. De F acto Corporations vs. D e Jure Corporations
DEJURE
DE FACTO
1. one created in strict or ' 1. one which actually
exists for all practical
substantial conformity
with the statutory
purposes as a
corporation but which
requirements for
has no legal right to
incorporation.
corporate existence as
against the State.
2.
right to exist cannot be
successfully attacked
even in a direct
proceeding by the
- State..
2.
right to exist cannot be
successfully attacked
even in a direct
proceeding by the
State.
PROBLEMS:*2
■h------ A corporation was created by a special law. Later,
the law creating it was declared invalid. May such
corporation claim to be a de facto corporation?
Ac
2.
NO. The corporation is not a de facto corporation
because the requisites for its existence are absent.
There is no valid law under which it 'was organized
and there would be no continuity of good faith.
PART III — BUSINESS ORGANIZATIONS
on installment basis. A Corp. paid the downpayment
and Taktak Corp. issued the corresponding receipt. To
his chagrin, Mamuhunan discovered that the Articles
of Incorporation had not been filed by his friends
on that date so he hurriedly attended to the matter.
No sooner had the Certificate of Incorporation been
issued by the SEC, A Corp. became bankrupt after
three months.
Upon being sued by Taktak Corporation in his
personal capacity, Mamuhunan raised among its
defenses the doctrines of de facto corporations and
corporations by estoppel.
Can the two defenses be validly raised? Explain.
NO. The two defenses cannot be raised because they
are not available to Mamuhunan. In the first, there
was no de facto corporation because the Articles of
Incorporation was not filed with the SEC. There
can be no attempt in good faith to incorporate if no
Articles of Incorporation was filed with the SEC. In
addition, Mamuhunan cannot raise the defense that
his corporation is a de facto corporation to defeat a
claim. Until the personality is attacked by the State,
the de facto corporation can continue as a corporation.
-This is- specially -true if the corporation that
was created was a private corporation which was
not a government-owned or controlled corporation.
Private corporations can only be created by special
law if it is government-owned or controlled.
The allegation that there was a corporation by
estoppel may be correct but the same is not a defense
against claimants. The concept of corporation by
estoppel is precisely for the purpose of protecting
third persons or creditors. The defense is established
in favor of persons with whom the corporation deals
but not in favor of those who represent themselves as
such corporation although it is not, like Mamuhunan.
Mamuhunan was invited by his friends to invest in
A Corp., a newly organized firm engaged in money
market and financing operation. Because of his heavy
investments, Mamuhunan became the firm's president
and, as such, purchased a big number of computers,
typewriters and other equipment from Taktak Corp.
However, Mamuhunan can raise his good faith
as a defense and claim that his liability is only up to the
extent of his investment. Section 21 of the Corporation
Code makes liable as general partner only those
who assume to act as a corporation knowing it to be
without authority,
REVIEWER ON COMMERCIAL LAW
192
PART III — BUSINESS ORGANIZATIONS
4, ADVANTAGES AND DISADVANTAGES
'
2)
At least five (5) but not more than fifteen
(15);
3)
They must be of legal age;
4)
Majority must be residents of the Philip­
pines; and
5)
Each must own or subscribe to at least one
4.01. ADVANTAGES
a)
The capacity to act as a legal unit;
b)
Limitation of, or exemption from, individual
liability of shareholders;
c)
Continuity of existence;
d)
Transferability of shares;
e)
Centralized management of board of directors;
share.
b)
CORPORATORS — all the stockholders and
members of a corporation including the incor­
porators who are still stockholders.
c)
STOCKHOLDERS AND MEMBERS — stock­
holders are persons who hold or own shares in a
stock corporation while members are those who
compose the non-stock corporation.
d)
DIRECTORS AND TRUSTEES — the Board of
Directors is the governing body in a stock corpo­
ration while Board of Trustees is the governing
body in a non-stock corporation. They exercise
the powers of the corporation.
e)
CORPORATE OFFICERS — they are the offi­
and : -
f)
Standardized method of organization, and
finance (Salonga, Phil Law on Private Corporations,
3rd ed., p. 9).
4.02.
DISADVANTAGES
a)
More complicated in formation and manage­
ment;
b)
Higher cost of formation and operation;
c)
Lack of personal element;
d)
Greater governmental control and regulation;
e)
Management and control are separate from
ownership; and
f)
Stockholders have little voice in the conduct of
business (De Leon, The Corporation Code o f the
Phil, Annotated, 2002 ed., pp. 48-49).
5. COMPONENTS OF A CORPORATION
5.01. a)
INCORPORATORS — those mentioned in the
articles of incorporation as originally forming
and composing the corporation, having signed
the articles and acknowledged the same before
a notary public. They have no powers beyond
those vested in them by the statute.
1)
They must be natural persons;
193
cers who are identified as such in the Corpora­
tion Code, the Articles of Incorporation or the
By-laws of the corporation.
f)
PROMOTER •— a self-constituted organizer
who finds an enterprise or venture and helps
to attract investors, forms a corporation and
launches it in business, all with a view to pro­
motion profits (Salonga, p. 71).
1)
The corporation is not bound by the con­
tract entered into by the promoter before
incorporation unless the contract is ratified
(Cagayan Fishing Dev. Co., Inc. v. Sandiko, 65
Phil 223).
2)
The promoter is personally liable for con­
tracts or agreements with third persons con-
REVIEWER ON COMMERCIAL LAW
PART III — BUSINESS ORGANIZATIONS
tracted in behalf of the future corporation if
the corporation does not ratify the same or
unless the agreement was expressly made
subject to such approval or ratification,
3)
1)
The promoter should remit to the corpora­
tion profits that he derived that properly
DIFFERENTIATE
CORPORATORS
2. Do not cease to be
(ii)
Retail trade enterprises with paid-up
(iii)
FROM
Cease to be such if
they are no longer
stockholders.
3. No restriction as to
number.
Small-scale mining (Sec. 3, R.A. No.
7076).
• (v)
Utilization of natural resources (Art.
XII, Sec. 2, Constitution).
1. Stockholder of
stock corporation
or member of non­
stock corporation.
2.
Private security agencies (Sec. 4, R.A.
No. 5487).
CORPORATORS
such.
3. Number is limited
from 5 to 15.
Mass Media except recording (Art
XVI, Sec, 11, Constitution).
(iv)
INCORPORATORS
Articles. . •
(i)
(Sec. 5, R.A. No. 8762).
INCORPORATORS
1. Signatory to
Where no foreign stockholder is allowed:
capital of less than US$2.5 Million
pertains to the corporation.
g)
195
(vi)
Cockpits (Sec. 5, P.D. No. 449).
(vii) Manufacture, repair, stockpiling and/
or distribution of nuclear weapons
(Art II, Sec. 8, Constitution).
(viii) Manufacture of firecrackers and
___________other pyrotechnic devices-XSgcz-A.
R.A. No. 7183).
2)
Up to twenty percent (20%) foreign equity.
Private radio communications network
4. Must have
contractual
capacity.
4.
May be such
through his
guardian.
(R.A. No. 3846).
3)
Up to twenty-five percent (25%) foreign
equity
(!)
5.02. FOREIGN STOCKHOLDERS
a)
b)
Private recruitment, whether for local
or overseas, employment (Art. 27, P.D.
No. 442).
Can all the stockholders in a corporation be
foreigners?
(ii)
YES, except in fully or partly nationalized
corporations. For example, a manufacturer that
exports all its products can be wholly-owned by
foreigners.
(iii) Construction of defense-related struc­
tures (Sec. 1, C.A. 541).
What are the fully or partly nationalized corpo­
rations?
4)
Construction and repair of locally
funded works (Sec. 1, C.A. 541).
Up to forty percent (40%) foreign equity
(i)
Exploration, development and utiliza­
tion of natural resources (Art. XII, Sec.
2, Constitution),
PART ID — BUSINESS ORGANIZATIONS
REVIEWER ON COMMERCIAL LAW
(it)
Realty companies and other corpora­
tions that own private lands (Art XII,
Sec. 7, Constitution).
(ill) Operation and management of public
utilities (Art. XII, Sec. 11, Constitution).
(iv) Culture, production, milling, process­
ing, trading except retail of rice and
com and by-products (Sec. 5, P.D. No.
194; Sec. 15, R.A. No. 8762).
(v)
Adjustment companies (Sec. 323, P.D.
No. 612).
(vi) Sauna and steam bath houses, mas­
sage clinics and similar activities (R.A.
No. 7042).
(vii) Domestic market enterprises with
paid-in capital stock of less than
US$200,000.00. However, the threshold paid-in capital is US$100,000.00
if enterprise involves advanced tech­
nology or they employ at least 50 di­
rect employees (Sec. 8, R.A. No. 7042).
(Thus, it can be 100% owned by for­
eigners if the corporation is engaged
entirely in export.).
5)
6.01. THE ARTICLES OF INCORPORATION
a)
m a t are the contents of the Articles of Incor­
poration prescribed under Sec.. 14 of the Corpo­
ration Code?
1) name of corporation;
2 ) purpose/s, indicating the primary and
secondary purposes;
3) place of principal office;
4) term which shall not be more than 50 years;
5) names, citizenship and residences of incor­
porators;
6) number, names, citizenship and residences
of directors;
7) in stock corporation, amount of authorized
capital stock, number of shares;
___________ 8) in par value stock corporations, the par
value of each share;
9) number of shares and amounts of subscrip­
tion of subscribers which shall not be less
than 25% of Authorized Capital Stock;
10) amount paid by each subscriber on their
subscription, which shall not be less than
25% of subscribed capital and shall not be
less than P5,000.00;
Up to sixty percent (60%) foreign equity
(i)
Financing companies (Sec. 6, R.A. No.
5980, as amended by R.A. No. 8556).
(ii)
Investment houses (Sec. 5, P. D. No. 129,
as amended by R.A. No. 8366).6
6. FORMATION OF A CORPORATION
The life of a corporation commences from the issuance
of the Certificate of Registration by the SEC upon filing of
the Articles of Incorporation and other documents.
11)
name of treasurer elected by subscribers;
and
12) if the corporation engages in a national­
ized industry, a statement that no transfer
of stock will be allowed if it will reduce the
. stock ownership, of Filipinos to a percent­
age below the required legal minimum.
m
198
REVIEWER ON COMMERCIAL LAW
b)
PART III — BUSINESS ORGANIZATIONS
What documents should be filed with the SBC
the name and (b) the name is either of three
(3) mentioned above (industrial Refractories
Corp. o f the Phils, v. Refractories Corp. of the
Philippines, G.R. No. 122174, Oct. 3, 2002).
for purposes of securing a certificate of regis­
tration of a stock corporation?
c)
1)
Articles of Incorporation.
2)
Treasurer's Affidavit certifying that 25% of
the total authorized capital stocks has been
subscribed and at least 25% of such have
been fully paid in cash or property.
3)
Bank certificate covering the paid-up capi­
tal.
4)
Letter authority authorizing the SEC to
examine the bank deposit and other cor­
porate books and records to determine the
existence of paid-up capital.
5)
Undertaking to change the corporate name
in case there is another person or entity
with same or similar name that was previ­
ously registered.
6)
Certificate of authority from proper gov­
ernment agency whenever appropriate like
BSP for banks and Insurance Commission
for insurance corporations.
The corporation chooses its name at its peril;
and the use of a name similar to one adopted by
another corporation, whether a business or a
non-profit organization, if misleading or likely
to injure in the exercise of its corporate functions,
regardless of intent, may be prevented by the
corporation having a prior right, by a suit for
injunction to prevent its use. It may likewise be
directed to change its corporate name (Ang Mga
Kaanib sa Iglesia ng Dios Kay Kristo Hesus, H.S.K.
sa Bansang Pilipinas, Inc. v. Iglesia ng Dios Kay
Cristo Jesus, Haligi at Suhay ng Katotohanan, G.R.
No. 137592, Dec. 12, 2001, where petitioner was
ordered to change its name for being similar to the
respondent's name).
d)
The principal place of business may
determine the venue of court cases involving
corporations. It may also determine if service of
summons and notices was properly made (Sy
What corporate name cannot be used?
1)
Names w hich. are identical, deceptively
or confusingly similar to that of any ex­
v. Tyson Enterprises, Inc., 119 SCRA 367 [1982]).
(Note: A specific address is now required; Metro
Manila is no longer allowed, SEC Circular No. 3,
Series o f2006).
isting corporation including internation­
ally known foreign corporation though not
used in the Philippines;
2)
Name already protected by law;
3)
Name which is contrary to law, morals or
public policy.
- - - " ' N otes: A corporation which seeks to
prevent another from using its name must
show that it (a) acquired prior right to use
What is the importance/significance of the prin­
cipal place of business stated in the Articles of
Incorporation?
e)
What is the maximum term of a corporation?
Can it be extended?
A corporation has a maximum term of fifty
(50) years. It may be extended for a period not
exceeding fifty (50) years in any single instance.
However, no extension can be made earlier than
PART III ~ BUSINESS ORGANIZATIONS
REVIEWER ON COMMERCIAL LAW
five (5) years prior to the expiration of the term
shall be located in Region III, in such municipality
therein as its Board of Directors may designate," c)
"Seventh Article. The capital stock of the corporation
is One Million Pesos (PI,000,000.00), Philippine
Currency."
(Sec. 11, CCP).
£)
Define the following terms: (1) authorized
capital stock; (2) subscribed capital stock; (3)
paid-up capital; (4) outstanding capital; and (5)
capital. . . . . . . .
1)
Authorized Capital Stock —■the amount
fixed in the articles of incorporation to be
subscribed and paid by the stockholders
of the corporation (SEC Opinion, Aug. 11,
What are your comments and suggested changes
to the proposed articles?
A:
a)
The First Article does not comply with the SEC
Memorandum Circular No. 5 dated July 17,2008,
which requires the corporate name to contain the
word "corporation" or its abbreviation "Corp.,"
Incorporated or "Inc." Hence, the name should
be either be "Toho Marketing Corporation"
or "Toho Marketing Company, Incorporated,"
"Toho Marketing Corp.," "Toho Marketing, Inc."
b)
The Third Article should indicate the specific
address in the Philippines, and not merely the
region (SEC Circular No. 3, Series o f2006),
1997).
2)
Subscribed"Capital"— that portion of the
authorized capital stock that is covered by
subscription agreements whether fully paid
or not.
3)
Paid-Up Capital — the portion of the
authorized capital stock which has been
subscribed and actually paid (MSCI-
NACUSIP Local Chapter v. National Wages*45
and Productivity Commission, ZbU SLKA l / J
[1997]).
4)
Outstanding Capital Stock — the total
shares of stock issued to subscribers or
stockholders, whether or not fully or par­
tially paid except treasury shares so long as
there is a binding subscription agreement
(Sec. 137, CCP).
5)
1.
— — -e)—
of shares into which the capital stock is divided,
and the par value if any as well as those without
par value.
6.02. AMENDMENT OF ARTICLES OF INCORPORA­
TION
a)
Procedure. Majority vote of directors or trustees,
and written assent of the stockholders represent­
ing 2/3 of outstanding capital or 2 /3 of mem­
bers of non-stock corporations.
b)
When effective. Upon approval of SEC or if not
acted upon by , SEC within six (6) months from
the date of filing provided that delay cannot be
attributed to the corporation.
Capital — properties and assets of the cor­
poration that are used for its business or
operation.
PROBLEM:
The Articles of Incorporation to be registered in the
Securities and Exchange Commission contained the
following provisions: a) "First Article. The name of the
corporation shall be Toho Marketing Company." b)
"Third Article. The principal office of the corporation
201
of statutes amending the
Corporation-Code or special laws may result in
the amendment of the Articles of Incorporation
202
PART III — BUSINESS ORGANIZATIONS
REVIEWER ON COMMERCIAL LAW
provided th a t
n o v e ste d
o f In c o r p o r a tio n prevails (Loyola Grand Villas
Homeowners [South] Asso., Inc. v. CA, 276 SCRA
681 [1997]).
right is impaired (Sec,
145, CCP).
6.03.
WHEN CAN SEC SUSPEND OR CANCEL CERTI­
FICATE OF REGISTRATION (Sec. 6[L], P.D. No.
c)
It must be reasonable and not arbitrary o r
oppressive.
d)
It must not disturb vested rights, impair contract
or property rights of stockholders or members
or create obligations unknown to law (See Thom­
son v. CA, 298 SCRA 280 [1998]), where the Court
disallowed absolute restriction on the right to
transfer and Salafranca v. Philamlife (Pamplona),
300 SCRA 469 (1998), where the Court declared
that amended By-laws should not undermine
the security of tenure of an employee by declar­
ing the position non-existent.
9&2-A)
a)
fraud in procuring registration;
b)
serious misrepresentation as to objectives of cor­
poration;
c)
refusal to comply with lawful order of SEC;
d)
continuous inoperation for at le a s t 5 years;
e)
failure to file by-laws within required period;
f)
failure to file reports; and
g)
other s im ila r grounds.
7.03. ADOPTION AND AMENDMENT
7. BY-LAWS
7.01.--BY-LAWS —- relatively permanent and continuing
-------------- rules of action adopted by the corporation for its own
government and that of the individuals composing
it and those having the direction, management
and control of its affairs, in whole or in part, in th e
management and control of its affairs and activities
(China Banking Corporation v. CA, 270 SCRA 503 [1997];
8 Fletcher, Sec. 4166).
7.02. REQUISITES
a)
OF VALID BY-LAWS
It must be consistent with Corporation Code,
other pertinent laws and regulations ( See Fleish-
cher v. Botica Nolasco, 47 Phil. 583; Barretto v. La
Previsora Filipina, 59 Phil. 212). Example: A p r o v i­
sion in the By-laws granting a permanent seat
in the Board of Directors is contrary to the Code
(Grace Christian High School v. CA, 281 SCRA 133
[1997]).
b)
203
It must be consistent with the Articles of Incor­
poration. Hence, in case of conflict, the Articles
a)
Original By-laws:
________ ,__ 1}__ may accompany the Articles of Incorporation and SEC will approve it together with
the Articles; or
2)
filed within one (1) month from notice of
issuance of certificate of incorporation,
in which case it must be: (i) approved by
stockholders constituting at least a major­
ity of outstanding capital and (ii) a copy
(signed by approving stockholders or
members, certified by majority of directors
or trustees, and countersigned by corporate
secretary) must be filed with the SEC.
N ote: Non-filing within one (1) month
is a ground to forfeit franchise and will
not result in automatic dissolution (Loyola
Grand Villas [South] Homeowners v. CA, 276
SCRA 681 [1997]).
REVIEWER ON COMMERCIAL LAW
h)
Amendment. May be made by the (1) Stockhold­
ers together with the Board, or (2) by the Board
only,
1)
from or necessary for the exercise of the express
powers.
:
Stockholders together with Board: majority
of board plus majority of outstanding capi­
c)
tal stock.
2)
a)
As to the Corporation and its components —
binding not only upon the corporation but also
on its stockholder, members and those having
direction, management and control of its affairs.
b)
As to Third Persons — not binding unless there
is actual knowledge. Third persons are not even
bound to investigate the content because they
are not bound to know the By-laws which are
merely provisions for the government of a cor™
__________ poration. and, notice to them will not be presumed (China Banking Corp. v. CA, 270 SCRA 503
[1997]).
Examples: Provisions of the By-laws on
delinquency sale shall not be binding on a
pledgee (Ibid.). In PMI Colleges v. NLRC (277
SCRA 462 [1997]), the provision in the By­
laws enumerating the contract signatory is not
binding on third persons who signed a contract
with the corporation as represented by the
Chairman who is not one of those enumerated.
POWERS OF A CORPORATION
8.01. KINDS
a)
b)
Note: There are express powers that are
By the Board as delegated by 2 /3 of out­
standing capital stock or 2 /3 of members.
7.04. BINDING EFFECT OF PROVISIONS OF BY-LAWS
Incidental Powers — those that are incidental to
the existence ,of the corporation.
incidental powers like the power to acquire
properties.
8.02. EXPRESS'POWERS UNDER THE CORPORATION
■ CODE aj
GENERAL POWERS (Sec. 36, CCP)
1) sue and be sued in its corporate name;
2) succession;
3) adopt and use a corporate seal;
4) amend Articles of Incorporation;
5) adopt, amend or repeal by -laws;
6) for stock corporations — issue stocks to
subscribers and to sell treasury stocks; for
non-stock corporations — admit members;
7) purchase, receive, take, or grant, hold, con­
vey, sell, lease, pledge, mortgage and other­
wise deal with real and personal property,
pursuant to its lawful business;
8) enter into merger or consolidation;
9) to make reasonable donations for public
welfare, hospital, charitable, cultural, scien­
tific, civil or similar purposes. Prohibited: for
partisan political activity;
Express — those expressly authorized by the
Corporation - Code and other laws, and its
Articles of Incorporation or Charter.
10):: to establish pension, retirement and other
plans for the benefit of directors, trustees,
Implied Powers — those that can be inferred
.11) other powers essential or necessary to carry
out its purposes.
officers and employees; and
PART III — BUSINESS ORGANIZATIONS
REVIEWER ON COMMERCIAL LAW
206
b)
SPECIFIC POWERS (S ec, 3 7 to
c)
S ec, 44, C C P )
Effects of Ultra Vires Act
1)
1) Power to extend or shorten corporate term
2) ■ executory contracts — no enforcement
even at the suit of either party (void and
unenforceable).
2) Increase / Decrease Corporate Stock (Sec. 38,
CCP);
3) Incur or create Bonded Indebtedness (Sec.
38, CCP);
3)
4) Deny pre-emptive right (Sec. 39, CCP);
5) Sell, dispose, lease, encumber all or sub­
stantially all of corporate assets (Sec. 40,
d)
CCP);
CCP);
7) Invest in : another corporation, business
other than the primary purpose (Sec. 42,
CCP);
8) Declare dividends (Sec. 43, CCP);
9) Enter into management contract (Sec. 44,
CCP); and
10) Amend the articles of incorporation (Sec.
e)
16, CCP).
:
Realty & Dev. v. Dieselman Freight Services, G.R.
No. 111448, Jan. 16,2002).
which a corporation is created as defined by the
law of its organization and therefore beyond the
power conferred upon it by law (Atrium Manage­
ment Corporation v. CA, G.R. No. 109491, Feb. 28,
2001).
former is merely voidable which may be en­
forced by performance, ratification, or estoppel,
while the latter is void and cannot be validated
(Ibid.).
Distinguished from Unauthorized Acts
N
5
Ultra vires acts of the corporation — An ultra
vires act is one committed outside the object for
Ultra vires act vs. illegal acts
The term ultra
vires is distinguished from an illegal act for the
Distinguished from Acts that do not comply
with-formalities
The act may be within the powers of the
corporation but not within the powers of the
particular officer. The latter is not an ultra vires
act of the corporation but is sometimes referred
to as an ultra vires act of the officer. The law on
agency applies. For instance, the authority of the
agent must be in writing in a sale of land through
an agent under Article 1874 of the Civil Code,
otherwise the sale shall be void. Hence, if there is
no written authority from the Board of Directors
to sell the land in the form of a Resolution, the
sale of the realty by an officer shall be void (AF
ULTRA VIRES ACTS
b)
part executed and part executory — prin­
ciple against unjust enrichment shall apply.
If certain procedures or formalities are pre­
scribed in the Articles of Incorportion or By-laws
and the same are not complied with, the result­
ing act is not ultra vires act of the corporation.
Thus, if the By-laws prescribe a procedure in
entering into contracts and the same was not
complied with when the contract involved in
the case was executed, the contract may even be
valid to third persons who are not familiar with
the By-laws.
6) Purchase or acquire own shares (Sec. 41,
a)
executed contract .... courts will not set
aside or interfere with such contracts.
(Sec. 37,, CCP);
8.03.
207
FA IT III — BUSINESS ORGANIZATIONS
REVIEWER ON COMMERCIAL LAW
208
Corporation Code. However, the board, as
the governing body, may create "executive"
committees that may help in managing the
affairs of the corporation but not under
Section 35 (Pilipinas Pori Services v. Go, et al,
8.04. EXERCISE OF POWERS
a)
Who may exercise the powers of the corpora­
tion?
The Board of Directors exercises the powers
of the corporation. Generally, the Board alone,
without the concurrence of the stockholders,
may exercise the powers. The stockholders can­
not overrule the directors in its exercise of the
corporate powers.
1)
2)
----------------------
G.R. No. 161886, March 16,2007).
3)
When not exercised by the board: The pow­
ers are not exercised by the board directly
if: (i) there is a management contract; and
(ii) the powers of the board are delegated
by majority vote (of board) to an executive
committee.
What are the powers that cannot be exer­
cised by or cannot _be delegated to the
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- —
-
approval of action requiring concur­
rence of stockholders;
(ii) filling of vacancies in the board;
(iii) adoption, amendment or repeal of by­
laws;
(iv) amendment or repeal of board reso­
lution which by its terms cannot be
.amended or repealed; or
(v)
In some cases, corporate officers like the
President can also bind the corporation.
The authority of such individuals to bind
the corporation is generally derived from:
(i)
law;
(ii) corporate by-laws; or
(iii) authorization from the board, either
expressly or impliedly by habit, cus­
tom or acquiescence in the general
course of business (Inter-Asia Invest­
ment Industries, Inc. v. CA, G.R. No.*4
The executive committee cannot exer­
cise any of the following:
(i)
209
distribution of cash dividends.
N ote: The executive committee is com­
posed of at least three (3) members of the
board and must be created under the by­
laws. The board may not by itself create the
executive committee under Section 35 of the
_________ 125778, June 10, 2003, citing People's
Aircargo and Warehousing Co., Inc. v.
CA, 297 SCRA170 [1998]).
4)
A corporate officer or agent may represent
and bind the corporation in transactions
with third persons to the extent that the
authority to do so has been conferred upon
him, and these include:
(i)
powers that, in the usual course of the
particular business, are incidental to
those expressly provided;
(ii) powers that may be implied from the
powers intentionally conferred;
(iii) powers added by custom and usage,
as usually pertaining to the particular
officer or agent; and
(iv) such apparent powers as the corpo­
ration has caused person dealing with
210
REVIEWER ON COMMERCIAL LAW
.
the officer or agent to believe that it
has conferred (Inter-Asia Investment
Industries, Inc, v. CA, ibid,),
5)
An officer may also bind the corporation
if he has apparent authority. Apparent au­
thority is derived not merely from practice.
Its existence may be ascertained through:
(i)
the general manner in which the cor­
poration holds out an officer or agent
as having the power to act or, in other
words, the apparent authority to act in
general, with which it clothes him; or
(ii)
the acquiescence in his acts of a partic­
ular nature, wi th actual or constructive
knowledge thereof, within or beyond
the scope of his ordinary powers.
It requires presentation of evi­
dence of similar act(s) executed either
It is not the quantity of similar acts
which establishes apparent authority,
but the vesting of a corporate officer
with power to bind the corporation
(Inter-Asia Investment Industries, Inc. v.
CA, ibid.).
PART III — BUSINESS ORGANIZATIONS
211
of reflecting a net worth, it turned out that "F" had
a deficiency of PI .2 Million. Hence, IAI is obligated
to reimburse AI the amount of P13.2 Million (P12
Million plus the deficiency of P I.2 Million). However,
considering that AI retained P7.5 Million, the balance
to be reimbursed is only P5.2 million. Later, LG,
the president of IAI proposed in writing that AFs
claim for refund be reduced to P4.09 Million but he
promised to pay the costs of certain superstructures
in behalf of AI. AI accepted the proposal. Later, IATs
Board refused to implement the accepted proposal
on the ground that while the said Board authorized
LG to purchase the shares, it did not authorize LG to
make the last proposal. Is the position of IAFs Board
tenable?
The position of the Board of IAI is not tenable. An
officer of a corporation who is authorized to purchase
the stock of another corporation has the implied power
to perform all other....nbligaIfom„AEismgMhem£mm^
such as payment of the shares of stock. By allowing
its president to sign the agreement to purchase the
share on its behalf, the corporation clothed him
with apparent capacity to perform all acts which are
expressly provided for or impliedly and inherently
included therein (Inter-Asia Investment Industries, Inc.
v. CA, ibid.).
PROBLEM; . ; :
1.
bA
IAfi rIncL ;:(IAI)- by a Stock Purchase Agreement,
sold to AI, Inc, (AI) for the sum of P19.5 Million all
its ^outstanding, shares of stocks in "F" Corp. The
agreement was signed by LG and JV, presidents of
IAI and AI respectively. IAI expressly warranted in
" the' agreementrtM t the rietwdrth of "F" Corp. is P12
Million. IAI agreed that if the networth is less than
P12 Million,TAI will pay Al the deficiency. AI paid IAI
P12 Million and --retained the amount of P7.5 million
- - ■■••toanswer f o r ^ y ;deficiency in the net worth. Instead
b)
In what instances is concurrence of the stock­
holders necessary for the exercise of the powers
of the corporations?
1)
Approval of the majority of the board and
concurrence of the-stockholders represent­
ing 2ZiM&eouMiadffigvapM (or 2/3 of
. the member whenever applicable) is neces­
sary in the exercise of the following powers:
(!)
Power to extend or shorten corporate
term (Sec. 37, CCP);
REVIEWER OH COMMERCIAL LAW
(ii)
Increase / Decrease
Corporate
PART III — BUSINESS ORGANIZATIONS
(i)
Stock
(Sec. 38, CCP);
(iii) Incur or create Bonded Indebtedness
(iv) To deny pre-emptive right (Sec. 39,
CCP);
3)
Sell, dispose, lease, encumber all or
substantially all of corporate assets
(Sec, 40, CCP);
(vii) To declare stock dividends (Sec. 4.3,
CCP); and
(2)
a stockholder or stockholders
representing the same interest of
both the managing and the man­
aged corporations own or control
more than 1 /3 of the total out­
standing capital entitled to vote
of the managing corporation; or
8.05. Instances when corporation may acquire its own
shares (Sec. 41)
a)
the corporation has unrestricted retained earn-*1
ings in its books to cover the shares to be purchased/ acquired.
b)
for a legitimate corporate purpose/s including
but not limited to the following:
a majority of the members of the
board or directors of the manag­
ing corporation also constitute a
majority of the members of the
board of the managed corporation;
1)
to eliminate fractional shares arising out of
stock dividends;
2)
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 the
sale; and
3)
to pay dissenting or withdrawing stock­
holders entitled to payment of their shares.
(ix) To amend the articles of incorporation
(Sec. 16, CCP).
2)
Approval of the stockholders representing
niajod&L^
capita 1 is nec- essary together with board approval in the
following instances:
2 /3 of Outstanding Capital —■Dele­
gate to the board the power to amend
the by-laws (Sec. 48, CCP).
(ii) Majority of Outstanding Capital —
Revoke the power of the board to
amend the by-laws which was previ­
ously delegated.
(Sec. 42, CCP);
__________(1)
Without board resolution, the stockholders
may by:
(i)
(vi) To invest in another corporation, busi­
ness other than the primary purpose
(viii) To enter into management contract
(Sec. 44, CCP) if:*2
To enter into management contract if
any of the two instances stated above
are absent (see: viiiflj and [2] above).
(ii) To adopt, amend or repeal the by-laws
(Secs. 46 and 48, CCP).
(Sec. 38, CCP);
(v)
213
8.06. DIVIDENDS
a)
Who may declare dividends? (Sec. 43)
1)
Board of Directors alone — cash, property
dividends.
214
PART III — BUSINESS ORGANIZATIONS
REVIEWER ON COMMERCIAL LAW
2)
of Outstanding Capital — stock dividends.
b)
c)
:
';
What are the conditions that must be present to 1
declare dividends?
1)
unrestricted retained earnings
2)
resolution of the board or if stock divi­
dends, the board with the concurrence of §
2/3 of outstanding capital.
Can the board be compelled to declare dividends every year?
However, even if the retained surplus prof- I
its are in excess of 100% of the paid in capital, the
board may still refuse to declare dividends if:
T
Justified by definite corporate expansion
projects/programs approved by the Board;
. or
2)
the corporation is prohibited under any
loan agreement with any financial institu­
tion or creditor, whether local or foreign,
from declaring dividends without its/his
consent, and such consent has not yet been
secured; or
3)
it can be clearly shown that such retention
is necessary under special circumstances
d)
:
.NO. Declaration of dividends is discretion- J
ary upon the board. Dividends are payable only
when there are profits earned by the corporation
and as a general rule, even if there are existing
profits, the Board of Directors has the discretion
to determine whether or not dividends are de-1
-------dared (Republic Planters Bank v. Agana, 209 5CRA—
1 [1997]). Exception: Stock corporations are pro­
hibited from retaining surplus profits in excess
of 100% of their paid-in capital.
1)
obtaining in the corporation. Example:
When there is a need for special reserve for
probable contingencies.
Bp_a£4,..Qf .Pim.ctors with, the approval <
jtfiddhddeiijepesef^
;=
/
21S
Dividends cannot be declared out of the capi­
tal. Exception: Wasting Assets Corporation —
corporations solely or principally engaged in the
exploitation of "wasting assets" to distribute the
net proceeds derived from exploitation of their
holdings such as mines, oil wells, patents and
leaseholds, without allowance or deduction for
depletion.
The trust fund doctrine will be violated if
dividends are declared out of capital except only
in two instances: (1) liquidating dividends; and
(2) dividends from investments in wasting asset
corporation.
e)
(1) What can be included in unrestricted
retained earning? (2) What items cannot be
used for dividend distribution? (3) Can gain
from sale of real property be considered part of
unrestricted retained earnings? (4) Can treasury
shares be distributed by way of dividends?
1)
Unrestricted Retained Earning shall only
include accumulated profits and gains
realized out of the normal and continuous
operations of the company after deducting
therefrom distributions of stockholders and
transfers to capital stock or other accounts,
and which is: (1) not appropriated by its
Board of Directors for corporate expansion
projects or programs; (2) not covered by a
restriction for dividend declaration under
a loan agreement; and (3) not required to
be retained under special circumstances
obtaining in the corporation such as when
there is a need for a special reserve for
216
REVIEWER ON COMMERCIAL LAW
PART III — BUSINESS ORGANIZATIONS
probable contingencies (SEC Memorandum
Circular [MC] No. 11, Series o f2008).
the option of recognizing actuarial gains
or losses directly to profit or loss statement
(SEC MC No. 11, Series o f2008).
For such purpose, the surplus profits
•or income must be a bonafide income found­
ed upon actual earnings or profits. The ex­
istence, therefore, of surplus profits arising
from the operation of corporate business is
a condition precedent to the declaration of
dividend. The phrase "actual earnings or
profits" as mentioned above shall be the net
income for the year based on the audited
financial statements (SEC MC No. 11, Series
(iv) Fair...yaljie . adjustment or the
gains arising only from market-to-market
valuation which are not yet realized (SEC
MCNo. 11, Series o f2008)'
(v) The amount of recognized de­
ferred tax asset that reduced the amount of
income tax expense and increased the net
income and retained earnings, until real­
ized (SEC MC No. 11, Series o f2008).
o f 2008).
2)
(vi) Paid-in-surplus cannot be dec­
lared as dividend. Paid-in surplus is the
difference between the par value and the is­
sued value or selling price of the shares and
are not therefore considered profits earned
in the conduct of the business of the corporation. They are considered part of capital.
The following unrealized items and other
items are not available for dividend decla­
ration:
d)
Share/equit_y_in net income of the
associate or joint venture accounted for
------- equity method as the same is not yet actually earned or realized. It is only after the
investee company declares such income as
dividend that said income is actually real­
ized or the earnings become available for
dividend declaration. Due to the effect on
the investment account, the investor com­
pany shall consider only cash or property
dividends declared by the investee-com­
pany as earnings declarable as dividends
(vii) Revaluation surplus or the in­
crease in the value of assets cannot be con­
sidered earnings of the corporation. They
are not income from operation. They are by
nature subject to fluctuations (SEC Opinions
dated Oct. 2,1981 and March 19,1992).
(viii) Reduction surplus cannot like­
wise be included in the amount to be
declared as dividends because they are not
income from operation. Reduction surplus
are those arising from the reduction of the
par value of the issued shares of stocks
(SEC MC No. 11, Series o f 2008).
(U) Unrealized__ foreign exchange
gains, except those attributable to cash and
cash equivalents, for the time being that
they are not yet actual income prior to real­
ization of such foreign exchange gain (SEC
MC No. 11, Series o f2008).
(Hi) Unrealized actuarial gains which
is the result when the company chooses
217
(SEC Opinion dated Aug. 8,1991).
3)
Gains on s_ale_of the corporation's real prop­
erties can be considered part of retained
earnings. The sale can be part of the busi­
ness of the corporation. Retained earnings
218
REVIEWER ON COMMERCIAL LAW
PART III — BUSINESS ORGANIZATIONS
include not only earnings realized from the
ordinary course of business of the corpora­
tion but also those arising from transactions
not associated with but incidental to or nec­
essary in keeping the business for which
the corporation was organized (other ex­
amples of the latter are earnings from rent,
royalties, fees and interests for the use by
others of the corporate assets and resourc­
es). However, there must be surplus profits.
Hence, the corporation cannot distribute
gains from sale of real properties as divi­
dends if the value of the remaining assets
after distribution is less than the amount of
legal or stated capital and liabilities (SEC
and not on the amount paid for the shares
(SEC Opinion dated July 16,1996).
2)
Yes, but only as property dividends. Trea­
sury shares cannot be declared as stock div­
idend or cash dividends because they are
not considered part of earned or surplus
profits. The distribution of cash or stock
dividends out of treasury shares would be
converting the corporation into both a debt­
or and creditor for the same amount at the
same time, or requiring it to take money or
stock from one of its pockets and putting it
in another, which is absurd. Treasury shares
may be declared as property dividend to be
issued out of the retained earnings previ­
ously used to support their acquisition pro­
vided that the amount of the said retained
earnings has not been subsequently im­
paired by losses (SEC Opinion dated July 17,
Other Rules Concerning Dividends 1)
Stockholders are entitled to dividends pro
rata based on the total number of shares
3)
The stockholder's right to be paid divi­
dends accrues as soon as the declaration
is m a d e i n a c c o rd a n c e with Section 4 3 of
the Corporation Code. From that time, the
stockholder can already demand payment
thereof (SEC Opinion dated Oct. 10,1992).
4)
Stock dividends can be declared at a premi­
um (at value higher than par) (SEC Opinion
dated Oct. 23,1992).
-5)— Ehreir-iiiTpHTtrArtjfe
d iv id e n d s .
8.07. SALE OF ALL OR SUBSTANTIALLY ALL PROP­
ERTIES
a)
1984).
f)
Stockholders at the time of declaration are
entitled to dividends. Dividends declared
before the transfer of shares belong to
the transferor and those declared after
the transfer belong to the transferee (SEC
Opinion dated July 15,1994).
Opinion dated May 9,1990).
4)
219
b)
Requisites:
1)
approval of majority of the directors or
trustees;
2)
assent of stockholders representing 2 /3 of
outstanding capital or 2 /3 of member in a
meeting duly called for the purpose after
written notice; and
3)
it must comply with the formalities of the
Bulk Sales Law.
When covered. A sale or other disposition shall
be deemed to cover substantially all corporate
property and assets if thereby the corporation
would be rendered incapable of continuing
221
2.
AA Corporation is engaged in the business of printing
books. Around 70% of its assets consists of cash in the
bank, 25% printing machine and the remaining office
equipment and supplies. AA Corporation plans to sell
the machine. Can it be considered sale of substantially
all of the assets of the corporation?
A:
YES. It may be considered sale of substantially all of
the assets because without a printing machine, the
corporation would be rendered incapable of continu­
ing its printing business. The fact that it is only 25% of
the total assets of the corporation, is immaterial.
the business or accomplishing the purpose for
which it was incorporated.
c)
Effect on creditors. The transferee / buyer of all
or substantially all of the assets (or even shares)
will not be liable for the debts of the transferor.
Exceptions:
1)
if there is an express assumption of liabili­
ties;
2)
there is a consolidation or merger;
3)
if the purchase was in fraud of creditors;
and
4)
if the purchaser becomes a continuation of
the seller.
8.08. INCREASE OR DECREASE OF CAPITAL
a)
PROBLEMS:
1.
X Corporation is engaged in selling pencils on
---------wholesale basis. It is merely renting a bodega and
90% of its assets consist of its stocks of pencil. "A,"
a school supply dealer, purchased all the stocks of X
Corporation. Is the transaction a sale of substantially
all of the assets of the corporation requiring
concurrence of stockholders representing 2/3 of the
outstanding capital stock?
A:
NO. Section 40 of the Corporation Code provides
that nothing in the law is intended to restrict the
power of any corporation, without authorization by
the stockholders or members, to sell or otherwise
dispose of any of its property and assets if the same is
necessary in the usual and regular course of business
or if the proceeds of the sale or other disposition of
such property and assets be appropriated for the
• conduct of its remaining business. The sale in the
given problem appears to be a sale in the regular
course of business because X Corporation is engaged
in wholesale business.
What are the ways of increasing the capital
stock?
1)
by increasing the number of shares and
retaining the par value;
2)
by increasing the par value of existing
shares without changing the number of
sKaieiTdr
3)
b)
by increasing the number of shares and in­
creasing the par value.
What are the ways of decreasing the capital
stock?
1)
by decreasing the number of shares and re­
taining the par value;
2)
by decreasing the par value of existing
shares without changing the number of
shares; or
3)
by decreasing the number of shares and
decreasing the par value.
9. DIRECTORS AND OFFICERS
. _ 9.01. QUALIFICATIONS OEDIRECTORS
a)
Stock Corporation — must own at least one
(1) share capital stock of the corporation in his
REVIEWER ON COMMERCIAL LAW
own name; Non-stock corporation —- must be s
member (Sec. 23, CCP). He must be a stodcholde.
in his own right. It must be legal title no.
beneficial title. Example: The stockholder-trasto.
in a voting trust agreement cannot be a directo:
because he only has beneficial title; the truster
can be elected as director because he has legal
title.
b)
A majority of the directors / trustees must be resi
dents of the Philippines (Sec. 23, CCP).
c)
He must not have been convicted by final judg
ment of an offense punishable by imprisonmen.
for a period exceeding six (6) years or a violatior
of the Corporation Code, committed within five
(5) years before the date of his election (Sec. 27,
M K T III — BUSINESS ORGANIZATIONS
the corporation commits a crime, will be individually
held answerable for the crime (Espiritu, Jr. u Petron
Corporation, ei a l, G.R. No. 170891, Nov. 24, 2009).
There are special laws that specify the officers who
■ are criminally liable for corporate crimes.
9.04. METHODS OF VOTING — Election of Directors
(Sec. 24)
a.
CCP).
d)
He must be of legal age.
He must possess other qualifications as may be
prescribed in the by-laws of the corporation. Fo;
---------------- example, the percentage of equity participation
of foreigners with respect to nationalized activi
ties must be complied with or he must not be a
director in a competing corporation.
e)
9.02. "Business Judgment Rule." Questions of policy o:
management are left solely to the honest decision o'
officers and directors of a corporation and the court?:
are without authority to substitute their judgment fo:
the judgment of the board of directors; the board is
the business manager of the corporation and so long
as it acts in good faith, its orders are not reviewable
by the courts or the SEC. The directors are also not
liable to the stockholders in performing such acts
(Montelibano v. Bacolod-Murcia Milling Co., 5 SCRA 36
[1962]; Phil. Stock Exchange, Inc. v. CA, 281 SCRA 232
119971).
9.03. Criminal Liability. Directors, Corporate officers, or
employees, through whose act, default or omission
223
Stockholders have the option to adopt any of the
following:
1)
Straight Voting — every stockholder "may
vote such number of shares for as many
persons as there are directors" to be elected.
2)
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 elect­
ed multiplied by the number of his shares
shall equal."
---------------- 3)— Cumulative Voting by Distribution — a stockholder may cumulate his shares by mul­
tiplying also the number of his shares by
the number of directors to be elected and
distribute the same among as many candi­
dates as he shall see fit.
Note: Cumulative voting is not avail­
able in non-stock corporations.
b.
Election should be at large in stock corpora­
tions — Election of directors in a stock corpora­
tion should be by the stockholders constituting a
quorum. All shareholders holding voting shares
have the right to vote (Secs. 6 and 24, CCP). There
can be no voting by district or region in a stock
corporation (Rev. Ao-As, ei al. v. CA, G.R. No.
128464, June 20,2006).
1) ■ Non-stock corporation —- there can be elec­
tion by region in a non-stock corporation,
REVIEWER ON COMMERCIAL LAW
224
M E L III ~ BUSINESS ORGANIZATIONS
because the right to vote in a non-stock cor­
poration may be limited, broadened or dec
nied in the Articles of Incorporation or By­
laws (Sec. 89, CCP; Rev. Ao-As, et at. v. CA,
G.R. No. 128464, June 20, 2006).
term of office expires. The loss of right of the
directors is automatic upon the expiration of
their term. However, if election is not held, the
directors whose term expired can continue to
function in a holdover capacity. If one of the
holdover directors resigns, the remaining hold­
over directors cannot replace him even if they
constitute a quorum. The power of the remaining
members of the board to fill in a vacancy applies
only if a director resigns before the expiration
of his term. With respect to the board authority
to replace, Section 29 contemplates a vacancy
occurring within the director's term of office
9.05. REMOVAL AND VACANCIES IN THE BOARD
a)
Requisites for Removal
1)
It must take place either at a regular meet­
ing or s p e c ia l meeting o f the stockholders
or members called fo r the purpose;
2)
There must be previous notice to the
s to c k h o ld e r s o r m e m b e r s o f th e in te n tio n to
(Valle Verde Country Club v. Africa, G.R. No.
151969, Sept 4,2009).
remove;
3)
The removal must be by a vote of the stock­
holders representing 2/3 of Outstanding
Capital Stock or 2 /3 of members; and
The director may be removed with or with­
out cause unless he was elected by the*1
----------------------- minority, in winch case, it is required llial
there is cause for removal (Sec. 28, CCP).
4)
b)
B y s to c k h o ld e r s o r m e m b e r s
if v a c a n c y
results because of: (i) removal; (ii) expi­
ration of term; (iii) the ground is other
th a n r e m o v a l or expiration of term
(e.g.,
death, resignation, abandonment) where
the remaining directors do not constitute
a quorum; (iv) increase in the number o f
' directors-.
2)
-
By board i f r e m a in in g directors constitute a
quorum — cases not reserved to stockhold­
ers or members.
c) - Replacement of Hold-Over Directors
Directors must be replaced by the stock­
holders or members in an election when their
'
If there is presented to a corporate officer or
director a business opportunity which:
a)
corporation is financially.aMetoQjLfflderlak^____
b)
from its nature, is in line with corporations busi­
ness and is of practical advantage to it; and
c)
one in which the corporation has an interest or a
reasonable expectancy.
Filling of vacancies in the Board
1)
:T:S'“ ' S’'-'-;-.:1'
9.06. DOCTRINE OF CORPORATE OPPORTUNITY
-
-
v'
By embracing the opportunity, the self-in­
terest 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 oppor­
tunity even if he will use his own funds in the
venture.
If he seizes the opportunity thereby obtain­
ing profits to the expense of the corporation, he
must account all the profits by refunding the
same to the corporation unless the act has been
ratified by a vote of the stockholders owning or
representing at least two-thirds (2/3) of the out­
standing capital stock (Sec. 34, CCP).
PART III ~~ BUSINESS ORGANIZATIONS
REVIEWER ON COMMERCIAL, LAW
226
2)
9.07. Who is an Interlocking Director?
There is an interlocking director in a corporation;
when one (or some or all) of the directors in one
corporation is (or are) a director in another corporation.
a)
If the interests of the interlocking director in the
corporations are both substantial (sfockholdings exceed 20% of Outstanding Capital^tock).
General Rule: A contract between two or
more corporations having interlocking directors
shall NOT be invalidated on that ground alone.
-Exception: If the contract is fraudulent or
not fair and reasonable.
b)
the presence-oi-siidhjiiig^
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/trustee was
not necessary for the approval of the con­
tract; and
3)
that the contract is fair and reasonable un­
der the circumstances.
Where any of the first two is absent, the contract
can be ratified by the vote of the stockholders
representing at least 2 /3 of Outstanding Capital
Stock or by the vote of the stockholders representing
at least 2 /3 of the members in a meeting called for the
purpose. P rovided, That:
' 1 ) ’ 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.
9*08. Are corporate agents such as directors, trustees or
officers of a corporation solidarity liable with the
corporation they represent?
As a rule, NO, they are not solidarity liable with
the corporation. Obligations incurred by them, acting
as such corporate agents, are not theirs but the direct
accountabilities of the corporation they represent.
However, in the following cases, solidary/per­
sonal liabilities may be incurred:
a)
If the interest of the interlocking director in one
of the corporations is nom inal while substantial
in the other (stockholdings 20%._o^more)/ the
contract shall be valid, provided the following
conditions are present:*23
___________1)
227
when directors and trustees or, in appropriate
cases, the officers of the corporation:
1)
votes or assents to patently unlawful acts of
the corporation;
2)
act in bad faith or with gross negligence in
directing the affairs of the corporation;
__________ 3)
are guilty of conflicts of interest to the prejudice of corporation, its stockholders or
members, and other persons;
b)
when a director has consented to the issuance
of watered stocks or who, having knowledge
thereof, did not forthwith file with the corporate
secretary his written objection thereto;
c)
when the director, trustee or officer has contrac­
tually agreed or stipulated to hold himself
personally and solidarily liable with the corpo­
ration; and
d)
when a director, trustee or officer is made, by
specific provisions of law, personally liable for
his corporate actions (MAM Realty Development
Corp. v. NLRC, G.R. No. 114787, June 2 , 1995).
9.09. a) Who are self-dealing directors/tmstees/officers?
■7 : b) What are the rales when there is a self-dealing
director/trastee/officer in a corporation?
REVIEWER ON COMMERCIAL LAW
228
a)
b)
Self-dealing directors /trustees /offi cers — those
who personally contract with the corporation
in which they are directors. It is discouraged
because the directors, trustees and officers have
fiduciary relationship with the corporation and
there can be no real bargaining where the same
is acting on both sides of the trade.
The contract between the corporation and the
self-dealing director / trustee / officer is voidable
unless the following requirements for its validity
are present:
1)
PART III — BUSINESS ORGANIZATIONS
9.10. (a)
The Corporate Officers are the President (who
shall be a director), Treasurer (who may or may
not be a director), Corporate Secretary (who
shall be a resident and citizen of the Philippines)
and such other officers as may be provided in
the By-laws.
ii)
Corporate officers. A position must be expressly
mentioned in the By-Laws in order to be consid­
ered as a corporate office and the person elected
to such office a corporate officer. Thus, the cre­
ation of an office by the Board pursuant to or un­
der a By-Law enabling provision is not enough
to make a position a corporate office (Marc II
Marketing v. Joson, Dec. 12, 2011; Mailing Indus­
trial and Commercial Corp. v. Corns, Oct. 13,2010).
2)
3)
The contract is fair and reasonable under
the circumstances; and
4)
In the case of an officer, there was previous
authorization by the board of directors or
trustees.
However, even if the requirements are not present,
the contract with the self-dealing director, trustee or officer
may still be ratified by a vote of stockholders representing
at least 2 /3 of Outstanding Capital Stock or by the vote of
the stockholders representing at least 2 /3 of the members in
a meeting called for the purpose. Provided, That:
full disclosure of the adverse interest of the
directors/trustees involved is made on such
. . , _ meeting;
.... .
a)
b)
the contract is fair and reasonable under the cir­
cumstances.
Who are the corporate officers of a corporation?
i)
The presence of such director/trustee in the
board meeting approving the contract was
not necessary for constituting a quorum for
such meeting;
The vote of such director/trustee in the
board meeting approving the contract was
not necessary for the approval of the con_______________ tract;____________________________________
229
iii)
Is service of summons on a secretary of the
president of a domestic private corporation
----------------binding on the corporation?--------------------------NO. Section 11, Rule 14 of the 1997 Rules of
Civil Procedure provides that: "When the defen­
dant is a corporation, partnership or association
organized under the laws of the Philippines with
a juridical personality, service may be made on
the president, managing partner, general man­
ager, corporate secretary, treasurer, or in-house
counsel."
- •The list: of authorized persons to receive
the summons is now limited. The phrase "agent
or any of its directors" which was stated in the
old rule is now deleted by Section 11, Rule 14.
Hence, the present rule calls for strict compli­
ance. Service of summons must only be to the
officers mentioned in the list (E.B. Villarosa &
Partner v. Benito, 312 SCRA 65 [1999]). Hence, the
summons cannot be served on any managerial
employee because the' rule now mentions gen-
WREVIEWER ON COMMERCIAL LAW
230
PART 111 — BUSINESS ORGANIZATIONS
era! manager. Service to an ordinary secretary is
not likewise effective as the law requires corpo­
rate secretary; service cannot even be justified on
the pretext that the secretary is an agent.
PROBLEM:
1.
"A," a s owner of a certain number shares o f stock in
X corporation, entered into a voting trust agreement
with B. On the basis of the voting trust agreement, B
announced his desire to run for a seat in the Board
of Directors of X corporation. C, another stockholder,
objected and questioned the eligibility of B to be a
director of X corporation.
:
Who can appoint and remove the officers
corporation?
Unless th e
of
the
9.11. MEETINGS OF THE BOARD
a)
Kinds ‘
(1)
Annual Meeting — the date is as specified
in the By-laws.
Special Meetings — upon the call of the
President or as provided in the By-laws.
Quorum — majority of the Directors or Trustees
as fixed in the Articles of Incorporation (Sec. 25,
CCP). The quorum is the same even if there is a
vacancy. The quorum properly fixed continues
even if some of the directors will leave or abstain
thereafter. However, the By-laws may require
more than the majority of Directors or Trustees
as a quorum.
d)
Proxy Not Allowed — Directors and Trustees
cannot attend the Board meetings by Proxy.
"e]
President — he can also vote during the meeting
even if he is the presiding officer because he is
also a Director.
f)
Pledge or Mortgaged Share — If the shares
are pledged or mortgaged, the shareholdermortgagor-pledgor can still attend the meeting
unless the right is given to the pledgee or
mortgagee and such right is recorded in the
books of the corporation (Sec. 55, CCP).
g)
Board Meeting through Teleconference or
Video Conference is allowed (SEC M.C. No.
15 dated Nov. 20, 2011). (1) The Corporation
Secretary must include in the notice of meeting
an inquiry if the Director / Trustee will attend
physically or through video conferencing; (2)
A Director/Trustee must choose and give notice
that he wants tele/videoconferencing; (3) The
proceedings must be recorded and the recording
by-laws specifies other officers
Jochico, G.R. No. 153413, March 1,2007).
(3)
c)
(Example: the by-laws may authorize the president to
appoint) who can appoint, the board of directors shall
appoint the officers and as a n incident of the power
of appointment, they may also remove or discharge
those that they appointed (Nectarina Raniel v. Paul
Regular
monthly unless otherwise speci­
fied in the By-laws. .
Notice — one (1) day prior to the scheduled reg­
ular or special meeting unless a different period
is provided in the By-Laws.
At
(b)
(2)
b)
I s C 's c o n te n tio n , correct? Why?
The contention of C is not correct. Under paragraph 1,
of Section 59, a trustee under a voting trust agreement
becomes registered as a stockholder in the corporate
books and as such he becomes the legal title holder or
______owner of the shares of stock transferred. By becoming
the registered title holder of the stocks, he becomes
eligible to run for a position in the Board of Directors.
231
V4
232
PART III — BUSINESS ORGANIZATIONS
REVIEWER ON COMMERCIAL LAW
(e.g., tapes, etc.) shall be stored by the Corporate
Secretary - - ■
10. TRUST FUND DOCTRINE
10.01. Trust Fund Doctrine. The capital stock, property anc
233
titute a fund to which the creditors have a right to
look for the satisfaction of their claims. This doctrine
is the underlying principle and/or articulated in the
following:
a)
other assets of the corporation are regarded as equity
in trust for the payment of the corporate creditors.
The subscribed capital stock of the corporation is v
trust fund for the payment of debts of the corporation
which the creditors have the right to look up to satisfy
their credits. Corporation may not dissipate this
and the creditors may sue stockholders directly for
the unpaid subscription (Phil Trust Co. v. Rivera, 44
Procedure for the distribution of capital assets,
embodied in the Corporation Code, which al­
lows the distribution of corporate capital only in
three instances: (1) amendment of the Articles of
Incorporation to reduce the authorized capital
stock, (2) purchase of redeemable shares by the
corporation, regardless of the existence of unre­
stricted/ retained earnings, and (3) dissolution
and eventual liquidation of the corporation;
Phil 469 [1923]; Lumanlan v. Cura, 59 Phil 746 [1934];
Commissioner o f Internal Revenue v. CA, 301 SCRA 152
[1999]).
b)
Section 41 on the power of a corporation to
acquire its own shares; and
a)
c)
In Section 122 on the prohibition against the
distribution of corporate assets and property
unless the stringent requirements therefor are
complied with.
Money received for subscription of increase of
authorized capital are not covered by the trust
fund doctrine prior to the approval of such
increase by the SEC (Central Textile Mills v.
NWPC, 260 SCRA 368 [1996]).
10.02. Give examples of cases where the trust fund doctrine
is violated.
a)
When the corporation releases or condones
payment of the unpaid subscription.
b)
When there is payment of dividends without b
unrestricted retained earnings.
c)
When properties are transferred in fraud of
creditors.
d)
When properties are disposed or undue prefer­
ence is given to some creditors even if the corpo- ::
ration is insolvent.
10.03. Distribution of Assets and the Trust Fund Doctrine
The Trust Fund Doctrine provides that subs­
criptions to the capital stock of a corporation cons- v
The distribution of corporate assets and property
cannot be made to depend on the whims and caprices
of the stockholders, officers or directors of the
corporation, or even, for that matter, on the earnest
desire of the court a quo "to prevent further squabbles
and future litigations" unless the indispensable
conditions and procedures for the protection of
corporate creditors are followed. Otherwise, the
"corporate peace" laudably hoped for by the court
will remain nothing but a dream because this time,
it will be the creditors' turn to engage in "squabbles
and litigations" should the court order an unlawful
distribution in blatant disregard of the Trust Fund
Doctrine (Ong Yong, et ai. v. David S. Tiu, ei a l, G.R. No.
144476, April 8, 2003).
REVIEWER ON COMMERCIAL LAW
PR O BLEM :
1,
FLAD Corporation (FLA DC for short) was original­
ly incorporated with an authorized capital stock of
P500,000,00 shares with the m embers of the "T" fam­
ily owning P450,200.00 shares representing the out­
standing capital. The "T" family invited the members
of the "O" family to invest in FLADC as stockhold­
ers necessitating an increase of the authorized capital
stock to give each group equal (50-50) shareholdings
as agreed upon in the Pre-Subscription Agreement.
Pursuant to the said subscription agreement, the
authorized capital stock was thus increased from
P500,000.00 shares to P2,000,000.00 shares with a par
value of P100.00 each, with the "O" family subscrib­
ing to PI,000,000.00 shares and the "T" to P549,800.00
more shares in addition to their P450,200.00 shares to
complete PI,000,000.00 shares. The Pre-Subscription
Agreement likewise provides that the "T" family
______ shall nominate the Vice-President and Treasurer and
five directors while the "O" family shall nominate the
President and six directors. The " O " family is sup­
posed to manage the mall owned by FLADC. Later,
alleging non-compliance with the obligation under
the agreement (the members of the "T" family were
allegedly prevented from acting as Vice-President
and Treasurer), the "T" family filed an action for re­
scission of the Pre-Subscription Agreement and asked
for the liquidation of the assets of FLADC. Will the
action prosper? Explain.
A:
The action will not prosper for the following reasons:
a)
The "T" family cannot rescind the contract
because they are not the real parties in interest. The
subject matter of the contract was the PI,000,000.00
unissued shares of FLADC stock allocated to the "O"
Family. The parties' Pre-Subscription Agreement
was in fact a subscription contract as defined under
Section 60 of the Corporation Code. A subscription
PART III — BUSINESS ORGANIZATIONS
235
contract necessarily involves the corporation as one
of the contracting parties since the subject matter of
the transaction is property owned by the corporation
•— its shares of stock. Thus, the subscription contract
(denominated by the parties as a Pre-Subscription
Agreement) whereby the "O" family invested P100.G0
million for PI,000,000.00 shares of stock was, from the
viewpoint of the law, one between the "O" family and
FLADC, not between the "O" and the "T." Hence, it
is the corporation and not the "T" family that has the
personality to rescind the contract. Even if there was
a violation of the agreement, the "T" family has other
remedies but rescission is not one of them.
b)
Granting but not conceding that the mem­
bers of the "T" family possess the legal standing to sue
for rescission based on breach of contract, said action
will nevertheless still not prosper since rescission will
violate the Trust Fund Doctrine and the procedures
for the valid distribution of assets and property
----------------unden-the-Gerperatien-Geder-The-^eseesienr-ef-thePre-Subscription Agreement will effectively result
in the unauthorized distribution of the capital assets
and property of the corporation, thereby violating the
Trust Fund Doctrine and the Corporation Code, since
rescission of a subscription agreement is not one of
the instances when distribution of capital assets and
property of the corporation is allowed. Rescission
will, in the final analysis, result in the premature
liquidation of the corporation without the benefit of
prior dissolution in accordance with Sections 117,118,
119 and 120 of the Corporation Code (Ong Yong, et al.
v. David S. Tiu, et a l, G.R. No. 144476, April 8, 2003).
11. STOCKHOLDERS AND SHARES
11.01. SUBSCRIPTION CONTRACT •— any contract
for the acquisition of unissued stock in an existing
corporation or a corporation still to be formed. It is
considered as such notwithstanding the fact that the
■
236
■
PART III — BUSINESS ORGANIZATIONS
REVIEWER ON COMMERCIAL LAW
6)
parties refer to it as purchase- or some other contract
'(Sec. 60, CCP).
a)
What are the kinds of subscription contracts?
1)
Pre-incorporation subscription — entered
into before the incorporation and irrevoca-------------- ble for a ppriod of six (6) months from the
date of subscription unless all other sub­
scribers consent or if the corporation failed
to materialize. It cannot also be revoked af­
ter filing the Articles of Incorporation with
the SEC (Sec. 61, CCP).
Note: Promissory notes or future ser­
vices are not valid considerations.
d)
What is an underwriting agreement?
An underwriting agreement is an agree­
ment between a corporation and a third person,
termed the "underwriter," by which the latter
agrees, for a certain compensation, to take a
stipulated amount of stocks or bonds, specified
in the underwriting agreement, if such securities
are not taken by those to whom they are first
offered.
e)
Doctrine of Individuality and Indivisibility of
Subscription
A subscription is one, entire and indivisible
__________cwhole_£Qntmct_ey_erL.i£.lwQ_Qr„more shares are
covered. The subscriber is not entitled to the cer­
tificate for part or all of certificates covered until
full payment of the subscription price.
What are the valid considerations for subscrip­
tion agreements?
11.02. SHARES OF STOCK — interest or right which an
owner has in the management of the corporation,
and its surplus profits, and, on dissolution, in all of
. its assets remaining after the payment of its debt.
The stockholder may own the share even if he is not
holding a certificate of stock.
1)
Cash;
DISTINCTIONS:
2)
Property;
3)
Labor or services actually rendered to the
corporation;
4)
Prior corporate obligations;
5)
Amounts transferred from unrestricted
retained earnings to stated capital (in case
of declaration of stock dividends); and
2)
c)
Outstanding shares in exchange for stocks
in the event of reclassification or conver­
sion.
H ow does one becom e a shareholder in a cor­
p o ratio n ?
:
A person becomes a shareholder the mo­
ment he: (1) enters into a subscription contract
with an existing corporation (he is a stockholder
upon acceptance of the corporation of his offer
to subscribe whether the consideration is fully
paid or not); (2) purchases treasury shares from
the corporation; or (3) acquires shares from ex­
isting shareholders by sale or any other contract,
or acquires shares by operations of law like suc­
cession.
b)
237
Post-incorporation subscription — entered
into after incorporation. ~
.
SHARE OF STOCK
CERTIFICATE OF STOCK
1. Unit of interest in a 1. Evidence of the hold­
er's ownership of the
corporation.
:
stock and of his right
as a shareholder and up
, to the extent specified
herein.
238
PART III — BUSINESS ORGANIZATIONS
REVIEWER ON COMMERCIAL LAW
2.
It is an incorporeal or
Intangible property.
2.
It is concrete and tan­
gible.
.
l
3. It m ay be issued by the 3. May be issued only if I
corporation even if the
the subscription is fully
paid.
subscription is not fully
paid.
239
the corporation. Preferred shares are not entitled to
payment of dividends as a m atter of right (Republic
Planters Bank v. Aganar 269 SCRA1 [1997]).
(c)
The Board of Directors cannot be given
blanket authority to fix the terms, conditions, and
rights of preferred shares unless the guidelines are
spelled out in the Articles of Incorporation (SEC
Opinion, May 24,1994).
a)
Classification of Shares (Sec, 6, CCP)
1)
Common shares — the most common type
of shares which enjoy no preference.
2)
Preferred shares — par value shares which
enjoy preference as to dividends or assets
upon dissolution as stated in the Articles of
3)
Limitations pn..jhe_j§g_uance of redeemable
Shares:
(i)
: Incorporation.
(i)
"
Redeemable-shares (Sec. 8, CCP) — are
those which permit tide issuing corporation
to redeem or purchase its own shares.
Cumulative — the shareholder is
entitled to recover dividends in
arrears. While dividend declaration
may not be compelled, once it is
declared, the shareholder is entitled to
the said arrears.
Redeemable shares may be issued
only when expressly provided for in
the Articles of Incorporation (Sec. 8).
(ii) The terms and conditions affecting
said shares must be stated both in the
Articles of Incorporation and in the
certificate of stock representing such
share (Sec. 8).
(ii) ■Non-cumulative
not entitled to
arrears only to present dividends.
(iii) Participating
(iii) Redeemable shares may be deprived
of voting rights in the Articles of Incor­
poration, unless otherwise provided
in the Code.
(iv) Non-participating — where there is no
such participation.
(iv) The corporation is required to main­
tain a sinking fund to answer for
redemption price if the corporation is
required to redeem.
— participates with
common shares after receiving its divi­
dends at preferred rate.
Notes:
(a) Preferred shares must have par
value (Sec. 5, CCP).
(b)
Preferred shares cannot have, as its pre­
ference, fixed demandable annual interest because
they represent investment to, rather than a debt
of the corporation. Prdexences._do_ not give them a
lien upon the property nor make them creditors of
(v)
:
9
The redeemable shares are deemed
retired upon redemption unless other­
wise provided in the Articles of Incorporation. • -
(vi) Unrestricted retained earning is not
necessary before shares can be re-
240
PART III — BUSINESS ORGANIZATIONS
REVIEWER ON COMMERCIAL LAW
deposited by the grantor or his agent with
a third person to be held by the latter until
the performance of a certain condition. The
beneficiary of the agreement is not yet a
stockholder until the performance of such
conditions and is not therefore entitled to
the rights of shareholders (SEC Opinion,
deem ed but there must be sufficient
assets to pay the creditors and to an­
swer for operations (Republic Plant­
ers Bank v. Agana, 269 SCRA 1 [1997]).
Redemption cannot be made if such
redemption will result in insolvency
or inability of the corporation to meet
its obligations (SEC Opinion, Aug. 24.,
1987).
4)
Treasury shares (Sec. 9, CCP) — shares
which have been earlier issued as fully
paid and have thereafter been acquired
by the corporation by purchase, donation,
redemption or through some lawful means.
5)
Par value and.no-par value shares — Par
value shares have a nominal value in the
certificate of stock while no-par value share
are those which do not have nominal value.
(i)
Both par value shares and no-par value shares have issued values (the val­
ue fixed for their issuance). The issued
value may be higher but not lower
than the par value.
(ii)
6)
7)
The issued value of no-par value
shares may be fixed in the Articles of
Incorporation or fixed by the board.
Founders shares — classified as such in
the Articles of Incorporation which may
be given certain rights and privileges not
enjoyed by others. However, if the right
is the exclusive right to vote and be voted
for,as director, it must be for a period not
exceeding five (5) years counted from the
approval of the SEC (Sec. 7, CCP).
Eacrow.,.shares — shares subjected to an
agreement by virtue of which the shares are
241
Nov. 20,1989).
b)
What is your understanding of "treasury
shares?" Are said shares considered; (a) issued;
(b) fully paid; (c) outstanding; (d) entitled to
dividends?; (e) may such shares be distributed
to the stockholder by way of dividends? If your
answer is yes, how would you classify the divi­
dend — cash or stock dividend?
Treasury shares are shares of stock which
have been issued fully paid for, but subsequent­
ly reacquired by the issuing corporation by pur-*1
__________________ dMsex_redempJion,..dmmtionMaiJimiiglL-SQmeother lawful means (Sec. 9, CCP).
1)
Yes, treasury shares are still considered
issued.
2)
Yes, they are considered fully paid (Sec. 9,
CCP).
3)
No, they are not considered outstanding
shares as they are held by the corporation.
4)
No, they are not entitled to dividends or to
vote until they are reissued. A corporation
cannot declare dividends for itself.
5)
Generally, treasury shares, being unrealized
income, are not part of earned or surplus
profits, and therefore are not distributable
as dividends, either in cash or stocks. How­
ever, if there are retained earnings arising
from the business of the corporation, trea. sury shares, being the property of the cor-
PART III ~~ BUSINESS ORGANIZATIONS
poration, may be distributed as
■dividends--notstock-dividends.
property
e)
2)
,
amendirierit of Articles of Incorporation;
; adoption and amendment of By-laws;
3)
increase or decrease of bonded indebted­
ness;
4)
increase or decrease of capital stock;
£)
Watered stocks are those issued not in
perty, share, stock dividends, or services; thus,
the issuance of such stocks are prohibited. These
include stocks:
of corporate property;
merger or consolidation of corporation;
7)
investments of funds in another corpora­
tion or another business purpose; and
8)
corporate dissolution.
What are the limitations; on the, issuance of "no
d)
What are watered stocks?
exchange for its equivalent either in cash, pro­
5) : sale or disposition df all br substantially all
6)
What is the doctrine of equality of shares?
Doctrine of Equality of Shares provides that
where the Articles of Incorporation do not pro­
vide 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 privi­
leges and are also subject to the same liabilities.
c) ■ WMatt are' instances when non-voting shares
may vote ifSec. 6 ) . '
1)
1)
issued without consideration (bonus share);
2)
issued as fully paid when the corporation
has received a lesser sum of money than its
par or issued value (discounted share);
3)
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; or
par value" shares?
1)
No-par value shares cannot have an issued
price of less than P5.00.
2)
The entire consideration for - its issuance
constitutes capital so that no part of it
should be distributed as dividends.
,
. , . 3)
5)
They cannot-be issued by banks, trust com-pames, insurance companies, public utili­
ties :and building -and loan association.
Tliey'^^ded;6f''InOTiporation must state
the fact that it issued no par value shares as
- - well as the number of
6)
4)
'
-Once issued, they are deemed fully paid
and non-assessable.
issued as stock dividend when there are no
sufficient retained earnings or surplus to
justify it.
Note: Directors or officers who consented
to its issuance is solidarily liable to the corpora­
tion for the difference in value.
They, cannot be issued as preferred stocks.
4)
243
12. CERTIFICATE OF STOCK
It is a written evidence of the shares of stock but it is
not the share itself (Lincoln Philippines Life v. CA, 293 SCRA
9211998]).
a)
The certificate is merely a prima facie evidence
of ownership and evidence can be presented to
LARI 1). — EASINESS ORGANIZATIONS
REVIEWER ON COMMERCIAL LAW
244
determine the real owner
of the shares (Biiong v.
registration with the Register of Deeds (Chua Gum v.
Samahan, 62 Phil. 472 [1935]); (2) Registration is also
necessary if the heirs acquire the shares of a deceased
shareholder (Reyes v. RTC-Zenith Ins. Corp., Aug. 11,
2008).
CA, 291 SCRA 503 [1998]).
b)
Delivery is also essential for its issuance (Ibid.).
12.01. FORMALITY
The certificate of stock must be signed by the
President or Vice-President and countersigned by
the Corporate Secretary or the Assistant Secretary
otherwise it is not deemed issued (Bitong v. CA, 292
SCRA 503 [1998]).
12.02. When certificate of stock may be issued (Sec, 64,
13.02. May a stockholder bring suit to compel the corporate
secretary to register valid transfer of stocks? To
be valid and binding on the corporation and third
parties, is the attachment or mortgage of shares of
stock required to be registered in the corporation's
stock and transfer books?
CCP)
YES. It is the corporate secretary's duty and
obligation to register transfers of stocks.
Only until the full amount of his subscription
together with interest and expenses (in case of
delinquent shares) if due has been paid,
NO. An attachment or mortgage of shares of
stock need not be registered in the corporation's stock
and transfer books inasmuch as a chattel mortgage
over shares of stock does not involve a "transfer of
shares" and that only absolute transfers of shares of*1
stock are required to be recorded m the corporation's
stock and transfer book in order to have "force and
effect as against third persons" (Chemphil Export and
13. TRANSFER* OF SHARES
13.01. How are shares of stocks transferred?_____________
a)
If represented by a certificate, the following must
be strictly complied with: (1) delivery of the
certificate; (2) indorsement by the owner or his
agent; (3) to be valid to third parties, the transfer
must be recorded in the books of the corporation
(Rural Bank of Lipa v. CA, G.R. No. 124535, Sept.
28, 2001).
b)
If NOT represented by the certificate (such as
when the certificate has not yet been issued or
where for some reason is not in the possession of
the stockholder).
a.
by means of a deed of assignment, and
b.
such is duly recorded in the books of the
corporation.
N otes; (1) Registration in the stock and transfer
book is not necessary if the conveyance is by way
of chattel mortgage. However, there must be due
245
Import Corp. v. CA, G.R. Nos. 112438-39, Dec. 12,1995).
PROBLEMS:
1.
FG is an incorporator of VC Corporation having
subscribed to and fully paid 239,500 shares. However,
no certificate of stock was issued to FG. In 1968, VCP
and FG signed a document entitled "Undertaking
and Indorsement" which states:
"UNDERTAKING: I, VCP, is the owner of the
total subscription of FG with VC Corporation in the
total amount of TWO HUNDRED THIRTY-NINE
THOUSAND FIVE HUNDRED (P239,500.00) PESOS
and that FG does not have any liability whatsoever
on the subscription agreement in favor of VC
Corporation. (SGD.) VCP, CONFORME: (SGD.) FG.
246
EARL III — BUSINESS ORGANIZATIONS
REVIEWER ON COMMERCIAL LAW
issuance of certificates. Mandamus should not issue
to compel the secretary of the corporation to make a
transfer of the stock on the books of the corporation
unless it affirmatively appears that he has failed or
refused to do so upon 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 (Vicente C, Ponce v.
INDORSEMENT: I, FG is indorsing the tote
amount of TWO HUNDRED THIRTY-NINE
THOUSAND FIVE HUNDRED (P239,500.00) stock:,
of VC Corporation to VCR (SGD.) FG."
However, FG remains to be the stockholder in
the books of the corporation and it is undisputec
that VCP had not made a request upon the corpora^
secretary of VC Corporation to record the allegec
transfer of stocks. In 1996, VCP made a demanc
for the issuance of certificates of stock in his name
The demand was denied and VCP filed petition fo:
mandamus for the issuance of the certificates. Will thr
action prosper?
The action will not prosper. It is a basic rule that i
transfer of shares of stock not recorded in the stock
and transfer book of the corporation is non-existenas far as the corporation is concerned. Without sud
recording, the transferee may not be regarded b)-*2
--------- the corporation as one of its stockholders and the—
corporation may legally refuse the issuance of stock
certificates. In other words, the stock and transfer
book is the basis for ascertaining the persons entitled
to the rights 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 (Vicente C. Ponce v. Alsom.
Alsons Cement Corporation, G.R. No. 139802, Dec. 10,
2002, citing Hager v. Brayan, 19 Phil 138 [1911]).
3.
A:
A:
A:
------
NO. Considering that the law does not prescribe a
period within which the registration of the transfer
of shares should be effected, the action to enforce the1
right does not accrue until there has been, a demand
and a refusal concerning the transfer (Vicente C. Ponce
v. Alsons Cement Corporation, ibid., citing Won v. Wack
Wack Golf and Country Club, Inc., 104 Phil 466 [1958]).
14. RIGHTS AND OBLIGATIONS OF STOCKHOLDERS
14.01. a) What are the basic rights of shareholders?
In problem No. 1, VCP argued that it is precisely
the duty of the corporate secretary, when presentee
with the document of fully paid shares, to effect the
transfer by recording the transfer in the stock and
transfer book and to issue stock certificates in the
name of the transferee. Is the contention tenable?
The contention is not tenable. VCP is not a registered
stockholder and the deed of undertaking and
indorsement does not establish, on its face, his right
to demand for the registration of the transfer and the ;
Assume in problem No. 1 that VCP can validly file
the petition for mandamus. Can such petition be
dismissed on the ground of prescription considering
that it was filed only 24 years after the execution of
the undertaking and indorsement?
Cement Corporation, G.R. No. 139802, Dec. 10, 2002).
2.
247
1)
direct or indirect participation in manage­
ment;
2)
voting rights (Sec. 6, CCP);
3)
right to remove directors (Sec. 28, CCP);
4)
proprietary rights:
(i)
- (ii)
(iii)
,
right to dividends;
appraisal right (Sec. 81, CCP);
right to issuance of stock certificate for
fully paid shares (Sec. 64, CCP);
248
REVIEWER ON COMMERCIAL LAW
PART III — BUSINESS ORGANIZATIONS
(iv) proportionate participation in the dis­
tribution of assets in liquidation (Secs.
118-119, CCP);
ration refuse to sue, or the ones to be sued, or has
control of the corporation.
(vi) pre-emptive right (Sec. 39, CCP);
Requisites of Derivative Action. A stockholder
or member may bring an action in the name of
a corporation or association, as the case may be,
provided, that:
right to inspect books and records (Sec. 74,
1)
He was a stockholder or member at the
time the acts or transactions subject of the
action occurred and at the time the action
was filed;
2)
He exerted all reasonable efforts, and
alleges- the same with particularity in the
- (v) right to transfer of stocks in corporate
'■
books (Sec. 63, CCP);
5}
.
CCP);
6)
right to be furnished with the most recent
financial statement/financial report (Secs.
74 and 75, CCP);
7)
right to recover stocks unlawfully sold for
delinquent payment of subscription; and
8)
b)
complaint, to exhaust all remedies available
under the articles of incorporation, by-laws,
laws or rules governing the corporation or
partnership to obtain the relief he desires;
right to file individual suit, representative
suit, and derivative suits.
What are the obligations of a stockholder?
1)
Liability to the corporation for unpaid
subscription (Secs. 67-70, CCP);
~~
2)
Liability to the corporation for interest on
unpaid subscription if so required by the
by-laws (Sec. 66, CCP);
3)
Liability to the creditors of the corporation
for unpaid subscription (Sec. 60, CCP);
4)
Liability for watered stock (Sec. 65, CCP);
5)
Liability for dividends unlawfully paid
(Sec. 43, CCP); and
6)
Liability for failure to create corporation
(Sec. 10, CCP).
Derivative Actions — those 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 cor­
porate rights whenever the officials of the corpo­
3)
No appraisal rights are available for the act&
or acts complained of; and________________
4)
The suit is not a nuisance or harassment
suit (Sec. 1, Interim Rules o f Procedure for
__________
ICC; Cua, Jr. v. Ocampo, G.R. Nos. 181455-56
& 182008, Dec. 4, 2009).
b)
Individual Actions
those brought by the
shareholder in his own name against the corpo­
ration when a wrong is directly inflicted against
him.
c)
Representative Actions — those brought by the
stockholder in behalf of himself and all other
stockholders similarly situated when a wrong is
committed against a group of stockholders.
14.02. SUITS BY STOCKHOLDERS/MEMBERS
a)
249
14.03. What is a pre-emptive right? (Sec, 39, CCP)
a)
A pre-emptive right is the shareholder's right to
subscribe to a l l issues o r d i s p o s it i o n o f s h a r e s
o f a n y c la s s in proportion to his present stock­
holdings, the purpose being to enable the share-
REVIEWER ON COMMERCIAL LAW
250
PART III — BUSINESS ORGANIZATIONS
holder to retain his proportionate control in the
2.
corporation and to retain his equity in the sur­
plus.
b)
no date in
the By-laws
— any date
in April as
determined
by the Board.
Pre-emptive right is not available in the follow­
ing:
1)
Shares to be issued to comply with laws
requiring stock offering or minimum stock
ownership by the public;
2)
Shares issued in good faith in exchange for
property needed for corporate purposes;
3)
If there is
Special Meeting of 1. Any time
deemed
Stockholders
necessary, or
Shares issued in payment of previously
2. In the absence
of provision
in the By­
laws —■Two
(2) weeks
prior to the
meeting.
1. Within
the period
provided in
the By-laws;
or
contracted debts;
4)
In case the right is denied in the Articles of
Incorporation; and
5)
If one shareholder does not want to exercise
his pre-emptive right, the other sharehold­
ers are not entitled to purchase the corre-
2. As provided
in the By­
laws.
---------------------spendmg--d;ta^es--©frthe--9hafeh©Mer-A¥h©declined. But if nobody purchased the same
and later on the board re-issued the shares,
the pre-emptive right applies.
Stockholders' Meeting —- A stockholder is giv­
en the right to participate in the corporate affairs
by giving him the right to attend meetings after
due notice and the right to vote thereat in person
or through a proxy or trustee.
Kinds of
Meeting
Regular Meeting
of Stockholders
Date of Meeting
Required Notice
1. The date in
the By-laws;
1. Within
the period
provided in
the By-laws;
or -
or
2. If there is no
provision in
the By-laws
— One (1)
week prior to
the meeting.
1)
Quorum of Meeting of Stockholders and
Members — stockholders representing a
majority of the outstanding capital stock or
a majority of the members.
2)
Excluded from the Computation of Quo­
rum — (1) Delinquent shares or members;
(2) Non-voting shares or members (Tan v,
14.04. RIGHT TO VOTE
a)
251
Sycip, 499 SCRA216 [2006]).
3)
Who will Call of Special Meeting of
Stockholders - (1) Officer designated in the
Articles or By-laws; (2) Board of Directors
or Trustees if nobody is designated to call
in the Articles and By-laws; or (3) SEC, if
there is no person authorized or the person
authorized refuses to call a meeting (Sec. 50,
CCP).
REVIEWER ON COMMERCIAL LAW
252
4)
b)
M K T III — BUSINESS ORGANIZATIONS
Place of Meeting — city or municipality of
principal office and if practicable, the prin­
cipal place of business (Sec. 51, CCP).
Proxy
Stockholders and members may vote in
person or by proxy in all meetings of Stockhold­
ers or members (Sec. 58, CCP).
1)
2)
~ c)—
— —
- - - ....
-----------------
One or more stockholder of a stock corpo­
ration may create a voting trust 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 five (5) years at any
one time. However, the trustee can also be voted
as director.
Limitations on right to vote
1)
Where the Articles of Incorporation pro­
vides for classification of shares pursuant
to Section 6, non-voting shares are not en­
titled to vote except as provided for in the
last paragraph of Section 6.
3)
Fractional shares of stock cannot be voted
unless they constitute at least one full share
(Sec. 41, CCP).
Treasury shares have no voting rights as
long as they remain in the treasury (Sec. 57,
CCP).
5)
Holders of stock declared delinquent by the
board of directors for unpaid subscription
are not entitled to vote or a representation
at any stockholder's meeting (Sec. 67, CCP).
6)
A transferee of stock cannot vote if his trans­
fer is not registered in the stock and transfer
book of the corporation (Sec. 63, CCP).*1
__________ 7)
A stockholder is still entitled to vote even if
the shares are mortgaged or pledged unless
he authorizes the creditor in writing to vote
(SEC Opinion, April 7,1987).
14.05. APPRAISAL RIGHT
a)
However, if the voting trust was a require­
ment for a loan agreement, period may exceed
5 years but shall automatically expire upon full
payment of the loan (Sec. 59, CCP).
d)
Preferred or redeemable shares may be
deprived of the right to vote unless other­
wise provided in the Code (Sec. 6, CCP).
4)
Period of Validity — unless otherwise pro­
vided in the proxy, it should be valid only
for the meeting for which it is intended.
No proxy shall be valid and effective for a
longer period than five (5) years at any one
time.*5
--------------------------— —
2)
:
Proxy Form — in writing, signed by the
stockholders or member and filed before
the scheduled meeting with the corporate
secretary.
253
Appraisal Right — right to withdraw from the
corporation and demand payment of the fair
value of his shares after dissenting from certain
corporate acts involving fundamental changes
in corporate structure (Sec. 81, CCP).
1)
b)
Upon demand, all rights accruing to the
shares shall be suspended (Sec. 83, CCP).
Instances Where It May Be Exercised:
1)
extension or reduction of corporate term
(Secs. 37 and 81, CCP);
2)
change in the rights of stockholders, au­
thorize preferences superior to those stock-
REVIEWER ON COMMERCIAL LAW
254
255
holders, or restrict the right of any stock­
holder (Secs. 37 and 81, CCP);
is abandoned; (iii) the SEC disapproves the
action (Sec. 84, CCP).
3)
corporation authorized the board to invest
corporate funds in another business or pur­
pose (Sec. 42, CCP);
15. COLLECTION OF UNPAID SUBSCRIPTION (Sec. 68,
CCP)
4)
corporation decides to sell or dispose of all
or substantially all assets of corporation
(Sec. 81, CCP); or
5)
c)
PART III — BUSINESS ORGANIZATIONS
15.01. What are the remedies of corporations to enforce
payment of stocks?
a)
Extrajudicial sale at public auction — this reme­
dy is available upon failure of the stockholder to
pay the unpaid subscription or balance thereof
within the grace period of 30 days from the date
specified in the contract of subscription, or in the
absence of such date, from the date stated in the
call made by the BOD (Sec. 67, CCP);
b)
Judicial action (Sec. 70, CCP); and
c)
Collection from cash dividends and withholding
of stock dividends (Sec. 43, CCP).
merger or consolidation (Sec. 81, CCP).
Rules for exercise of appraisal right:
1)
The stockholder must be a dissenting
stockholder — he voted against the pro­
posed action (Sec. 82, CCP);
2)
The stockholder must make a written
demand on the corporation within 30 days
after the vote was taken (Ibid.);3
456
3)
The proposed action is any one of the
instances enumerated above (b);
15.02. What does the term unpaid claim mean (for purposes
of declaring the shareholder delinquent)?
4)
The price to be paid is the fair value of the
shares on the date before the vote was taken
It refers to any unpaid subscription, and not to
any indebtedness which a subscriher or stockholder
may owe the corporation arising from any other
transaction (China Banking Corp. v. CA, ei a l, March 26,
1997).
(Ibid,);
5)
6)
The fair value shall be agreed upon but in
case there is no agreement within 60 days
from the date the vote was taken, the fair
value shall be determined by a majority of
the 3 disinterested persons one of whom
shall be named by the stockholder, another
by the corporation and the third by the two
who were chosen (Sec. 82, CCP); and
The right of appraisal is extinguished when:
(i) he withdraws th e demand with the cor­
porations consent (consent of the corpora­
tion is necessary); (ii) the proposed action
i:
15.03. CALL —- a declaration by the board of directors that
the unpaid subscriptions are due and payable to the
corporation.
a)
A call is necessary if no time to make payment
is stated in the subscription agreement. A call is
not necessary if: (1) there is a time fixed in the
agreement for payment; or (2) if the corporation
becomes insolvent.
b)
Notice of call is necessary to bind the stockhold­
ers (Baltazar v. Lingayen Gulf Electric Power, 14
SCRA 522 [1965]). ■
PART III — BUSINESS ORGANIZATIONS
REVIEWER ON COMMERCIAL LAW
256
15.04. PROCEDURE FOR COLLECTION AND DELIN­
QUENCY SALE
257
2)
to be entitled to vote; or
3)
to representation at any stockholders' meet­
ing.
a)
Call whenever required must be made by the
: - Board. ■
b)
b)
Notice of call — the stockholders are given
notice of the board resolution by the corporate
secretary either personally or by registered mail.
Delinquent stockholder shall not be entitled to
any of the rights of a stockholder but he shall
still be entitled to receive dividends.
c)
c)
If the stockholders concerned do not pay with­
in thirty (30) days from the date specified in
the contract of subscription or in the call, all
the stocks covered by the subscription shall be
declared delinquent and shall be subject to sale
under Section 68.
Delinquent stocks shall be subject to delinquen­
cy sale.
Notice of delinquency served on the subscribers
either personally or registered mail and publi­
cation in a newspaper of general circulation in
the province or the city where principal office is
---------------- located once a week for two consecutive weeks.
d)
Notice shall state the amount due on each
subscription plus 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 become delinquent.
e)
Sale — such number of shares as may be neces­
sary to pay the amount due on subscription,
plus interest and other amounts due, will be sold
at public auction.
N ote: If the delinquent stockholder is a director,
he shall continue to be a director but he cannot run for
re-election.
BOOKS (Sec. 74, CCP)
16.01. What books are required to be maintained by the
corporation?
a)
Book of minutes of stockholders meetings;
b)
Book of minutes of board meetings;------------------
c)
Record or Book of all business transactions; and
d)
Stock and transfer book.
16.02. Entries in Stock and Transfer Book
a)
The highest bidder is the person offering to pay
the full amount of the balance on the subscription and
other amount that are due for the smallest number of
shares or fraction of a share (Secs. 67-70, CCP).
15.05. What are the effects of stock delinquency? (Sec. 71,
CCP)
a)
Deprives the stockholder the right:
1)
to be voted for;
b)
What are the contents of the stock and transfer
book?
1)
All stocks in the name of the stockholders
which are alphabetically arranged;
2)
Amount paid and unpaid on all stocks and
the date of payment of any installment;
3)
Alienation, sale or transfer of stocks; and
4)
Other entries as the by-laws may prescribe.
Who is authorized to make entries in the stock
and transfer book?
The corporate secretary is the officer who is
duly authorized to make entries on the stock and
PART III — BUSINESS ORGANIZATIONS
REVIEWER ON COMMERCIAL LAW
258
porations. The approval of the SEC is required
transfer book. Hence, entries made by the Chair­
man or President are invalid (Torres, Jr. v. CAf 278
(PNB v. Andrada Electric & Engr. Co., G.R. No.
142936, April 17,2002).
SCRA 793 [1997]).
c)
What is the probative value of the stock and
transf er book?
The stock and transfer book is the best evi­
dence of the transactions that must be entered
or stated therein. However, the entries are con­
sidered prima facie evidence only and may be
subject to proof to the contrary (Bitong v. CA, 292
17.02. EFFECTS OF MERGER OR CONSOLIDATION
(Sec. 80, CCP)
a)
The constituent corporations shall become a
single corporation.
b)
The separate existence of the constituents shall
cease except that of the surviving corporation (in
merger) or the consolidated corporation (in con­
solidation).
c)
The surviving or the consolidated corporation
shall possess all the rights, privileges, immuni­
ties and powers and shall be subject to all duties
and liabilities of a corporation.
SCRA 503 [1998]).
16.03. RIGHT
BOOKS
a)
STOCKHOLDERS
TO
INSPECT
What are the requirements for the exercise of
the right of inspection?
1)
It must be exercised at reasonable hours on
business days;
shall possess all rights, privileges, immunities
ie stockholder has not improperly usee
any information he secured through any
previous examination; and
and the properties shall be deemed transferred
to the surviving or the consolidated corporation.
US W.4U V £. V AA,
_
e)
All liabilities of the constituents shall pertain to
the surviving or the consolidated corporation.
Mandamus is a proper remedy if the stockholder
is being improperly deprived of his right to
f)
Employees of an absorbed corporation are neither
assets nor liabilities that are deemed absorbed
by the surviving corporation. The Corporation
Code does not mandate the absorption of the
employees of the non-surviving corporation.
The absorption of the employees may, however,
be provided for in Merger Plan. In the absence of
stipulation, the surviving corporation may not
be judicially compelled to absorb the employees
of the non-surviving corporation (BPI v. BPI
inspect.
17. MERGER vs. CONSOLIDATION
17.01. DEFINITIONS. Merger is one where a corporation
absorbs the other and remains in existence while
the others are dissolved (Sec. 76, CCP). On the other
hand, Consolidation is one where a new corporation
is created, and consolidating corporations are
extinguished (Sec. 76, CCP). ■
a)
_
Demand is made in good faith or for a
legitimate purpose (Sec. 74, CCP).
3)
b)
OF
259
Merger or consolidation does not become effec­
tive by mere agreement of the constituent cor-
Employees Union, G .K No. 164301, Aug. 10,2010).
g)
For purposes of applying the Union Shop Clause
in the Collective Bargaining Agreement between
PART 111 — BUSINESS ORGANIZATIONS
REVIEWER ON COMMERCIAL. LAW
260
the surviving corporation and the certified union
therein, the absorbed employees of the non­
surviving corporation are considered new em­
ployees of the surviving corporation. Hence, ■ .
Union Shop Agreement applies to the absorbed
employees (BPI v. BPJ Employees Union, ibid.).
17.03. PROCEDURE
a)
The Board of each corporation shall draw u r ■'
plan .ofjiLei:g;er orxons
setting forth 1: ;
names of the corporation involved; (2) terms and
mode of carrying it; (3) statement of changes, if
any, in the present articles of the surviving cor­
poration or the articles of the new corporation to
be formed in the case of consolidation.
b)
Plan for merger or consolidation shall be
approved by majority vote of each of the board of
the concerned corporations at separate meetings,
and approved by 2 /3 of the Outstanding Capital
Stock or members for non-stock corporations.
c)
Any amendment to the plan must be approved
by the majority vote of the board members or
trustees of the constituent corporations and
affirmative vote of 2 /3 of the OCS or members.
d)
Articles of Merger or Articles of Consolidation
shall be executed by each of the constituent
corporations, signed by the President or Y'ce
President and certified by secretary or assis t :"
secretary setting forth: (1) plan of merger or con­
solidation; (2) for stock corporation, the number
of shares outstanding; for non-stock, the number
of members; (3) as to each corporation, number
Of shares or members voting for and against
such plan respectively.
e)
.•
Four copies of the Articles of Merger or Cone''
dation shall be submitted to the SEC for app. l al. Merger or consolidation of banks, insurance
companies, building and loan associations, t. :■
261
companies, public utilities, educational institu­
tions and other special corporations requires
favoraMe n©commendation of government agen­
cy eoncemed.
-
11. NON-USE OF CORPORATE CHARTER
18.01. Effects of Non-Use of Corporate Charter and Con­
tinuous Inoperstion of Corporation (Sec. 22)
a)
When the corporation does not fully organize
and commence the transaction of its business or
the construction of its works within,2 years from
.the date of_its incorporation, its corporate pow­
ers cease and the corporation shall be deemed
dissolved.
When the corporation, has commenced the
transaction of its business but subsequently
becomes continuously mo^M BtiveJorapSXiQ dM
_______________at least five (5) years., the certificate of registration
may be suspended or revoked. Suspension
or cancellation of corporate franchise is not
automatic. Exception: Inoperation is beyond the
control of the corporation.
b)
PROBLEM :
1.
In the articles of incorporation of T Corporation,
eleven members were named to constitute the
board of directors. These eleven elected from among
themselves a secretary-treasurer but did not elect a
president. The board used to hold meetings to transact
business, which was done through the secretarytreasurer. In a proceeding to forfeit its charter, the
question was posed as to whether the corporation
may be considered to have formally organized.
Resolve the question.
A:
YES. The T Corporation may be considered to have
formally organized. The presence/election of a Pre­
sident is not absolutely necessary to determine if
PART ID — BUSINESS ORGANIZATIONS
REVIEWER ON COMMERCIAL LAW
262
the corporation already organized.
the issuance of the Certificate of
Corporation already had a board, a
clerk. T Corporation also functioned
business.
At the time of
Registration, T
treasurer and a
and engaged in
19. DISSOLUTION
b)
Voluntary dissolution where creditors are affected (Sec, 119, CCP).
1)
Approval of the stockholders representing
at least 2 /3 of the outstanding capital stock
or 2 /3 of members in a meeting called for
that purpose;
2)
Filing of a Petition with the SEC signed by
majority of directors or trustees or other
officers having the management of its
affairs verified by President or Secretary
or Director. Claims and demands must be
stated in the petition;
3)
If Petition is sufficient in form and sub­
stance, the SEC shall issue an Order fixing a
hearing date for objections;
4)
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 municipality
or city of the principal office, posting for 3
consecutive weeks in 3 public places is suf­
ficient;
19.01. Dissolution of a Corporation — extinguishment of
the franchise of a corporation and the termination of
its corporate existence.
19.02. Modes of Dissolution: a) Voluntary Dissolution; b)
Involuntary Dissolution; c) Shortening of term; and
d) Expiration of term.
a)
263
Voluntary dissolution where no creditors areMfected (Sec. 118, CCP).
1)
A meeting must be held on the call of direc­
tors or trustees;23456
2)
Notice of the meeting should be given to
the stockholders by personal delivery or
registered mail at least 30 days prior to the
meeting;
3)
The notice of meeting should also be pub­
lished for 3 consecutive weeks in a newspa­
per published in the place;
5)
Objections must be filed no less than 30
days nor more than 60 days after the entry
of the Order;
4)
The resolution to dissolve must be ap­
6)
After the expiration of the time to file
proved by the majority of the directors/
trustees and approved by the stockholders
representing at least 2 /3 of the outstanding
capital stock or 2 /3 of members;
5)
A copy of the resolution shall be certified by
the majority of the directors or trustees and
countersigned by the secretary; and
6)
The signed .and countersigned .copy will be
filed with the SEC and the latter will issue
the certificate of dissolution.
objections, a hearing shall be conducted
upon prior 5-day notice to hear the objec­
tions; and
7)
Judgment shall be rendered dissolving the
corporation and directing the disposition of
assets; the judgment may include appoint­
ment of a receiver.
(Sec.
120, CCP). — This is done by amending the
Articles of Incorporation. The amended Articles
EAR]’ III — BUSINESS ORGANIZATIONS
REVIEWER ON COMMERCIAL LAW
264
shall be filed with the SEC and the corporation
is deemed dissolved upon approval of the
d)
Reincorporation of Dissolved Corporation —
Though a dissolved corporation cannot be re­
vived, those interested ma)?' reincorporate by
re-filing the new Articles of Incorporation and
by-laws;
e)
Continuation of a Body Corporation — The cor­
poration continues as a body corporate for 3
years for purposes of winding up or liquidation;
0
Ceg§Mipn, Qi.Co.rp.orate Existence,for AJLRur:
poses — Upon the expiration of the 3 year­
winding up period, the corporation ceases to
exist for all purposes.
amended Articles or upon expiration of the new
term.
d)
Involuntary dissolution (Sec. 121, CCP). — by fil­
ing a verified complaint with the SEC based on
any ground provided by law or rules, including:
1)
2)
Failure to organize and commence business
within 2 years from incorporation (Sec. 22,
CCP);
Continuously inoperative for 5 years (Sec.
22, CCP);
3)
Failure to file by-laws within 30 days from
issue of certificate of incorporation;
4)
Continuance of business not feasible as
found by Management Committee or Reha­
bilitation Receiver;
19.04. LIQUIDATION AFTER THREE YEARS
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 (Gelano v.
CA, 103 SCRA 90 [19911; Reburiano v. CA, 301 SCRA
---------:— :—§)— Eaudap^prooiringAZeriificate of Registra­
tion;
6)
Serious Misrepresentation; and
7)
Failure to file required reports.
---------342 [1999]).------------------- — _______________________ _
20.
19.03. EFFECTS OF DISSOLUTION
a)
Transfer of Legal Title to Corporate Property. —
Dissolution results in the transfer of legal title to
properties in the stockholders who become co­
owners thereof;
b)
On Continuation of Corporate Business — The
corporation ceases as a body corporate to con­
tinue the business for which it was established;
c)
Creation of a New Corporation — The stock­
holders are not prevented from conveying their
respective shareholdings toward the creation of
a new corporation to continue the business of
the old;
LIQUIDATION — process by which all the assets of the
corporation are converted into liquid assets (cash) in order
to facilitate the payment of obligations to creditors, and the
remaining balance if any is to be distributed to the stock­
holders.
20.01.; MODES OF LIQUIDATION
21.
a)
By the Board of Directors;
b)
Through a trustee to whom the properties are
conveyed; and
c)
By management committee or rehabilitation
receiver.
FOREIGN CORPORATION — corporation formed,
organized or existing under any law other than those of
the Philippines, and whose laws allow Filipino citizens and
REVIEWER ON COMMERCIAL LAW
266
corporations to do business in its own country or state (Sec,
123, CCP),
21.01. Foreign Corporation — power to sue and be sued.
a)
b)
Suit By a Foreign. Corp-Qraticm — The foreign
corporation transacting business in the Philip­
pines without a license to do business shall not be
permitted to maintain or intervene in any action,
suit or proceeding in any court or administrative
agency.
Suit Against a Foreign Corporation — Any for­
eign corporation transacting business in the
Philippines whether or not with a license, may
be sued against/before Philippine courts or ad­
ministrative tribunals on any valid cause of ac­
tion recognized under Philippine laws (Doctrine
PART III — BUSINESS ORGANIZATIONS
as "doing business" since it lacks the element of
CONTINUITY. However, where a single or isolated
transaction is not merely incidental or casual but
indicates the foreign corporation's intention to do
other business in the Philippines, said single act
or transaction constitutes "doing business" in the
Philippines.
21.04. Explain the Contract Test of "doing business" in the
Philippines
a)
of Quasi-Estoppel By Acceptance o f Benefits).
21.02. What constitutes "doing business" in the Philippines
for foreign corporations?
Under the Continuity Test, doing business im­
plies a continuity of commercial dealings and ar­
rangements, and contemplates to some extent the
performance of acts or works or the exercise of some
functions normally incident to and in progressive
prosecution of, the purpose and object of its organi­
zation.
21.03. Does an "isolated transaction" by a foreign corpora­
tion qualify as "doing business" in the Philippines?
It depends. If a single or isolated transaction is
incidental and casual transaction, it cannot qualify
An essential condition to be considered as "do­
ing business" in the Philippines is the actual
performance of specific commercial acts within
the territory of the Philippines for the plain rea­
son that the Philippines has no jurisdiction over
commercial acts performed in foreign territories
(B. Van Zuiden v. GTVL Manufacturing Industries,
Inc., G.R. No. 147905, May 28, 2007).
_____ b)__ Activities within the Philippine jurisdictionJhal
do not create earnings or profits to the foreign
corporation do not constitute doing business in
the Philippines (Natl. Sugar Trading Corp. v. CA,
316 Phil. 562 [1995]; Cargill, Inc. v. Intra Strata
Assurance Corp., G.R. No. 168266, March 15,2010).
c)
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.
N ote: The two tests are referred to as the "TwinCharacterization Test" (Mentholatum Co. v. Mangaliman,
72 P hil 524).
267
A foreign company that merely imports goods
from a Philippine exporter without opening an
office or appointing an agent in the Philippines
is not doing business in the Philippines (Car­
gill, Inc. v. Intra Strata Assurance Corp., G.R. No.
168266, March 15,2010).
d)
A foreign country that exports products to the
Philippines, without doing any specific commer­
cial act, is not doing business in this country (B.
Van Zuiden v. GTVL, supra; Pacific Veg. Oil Corp. v.
Singson, April 1955).
(See: Aetna Casualty & Surety Co. v. Pacific
Star Lines, 80 SCRA 835 [1970]; Universal Shipping
PART III — BUSINESS ORGANIZATIONS
REVIEWER ON COMMERCIAL LAW
268
Lines, Inc, v. IAC, 188 SCRA 170 [1970]; Agilent
Technologies v. Integrated Silicon Technology, G.R.
No. 154618, April 14,20041
e)
The appointment of a distributor in the Philip­
pines is not sufficient to constitute "doing busi­
ness" unless it is under the full control of the
foreign corporation. On the other hand, if the
distributor is an independent entity which buys
and distributes products, other than those of the
foreign corporation, for its own name and its
own account, the latter cannot be considered to
be doing business in the Philippines (Steel case,
b)
Not doing business (Sec. 3[d])
1)
Mere investment as shareholder and exer­
cise of rights as investor;
2)
Having a nominee director or officer to
represent its interest in the corporation; and
3)
Appointing a representative or distributor
which transact business in its own name
and for its own account.
21.06. Requisites for obtaining license to do business
a)
Inc. v. Design International Selections, Inc., G.R.
No. 171995, April 18, 2012).
The foreign corporation should file a verified
application containing and together with the
following:
1)
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 trans­
act business or” if there is no more resident agent, summons shall then be served
through theSEC; and
3)
Oath of Reciprocity. Certificate under Oath
of the authorized official o f the foreign
corporation's country that allows Filipino
citizens and corporations to do business in
said country.
21.05. "DOING BUSINESS" UNDER THE FOREIGN
INVESTMENT ACT OF 1991
a)
Doing Business (Sec. 3[d]) 1234
1)
Soliciting orders, service contracts, opening
offices (whether branch or liaison officer);
2)
Appointing representatives, distributors
domiciled in the Philippines or who stay
for a period or periods totaling 180 days or
more;
3)
4)
Participating in the management, supervi­
sion or control of any domestic business,
firm, entity or corporation in the Philip­
pines; and
Any act or acts that imply a continuity of
commercial dealings or arrangements, and
contemplate to some extent the perfor­
mance 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.
269
______
b)
Within 60 days from issuance of license, the
corporation should deposit at least P100,000.00
(cash, property or bond) for the benefit of credi­
tors subject to further deposit every six months.
21.07. EFFECT OF ESTOPPEL AND SUBSEQUENT COM­
PLIANCE
a)
Estoppel. A party is estopped to challenge the
personality of a corporation after having ac­
knowledged the same by entering into a contract
REVIEWER ON COMMERCIAL LAW
270
with it. The principle "'will he applied to prevent
a person contracting with a foreign corporation
from later taking advantage of its noncompli­
ance with the statutes, chiefly in cases where
such person has received the benefits of the
contract" (Steel case, Inc, v. Design International
Selections, Inc., ibid,, citing Rimbunan Hijau Group
of Companies v. Oriental Wood Processing Corpora­
tion, 507 Phil. 631 [2.005] and Merril Lynch Futures
v. CA).
Note: In one case, the Supreme Court cited the In
Pari Delicto in ruling that no remedy could be afforded
to parties if one party is a foreign corporation without
a license (Top Weld Mfg„ Inc., ECED, SA, 138 SCRA
118).
b)
Subsequent Compliance — subsequent com­
pliance (securing a license) will cure the lack of
capacity to sue at the time of the execution of
fHe contm&Tffuriwfnsmimcc-Cmrifpmif^^mte^
Shipping Lines, 123 SCRA 424 [1988]).
22. CLOSE CORPORATIONS
22.01. REQUIREMENTS FOR CLOSE CORPORATIONS
a)
The Articles of Incorporation must state that the
number of stockholders shall not exceed 20;
b)
The Articles of Incorporation must contain
restriction on the transfer of issued stocks (which
must appear in the Articles of Incorporation, By­
laws and Certificate of Stock).
—
c)
Restriction on the transfer must not be
more onerous than granting the existing
SH or corporation the option to purchase
the shares;
The stocks cannot be listed in the stock exchange
nor be publicly offered.
PART III — BUSINESS ORGANIZATIONS
271
N ote; The corporation is not a close corporation
even if the shares belong to less than twenty if not all
the requisites are present (San Juan Structural and Steel
Fabricators, Inc. v. CA, 296 SCRA 631 [1998]). The three
requisites must concur.
22.02. The following cannot be a close corporation*.
a)
mining companies;
b)
oil companies;
c)
stock exchanges;
d)
banks;
e)
insurance companies;
f)
public utility;
g)
educational institution; and
h)
other corporation declared to be vested with
public interest.
^2J3J?i£^empii¥.e, Righ t i n . Close Corporations —- shall
extend to all stocks to be issued, including re-issuance
of treasury shares, whether for money or property or
personal services, or in payment or corporate debts,
unless the articles of incorporation provide otherwise
(Sec, 102, CCP).
Pre-emptive rights covers even those that are
excluded in Section 39 of the Corporation Code:
(a) issued in compliance with laws requiring stock
offering or minimum stock ownership; (b) in exchange
of property needed for corporate purposes upon 2 /3
vote of outstanding capital.
22.04. Deadlocks. In case of irreconcilable disputes among
the directors or shareholders, the SEC may be asked to
intervene and the SEC may perform such actions that
may be necessary under the circumstances including
the appointment of a provisional director who, as an
impartial person, will have all the powers of a duly
elected director (not a receiver).
.
PA EI III ■— BUSINESS ORGANIZATIONS
REVIEWER ON COMMERCIAL LAW
272
tion or By-laws (Sec. 89, CCP). Thus, the By-laws
of a non-stock corporation may provide for the
desired voting rights of members, including the
number of votes (SEC Opinion, Oct. 10,1989).
22JML CHAEAGfEH.ISTIGS:
a)
The stockholders themselves can directly man­
age the corporation and perform the functions of
directors without the need of election:
1)
when ’they manage; stockholders are liable ■
: as directors;
2)
there is no need to call a meeting to elect
b)
directors;
3)
b)
the stockholders are liable for tort.
Despite the presence of the requisites, the corporation shall not be deemed a close corporation if
at least 2 /3 of the voting stocks or voting rights
belong to a corporation which is not a close cor­
poration.
23. NONSTOCK CORPORATIONS
23.01. PURPOSES 0 F NON-STOCK CORPORATIONS*•
,
a)
charitable;
b)
religious;
c)
educational;
•• d)
professional;
273
Right to Transfer Membership. As a general
rule, a member cannot transfer his membership
(and the rights arising therefrom) in a non-stock
corporation. However, by way of exception, the
Articles of Incorporation or By-laws may pro­
vide for their transferability (Sec. 90, CCP).
23.03. TERMINATION OF MEMBERSHIP. The power to
admit members pertains to the Board in the absence
of any contrary provision in the Articles and By-laws.
Consistently, it is also the Board of Trustees who has
the power to terminate membership.
a)
Standards. A non-stock corporation is autho­
rized to terminate the membership in accor-*1
__________danm-withJfae^tandaniajfixediiiAe,,AEticles-n£
Incorporation or the By-laws (Sec. 91, CCP).
b)
When Property Rights are Involved. Mem­
bership may involve property rights. Example:
Membership in a golf club where the purchase
of a share is a sine qua non (Valley Golf & Coun­
e)
cultural;
f)
fraternal;,
try Club, Inc. v. Caram, G.R. No. 158805, April 16,
2009).
g)
literary;
1)
h)
scientific;
i)
social;
j)
civic service; and
k)
similar purposes, such as chambers or combina­
tions trade, industry or agriculture.
:23.:02,;RIGHTS OF MEMBERS
a)
Right :to ¥ote. A member is 'entitled to one (1)
' vote. However, such right may be broadened,
limited, or denied in the Articles of Incorpora-
When loss of property rights is involved,
the manner of deprivation of such property
right should also be in accordance with
the provisions of the Civil Code including
Articles 19, 20 and 21 under the Chapter
on Human Relations (Valley Golf & Country
Club, Inc. v. Caram, ibid.).
c)
Lien. Non-payment of dues may be a ground for
termination or suspension of membership. The
Articles or the By-Laws of a non-stock corpora­
tion may provide that unpaid dues shall con-
PART III — BUSINESS ORGANIZATIONS
REVIEWER ON COMMERCIAL LAW
274
stitute a lien, on the member's share. However,
Section 68 of the Corporation Code does not ap­
ply if the membership shares are sold under the
provisions that provide for the constitution of
lien (Calatagan Golf & Country Club, Inc. v. Caram,
b)
G.R. No. 165443, April 16,2009).
c)
1)
The shares may be sold by virtue of a lien.
In such sale by virtue of a lien, the member
had already fully paid for the share and no
longer had any outstanding obligation to
deprive him of full title to his share (Calata­
gan Golf & Country Club, Inc. v. Caram, ibid.).
d)
a)
all its creditors shall be paid;
b)
assets held subject to return on dissolution shall
be delivered back to their givers;
c)
assets held for charitable, religious purposes,
etc., without a condition for their return on1
dissolution, shall be conveyed to one or more
organizations engaged in similar activities as
dissolved corporation; and
_______
d)
all other assets shall be distributed to members,
as provided for in the Articles or By-laws.
PROBLEM:
1.
Can a non-stock corporation offset unused contri­
butions of members against the balance of receivables
from the same members? .
A.
NO. The unused contributions of members cannot be
offset against receivables because this would amount
: to distribution of the capital of the corporation.
Members of non-stock corporation are not entitled
to distribution of capital. They are only entitled to
distribution of capital upon dissolution when it is
provided for in the Articles or by-laws (SEC Opinion,
No. 153468, Aug. 17, 2006, 499 SCRA216).
23.04. CONVERSION
A non-stock corporation cannot be converted
into a stock corporation through mere amend­
ment of its Articles of Incorporation. This would
violate Section 87 which prohibits distribution
of income as dividends to members. Giving the
members shares is tantamount to distribution
of its assets or income (SEC Opinion, March 20,
1995). •
A stock corporation may be converted into a
non-stock corporation by mere amendment pro­
vided all the requirements are complied with. Its
rights and liabilities will remain.
23.05. ORDER OF DISTRIBUTION OF ASSETS (On
Dissolution of Non-Stock Corporation, Sec. 94,
CCP)
e)
a)
A non-stock corporation can. be converted into
stock corporation only if the members dissolve
it first and then organize a stock corporation.
However, there is a resulting new corporation
(SEC Opinion, May 13,1992).
Notice. For the termination of membership to be
valid, there should be reasonable notice to the
member concerned and he must be given a fair
opportunity to be heard in his defense.
Effect of Death of Member. Membership in
and all rights arising from a non-stock corpo--------------- ration— are— personal— and— non-transferable.
unless the articles of incorporation or the by­
laws of the corporation provide otherwise.
Deceased members who are dropped from the
membership roster in the manner and for the
cause provided for in the By-Laws are not to
be counted in determining the requisite vote in
corporate matters or the requisite quorum for
the annual members' meeting (Tan v. Sycip, G.R.
275
Nov. 27,1985).
PART III — BUSINESS ORGANIZATIONS
REVIEWER ON COMMERCIAL LAW
276
24, RELIGIOUS CORPORATIONS
even if it is headed by the Pope (Roman Catholic
Apostolic Church v. Land Registration Commission,
102 Phil. 596 [1957]).
24.01. KINDS (Sec. 109)
a)
b)
Corporation sole — special form of corporation,
usually associated with the clergy and consists
of one person only and his successors, who are
incorporated by law to give some legal capaci­
ties and advantages; and
The opinion of the SEC is that for registered
corporation sole, it can acquire land if its mem­
bers constitute at least 60% Filipinos (SEC Opin­
ion, Aug. 8,1994).
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, CCP).
b)
1)
c)
Conversion to Corporation Aggregate. A cor­
poration sole may be converted to a corporation
aggregate (Religious corporation) through the
amendment of its Articles of Incorporation. Con­
currence of 2 /3 of the members of the corpora­
tion sole (and not merely by the head of church
OT'tiisteFhlFmecesHanrior^e-ainendment of
the Articles of Incorporation (IEMELIF v. Bishop
Lazaro, G.R. No. 184088, July 6, 2010).
d)
Dissolution — by filing a verified declaration
of dissolution stating: (1) the name of the corpo­
ration; (2)reason for dissolution; (3) authorization
for the dissolution by the particular religious
denomination, sect or church; (4) names and
addresses of the persons who will supervise the
dissolution and winding up.
Long v. Lydia Basa, G.R. Nos. 134963-64, Sept.
27,2001).
24.02. CORPORATION SOLE
Nationality — A corporation sole does not have
any nationality but for purposes of applying our
nationalization laws, nationality is determined
not by the nationality of its head, but by the
nationality of the members constituting the sect
in the Philippines. Thus, the Roman Catholic
Church can acquire land in the Philippines
Effect of Separation of Members — members
of the sect who left and who formed a separate
religious group are not entitled to any right over
the properties of their former sect (Cahete v. CA,
171 SCRA 13 [1989]).
The by-laws of the religious corporation
may provide that the member may be
expelled or removed without prior notice.
This is justified under Section 91 of the
Corporation Code which states that
termination of membership may be in the
------------------------------ manner provided in the Articles and Bylaws. If no notice is provided in the By­
laws, the members are bound because
they consented thereto when they became
members. Consequently, where any member
of a religious corporation is expelled from
the membership for espousing doctrines
and teachings contrary to that of his church,
such action is conclusive in Court (Alfredo
a)
277
C. SECURITIES REGULATIONS CODE
(SRC, R.A. No. 8799)
:
AND RELATED LAWS
State the powers and functions of the SEC
The Commission shall act with transparency and shall
have the powers and functions provided by the Securities
278
REVIEWER ON COMMERCIAL LAW
Regulation Code, Presidential Decree No. 902-A, the Cor­
poration Code, the Investment Houses Law, the Financing
Company Act and other existing laws. Pursuant thereto, the
Commission shall have, among others, the following pow­
PART III — BUSINESS ORGANIZATIONS
Issue cease and desist orders to prevent fraud or
i)
injury to the investing public;
j)
Have jurisdiction and supervision over all corpo­
rations, partnerships or associations who are the
grantees of primary franchises and/or a license
or permit issued by the Government;
Punish for contempt of the Commission, both
direct and indirect, in accordance with the
pertinent provisions of and penalties prescribed
by the Rules of Court;
k)
Compel the officers of any registered corpora­
tion or association to call meetings of stockhold­
ers or members thereof under its supervision;
Formulate policies and recommendations on
issues concerning the securities market, advise
l)
Issue subpoena duces tecum and summon witnesses
to appear in any proceedings of the Commission
and in appropriate cases, order the examination,
search and seizure of all documents, papers, files
and records, tax returns, and books of accounts
of any entity or person under investigation as
may be necessary for the proper disposition of
the cases before it, subject to the provisions of
existing laws;
m)
Suspend, or revoke, after pro per notice and hear­
ing the franchise or certificate of registration of
corporations, partnerships or associations, upon
any of the grounds provided by law; and
ers and functions:
a)
b)
Congress and other government agencies on
all aspects of the securities market and propose
legislation and amendments thereto;
c)
Approve, reject, suspend, revoke or require
amendments to registration statements, and
registration and licensing applications;
_____ d]__ RegulateAinveM.igate,Aji-aup-er3d££AheL^£tiviti£Sof persons to ensure compliance;
e)
Supervise, monitor, suspend or take over the
activities of exchanges, clearing agencies and
other SROs;
f)
Impose sanctions for the violation of laws and
n)
the rules, regulations and orders issued pursu­
ant thereto;
g)
. h)
279
Prepare, approve, amend or repeal rules, regu­
lations and orders, and issue opinions and pro­
vide guidance on and supervise compliance
with such rules, regulations and orders;
Enlist the aid and support of and/or deputize
any and all enforcement agencies of the Gov­
ernment, civil or military as well as any private
institution, corporation, firm, association or
person in the implementation of its powers and
functions under this Code;
Exercise such other powers as may be provided
by law as well as those which may be implied
■ from, or which are necessary or incidental to the
earrying out oh the express powers granted the
Commission to achieve the objectives and pur­
poses of these laws.
1,01. TRANSFERRED JURISDICTION
a)
Under Section 5.2 of the SRC, the Commission's
jurisdiction over all cases enumerated under
Section 5 of Presidential Decree No. 902-A has
been transferred to the courts of general juris­
diction or the appropriate Regional Trial Court.
Thus, the following are within the jurisdiction of
the RTC:
REVIEWED Of'i COMMERCIAL LAW
280
1)
fraudulent devices and schemes employed
by directors detrimental to the public inter­
est and to other firms;
2)
intra-corporate dispute and with the state
in relation to their franchise and right to
PART HI — BUSINESS ORGANIZATIONS
Define the following terms: a) Issuer; b) broker; c) dealer;
d) clearing agency; e) exchange; f| pre-need plans; g)
promoter; h) prospectus; S) registration statement; j)
uncertlfleafed securities; k) underwriter. .
a)
"Issuer" is the originator, maker, obligor, or
creator of the security.
b)
"Broker" is a person engaged in the business of
buying and selling securities for the account of
exist as such;
3)
controversies in election, appointment of
directors or trustees;
4)
petition to be declared in state of suspen­
sion of payments; and
5)
others.
c)
"Dealer" means any person who buys and sells
securities for his/her own account in the ordi­
nary course of business.
d)
"Clearing Agency" is any person who acts as in­
termediary in making deliveries upon payment
to effect settlement in securities transactions.
appointment of Rehabilitation Receiver or
Management Committee.
2. WHAT ARE SECURITIES?
"Securities" are shares, participation or interests in a
corporation or in a commercial enterprise or profit-making
venture and eyjdeiimdhy-njQeiLiikai^xr^^
whether written or electronic in character. It includes:
a)
Shares of stock, bonds, debentures, notes, evi­
dences of indebtedness, asset-backed securities;
b)
Investment contracts, certificates of interest or
participation in a profit sharing agreement, cer­
tificates of deposit for a future subscription;
c)
Fractional undivided interests in oil, gas or other
mineral rights;
d)
Derivatives like option and warrants;
e)
Certificates of assignments, certificates of partic­
ipation, trust certificates, voting trust certificates
- or similar instruments; and
f)
Proprietary or non-proprietary membership
certificates in corporations; and other instru­
ments as may in the future be determined by the
Commission.
281
e)---- "Exchange" is an organized marketplace or
---------------- facility that brings together buyers and sellers
and executes trades of securities and/or com­
modities.
f)
"Pre-need plans" are contracts, agreements,
deeds or plans for the benefit of the planhold­
ers which provide for the performance of future
service/s, payment of monetary considerations
or delivery of other benefits at the time of actual
need or agreed maturity date, as specified there­
in, 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
as may be determined by the Insurance Com­
mission (I.C.). Pre-need plans are now being
regulated by the I.C. under the Pre-need Code of
the Philippines (Sec. 4[c], R.A. No. 9829).
g)
"Promoter" is a person who, acting alone or with
others, takes initiative in founding and organiz­
PART III — BUSINESS ORGANIZATIONS
REVIEWER ON COMMERCIAL LAW
Homes Unlimited Corp. v. SEC, G.R. No. 164182,
Feb. 26,2008; SEC v. Prosperity.Com, Inc., G.R. No.
ing the business or enterprise of the issuer and
receives consideration therefore.
h)
"Prospectus" is the document made by or on
behalf of an issuer, underwriter or dealer to sell
or offer securities for sale to the public through
a registration statement filed with the Commis­
sion.
i)
"Registration statement" is the application for
the registration of securities required to be filed
with the Commission.
j)
"Uncertificated security" is a security evidenced
by electronic or similar records.
k)
164197, fan. 25,2012).
3.02. What are derivatives?
Derivatives, with respect to equity securities,
means a financial instrument, including options and
warrants, whose value depends on the interest in or
performance of an underlying security, but which
does not require any investment of principal in the
underlying security.
a)
"Options" are contracts that give the buyer the
right, but not the obligation, to buy or sell an
underlying security at a predetermined price,
called the exercise or strike price, on or before
a predetermined date, called the expiry date,
which can only be extended in accordance with
Exchange rules.
b)
"Call, options" are rights to buy and "put
options" are rights to sell.
c)
"Warrants" are rights to subscribe or purchase
new shares or existing shares in a company, on
or before a predetermined date called the expiry
date, which can only be extended in accordance
with Exchange rules. Warrants generally have a
longer exercise period than options.
"Underwriter" is a person who guarantees on
a firm commitment and/or declared best effort
basis the distribution and sale of securities of
any kind by another company.
3.01. What are investment contracts?
An investment contract means a contract, trans­
action or scheme (collectively "contract") whereby
a person invests his money in a common enterprise
and is led to expect profits primarily from the efforts
of others.
a)
b)
c)
A presumption that a contract is an investment
contract arises whenever a person seeks to use
the money of others on the promise of profits.
When two or more investors "pool" their
resources, there is a common enterprise, even if
the promoter does not do more than receive a
broker's commission.
Requisites of Investment Contract: (1) an in­
vestment of money, (2) in a common enterprise,
(3) with expectation of profits, (4) primarily from
efforts of others. (Note.* This modifies the "Howey Test" which requires the profit to be derived
"solely" from the efforts of others; See: Power
283
■
~
3.03, What are commodity futures -contracts? What is a
commodity?
a)
"Commodity futures contract" means a contract
providing for the making or taking delivery at a
prescribed time in the future of a specific quanti­
ty and quality of a commodity or the cash value
thereof, which is customarily offset prior to the
delivery date, and includes standardized con­
tracts having the indicia of commodities futures,
commodity options and commodity leverage, or
margin contracts. .
REVIEWER ON COMMERCIAL LAW
284
b)
PART Hi — BUSINESS ORGANIZATIONS
Commodity means any goods/articles, services,
rights and interests, including any group or in­
dex of any of the foregoing, in which commodity
interests contracts are presently or in the future
communication, including any summary
prospectus, shall be deemed not to consti­
tute an offer for sale under this Section.
dealt in.
3)
A record of the registration of securities
shall be kept in a Register of Securities in
which shall be recorded orders entered by
the Commission with respect to such secu­
rities. 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.
4)
The Commission may audit the financial
statements, assets and other information of
a firm applying for registration of its securi­
ties whenever it deems the same necessary
to insure full disclosure or to protect the
interest of the investors and the public in
general.
4. How does the SRC protect the public who wishes to
invest In securities?
The law protects the publicas follows: a) the law requires
full disclosure of information to the public regarding the
securities that are being offered and the issuers, including
the filing of and approval of the registration statement and
the approval of the prospectus. There is also a continuing
duty to regularly submit material information to the SEC; b)
close monitoring of the securities and other circumstances
that may affect the same as well as the persons involved
including brokers, issuers, the exchange itself, etc. in order
to ensure compliance with pertinent laws and regulations;
c) prohibiting and penalizing different fraudulent practices
----- and transactions; and d) providing the SEC with powers
and functions (Philippine Stock Exchange v. CA, 281 SCRA 232
[1997]; Securities and Exchange Commission v. CA, 246 SCRA
738 [1995]).
__
•
b)
5. State the basic rules regarding registration of securities
a)
The SRC (Sec. 8.1) provides that securities shall
not be sold or offered for sale or distribution
within the Philippines, without a registration
statement duly filed with and approved by the
Commission. Prior to such sale, information on
the securities, in such form and with such sub­
stance as the Commission may prescribe, shall
be made available to each prospective purchaser.
1)
The Commission may conditionally ap­
prove the registration statement under such
terms as it may deem necessary..
2)
The Commission may specify the terms
and conditions under which any written
285
In approving the registration of the securities,
the SEC is not only concerned with the require­
ment that full disclosure of information is given
to the public. The SEC is also concerned with the
merit of the securities themselves and the issuer
(Philippine Stock Exchange v. CA, 281 SCRA 232
[1997]).
6. What securities are exempt from the requirement of
registration?
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, or by any poli­
tical subdivision or agency thereof, or by any
person controlled or supervised by, and acting
as an instrumentality of said Government.
PART m — BUSINESS ORGANIZATIONS
REVIEWER ON COMMERCIAL LAW
286
b)
Any security issued or guaranteed by the gov­
ernment of any country with which the Philip­
pines maintains diplomatic relations, or by any
state, province or political subdivision thereof
on the basis of reciprocity: Provided, That the
Commission m ay require compliance with the
form and content of disclosures the Commission
may prescribe.
c)
Certificates issued by a receiver or by a trustee
in bankruptcy duly approved by the proper
adjudicatory body.
d)
Any security or its derivatives the sale or trans­
fer of which, by law, is under the supervision
and regulation of the Office of the Insurance
Commission, Housing and Land Use Regulatory
Board, or the Bureau of Internal Revenue.
e)
Any security issued by a bank except its own
shares of stock.
Note: The Commission may, by rule or regulation after
public hearing, add to the foregoing any class of securities
if it finds that the enforcement of this Code with respect to
such securities is not necessary in the public interest and for
the protection of investors.
date a bona fide debt, a security pledged in good
faith as security for such debt.
c)
An isolated transaction in which any security is
sold, offered for sale, subscription or delivery by
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 transactions
of a like character by such owner, or on his
account by such representative and such owner
or representative not being the underwriter of
such security.
d)
The distribution by a corporation, actively
engaged in the business authorized by its articles
of incorporahon^ of secuMties to its stockholders
or other security holders as a stock dividend or
other distribution out of surplus.
e) The sale of capital stock of a corporation to its
------ own stockholders exclusively, where no commission or other remuneration is paid or given
directly or indirectly in connection with the sale
of such capital stock.
f)
The issuance of bonds or notes secured by mort­
gage upon real estate or tangible personal prop­
erty, where the entire mortgage together with all
the bonds or notes secured thereby are sold to a
single purchaser at a single sale.
g)
The issue and delivery of any security in
exchange for any other security of the same issuer
pursuant to a right of conversion entitling the
holder of the security surrendered in exchange
to make such conversion: Provided, That the
security so surrendered has been registered
under this Code or was, when sold, exempt,
from the provisions of this Code, and that the
security issued and delivered in exchange, if
sold at the .conversion'price, would at the time of
7. What transactions are exempt from the registration
requirement under SRC?
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.
b)
By or for the account of a pledge holder, or mort­
gagee or any other similar lien holder selling
or offering for sale or delivery in the ordinary
course of business and not for the purpose of
avoiding the provisions of this Code, to liqui-
287
PART III — BUSINESS ORGANIZATIONS
REVIEWER ON COMMERCIAL LAW
288
such conversion fall within the class of securities
(iv) 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;
entitled to registration under this Code. Upon
such conversion, the par value of the securitysurrendered in such exchange shall be deemed
the price at which the securities issued and
delivered in such exchange are sold,
h)
Broker's transactions, executed upon custom­
er's orders, on any registered Exchange or other
trading market.
i)
Subscriptions for shares of the capital stock c£
a corporation prior to the incorporation thereof
or in pursuance of an increase in its authorized
capital stock under the Corporation Code, when
no expense is incurred, or no commission, com­
pensation or remuneration is paid or given in
connection with the sale or disposition of such
securities, and only when the purpose for solicit­
ing, giving or taking of such subscriptions is to
comply with the requirements of such law as to
the percentage of the capital slock of a corpora- tion which should be subscribed before it can be
registered and duly incorporated, or its autho­
rized capital increased.
j)
The exchange of securities by the issuer with its
existing security holders exclusively, where no
commission or other remuneration is paid or
given directly or indirectly for soliciting such
exchange.
k)
The sale of securities by an issuer to fewer than
twenty (20) persons in the Philippines during
5any twelve-month period.
l)
The sale of securities to any number of the
following qualified buyers:
(i)
Bank;
(ii) Registered investment house;
(iii) Insurance company;
289
(v)
Investment company; or
(vi) Such other person as the Commission may
by rule determine as qualified buyers, on
the basis of such factors as financial sophis­
tication, net worth, knowledge, and expe­
rience in financial and business matters, or
amount of assets under management.
7,01, The Commission may exempt other transactions, if it
finds that the requirements of registration under this
Code is not necessary in the public interest or for the
protection of the investors such as by reason of the
small amount involved or the limited character of the
public offering. Any person applying for an exemption
under this Section, shall file with the Commission a
notice identifying the exemption relied upon on such
form and at such time as the Commission by rule
may prescribe and with such notice shall pay to the
Commission a fee equivalent to one-tenth (1 /10) of
one percent (1%) of the maximum aggregate price or
issued value of the securities.
8. What are the grounds for revocation and/or rejection of
the registration of securities?
The SEC may reject a registration statement' and
refuse registration of the security thereunder, or revoke the
effect!vity of a registration statement and the registration
of the security thereunder after due notice and hearing by
issuing an order to such effect, setting forth its findings in
respect thereto, if it finds that:
a)
The issuer:
(i)
Has been judicially declared insolvent;
REVIEWER ON COMMERCIAL LAW
290
PART III — BUSINESS ORGANIZATIONS
(ii) Has violated any of the provisions of this
Code, the rules promulgated pursm
thereto, or any order of the Commission
in an Exchange or any other trading market
(hereafter referred to purposes of this Chapter as
"Exchange"):
which the issuer has notice in connecti .with the offering for which a registrath .
1)
"Wash sale" —- By effecting any transaction
in such security which involves no change
in the beneficial ownership thereof;
2)
"Matched orders" — By entering an order
or orders for the purchase or sale of such
security with the knowledge that a simul­
taneous 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
(but colluding) parties; or
3)
"Market rigging or jiggling" — By perform­
ing similar act where there is no change in
beneficial ownership.
statement has been, filed;
(iii) Has been or is engaged or is about to enge ;/-■
in fraudulent transactions;
(iv) Has made any false or misleading represe.
tation of material:: facts in any prospecC
concerning the issuer or its securities; or
(v) Has failed to comply with any requireme. ■
that the Commission may impose as a cm
dition for registration of the security hn
which the registration statement has been
filed; or
The registration statement is on its face incom­
plete or inaccurate in any material respect or
-------------------- includes any untrue statement of a material
fact or omits to state a material fact required
to be stated therein or necessary to make the
statements therein not misleading; or
b)
c)
The issuer, any officer, director or controlling
person of the issuer, or person performing similar
functions, or any underwriter 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 judicial or administrative body
for violations of securities, commodities, and
tions in securities that:
#
a)
To create a false or misleading appearance of
active trading in any listed . security traded
1)
Raises their price to induce the purchase of
a security, whether of the same or a differ­
ent class of the same issuer or of a control­
ling, controlled, or commonly controlled
company by others;
2)
Depresses their price to induce the sale of a
security, whether of the same or a different
class, of the same issuer or of a controlling,
controlled, or commonly controlled com­
pany by others; or
3)
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.
■
other related laws, v ,
9. State the devices and practices on manipulation of
security prices identified under the SRC
291
111
M
l
■IIS
iS B i
i jjl i
■ H
PART III — BUSINESS ORGANIZATIONS
REVIEWER ON COMMERCIAL LAW
292
c)
d)
e)
f)
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 depress­
ing 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 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.
No person shall use or employ, in connection
with the purchase or sale of any security any
manipulative or deceptive device or contrivance.
Neither shall any short sale be effected nor any
stop-loss order be executed in connection with
the purchase or sale of any security except in
accordance with such rules and regulations as
the Commission may prescribe as necessary
or appropriate in the public interest or for the
protection of investors.
10. Define “put,” “call,” and “straddle.” What is the rule
regarding the three practices in the SRC?
"Put" is a transferable option or offer to deliver a given
number of shares of stock at a stated price at any given time
during a stated period. "Call" is transferable option to buy
a specified number of shares at a stated price. "Straddle" is
a combination of put and call.
293
The SRC prohibits members of an Exchange from
directly or indirectly indorsing or guaranteeing the perfor­
mance of a put, call or straddle.
11. Enumerate the acts that are considered unlawful with
respect to the purchase and sale of securities.
Under Section 26 of the SRC, 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;
b)
Obtain money nr property by means of any un­
true statement of a material fact or any omis­
sion 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; or
c)
Engage in any act, transaction, practice or course
of business which operates or would operate as
a fraud or deceit upon any person.
12. Who is an insider?
"Insider" means: (a) the issuer; (b) a director or officer
(or person performing similar functions) of, or a person
controlling the issuer; (c) a person whose relationship or
former relationship to the issuer gives or gave him access
to material information about the issuer or the security that
is not generally available to the public; (d) a government
employee, or director, or officer of an exchange, clearing
agency and/or self-regulatory organization who has access
to material information about an issuer or a security that is
not generally available to the public; or (e) a person who
learns such information by a communication from any of
the foregoing insiders.
294
REVIEWER ON COMMERCIAL LAW
PART III — BUSINESS ORGANIZATIONS
295
12.01. What are the duties of an insider when he is trading
securities?
12.04. What is the prohibition imposed on insiders regard­
ing material non-public information?
It shall be unlawful for an insider to sell or buy a
security of the issuer, while in possession of material
information with respect to the issuer or the security
that is not generally available to the public, unless:
It shall be unlawful for any insider to commu­
nicate material non-public information about the
issuer or the security 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 the possession of
such information.
a)
The insider proves that the information
was not gained from such relationship; or b) If the
other party selling to or buying from the insider (or
his agent) is identified, the insider proves: (i) that
he disclosed the information to the other party, or
(ii) that he had reason to believe that the other party
otherwise is also in possession of the information.
12.02. Presumption: A purchase or sale of a security of the
issuer made by an insider defined in Subsection 3.8,
or such insider's spouse or relatives by affinity or
consanguinity within the second degree, legitimate
or common-law, shall be presumed to have been
effected while in possession of material non-public
information if transacted after such information
came into existence but prior to dissemination of
such information to the public and the lapse of a
reasonable time for the market to absorb such infor­
mation: Provided, however, That this presumption shall
be rebutted upon a showing by the purchaser or seller
that he was not aware of the material non-public
information at the time of the purchase or sale.
13. TENDER OFFER
13.01. What is Tender Offer— Tender offer means a publicly
announced intention by a person acting alone or in
concert with other persons (hereinafter referred to
as "person") to acquire equity securities of a public
company.
a)
12.03. What is material non-public information?
An information is "material non-public" if: (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 and the
lapse of a reasonable time for the market to absorb
the information; or (b) 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.
A tender offer is an offer by the acquiring person
to stockholders of a public company for them to
tender their shares therein on the terms speci­
fied in the offer. Tender offer is in place to pro­
tect 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
(CE 'MCO Holdings, Inc. v. National Life Insurance
Company, Inc., G.R. No. 171815, Aug. 7,2007).
b)
Public Company means 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 two hundred (200)
or more holders, at least :Two "hundred (200) of
which are holding at least one hundred (100)
shares of a class of its equity securities.
REVIEWER ON COMMERCIAL LAW
296
18.02. When tender offer is mandatory
a)
b)
c)
When any person or group of persons acting in
concert, who intends to acquire thirty-five per­
cent (35%) or more of equity shares in a public
company. (Note: They must disclose their inten­
tion to acquire the shares contemporaneously
with.-the tender offer.)
Any person or group of persons acting in concert,
who intends to acquire thirty-five percent (35%)
or more of equity shares in a public company
in one or more transactions within a period of
twelve (12) months, shall be required to make a
tender offer to all holders of such class for the
number of shares so acquired within the said
period.
If any acquisition of even less than thirty-five
percent (35%) would result in ownership of over
fifty-one percent (51%) of the total outstanding
equity securities of a public company, the
acquirer shall be required to make a tender offer
for all the outstanding equity securities to all
remaining stockholders of the said company
at a price supported by a fairness opinion pro­
vided by an independent financial advisor or
equivalent third party. The acquirer in such a
tender offer shall be required to accept any and
all securities thus tendered.
PART HI — BUSINESS ORGANIZATIONS
3)
purchase in connection with foreclosure pro­
ceedings involving a duly constituted pledge or
security arrangement where the acquisition is
made by the debtor or creditor;
4)
purchases in connection with privatization un­
dertaken by the government of the Philippines;
5)
purchases in connection with corporate rehabili­
tation under court supervision;
6)
purchases through an open market at the pre­
vailing market price; and
7)
merger or consolidation.
13.04. Obligations of person making a tender offer
a)
1)
2)
any purchase of shares from the unissued capi­
tal stock provided that the acquisition will not
result to a fifty percent (50%) or more ownership
of shares by the purchaser;
- -
any purchase of shares from an increase in
authorized capital stock;
Make an a n n o u n c e m e n t o f his intention in a
newspaper of general circulation, prior to the
commencement of the offer;
b) At least two (2) business days prior to the date of
---------------- the commencement of the tender offer:--------------
13.03. Exempt from Mandatory Tender Offer Requirement
The mandatory tender offer requirement shall
not apply to the following:
297
c)
1)
File with the SEC a required form for tender
offer (SEC Form 19-1) including all exhib­
its thereto (and any amendments thereto),
with the prescribed filing fees; and
2)
Hand deliver a copy of such form includ­
ing all exhibits (and amendments thereto)
to the target company at its principal execu­
tive office and to each Exchange where such
class of the target company's securities are
listed for trading.
Report the results of the tender offer by filing
with the Commission, not later than ten (10)
calendar days after the termination of the tender
offer, copies of the final amendments to the form.
13.05. DIRECT AND INDIRECT ACQUISITION
Ownership acquisition means both direct and
indirect. What is decisive is the determination of
298
PART III — BUSINESS ORGANIZATIONS
REVIEWER ON COMMERCIAL LAW
the power of control The bottom line of the law
is to give the shareholder of the public company
the opportunity to decide whether or not to sell
in connection with a transfer of control. Thus, the
rules apply even if one will acquire the shares in the
corporation that owns the shares of a public company
(including subsidiary). Example: X Corp. owns 61% of
the outstanding shares in B, a public company. The
tender offer rules apply if there will be a sale of the
controlling shares in X Corp. (CEMCO Holdings, Inc.
v. National Life Insurance Company, Inc., supra).
14. MARGIN TRADING
The customer purchases stocks by advising only a
portion of the purchase price with the broker extending
credit or making loan for balance due.
a)
The main purpose is to give the government an
effective method of reducing the aggregate amount
__________ of the nation7swirediimasoiiiresLw^
by speculation into the stock market and out of
other more desirable uses of commerce and industry
(Abacus Securities Corp. v. Ampil, G.R. No. 160016, Feb.
27, 2006).
14.01. PROHIBITIONS
a)
-A, Broken 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
into an account in which the equity is less than
P50,000.00.
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.
e)
299
Mandatory Close-Out Rule. 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 five (5) business days
from the date the insufficiency is created. A call
for maintenance margin shall be satisfied within
twenty-four (24) hours after the call is issued.
14.02. The parties may be considered in pari delicto if they
violate the limitations on margin trading. If a broker
tolerates the purchases of its customer without
performing its obligation under the Mandatory CloseOut Rule and without requiring the latter to deposit
cash before embarking on trading stocks any further,
broker violated the law at its own peril. Hence, it
cannot complain for failing to obtain the full amount
of its claim for later transactions (Abacus Securities
Corp. v. Ampil, ibid.).
15. VIOLATIONS OF SRC
All complaints for any violation of the Code and its
implementing rules and regulations should be filed with
the SEC. Where the complaint is criminal in nature, the
SEC shall indorse the complaint to the DOJ for preliminary
investigation and prosecution (Sec. 53.1, SRC; Baviera v.
Paglinawan , et a t, G.R. No. 168380, Feb. 8 , 2007).
PART IV ™ GENERAL BANKING LAW (R.A. NO. 8791),
LAW ON SECRECY OF DEPOSITS AND RELATED LAWS
1)
A. GENERAL BANKING LAW
(R.A. NO. 8791), LAW ON SECRECY
OF DEPOSITS AND RELATED LAWS
1. BANKS — entities engaged in the lending of funds obtained
in the form of deposits from the public (Sec. 3.1, General
Banking Law, GBLfor short).
a)
It is required that banks are stock corporations
and that its funds are obtained from the public,
meaning deposits of twenty (20) or more persons
Security Credit and Acceptance Corporation, G.R.
No. L-20583, fan. 23,1967).
c)
Quasi-Banks — entities engaged in the borrow­
ing of funds through the issuance, endorsement
or assignment with recourse or acceptance of
deposit substitutes for purposes of relending or
purchasing of receivables and other obligations
(Sec. 4, GBL).
300
Deposit substitutes are alternative forms of
obtaining funds from the public, other than
deposits, through the issuance, endorse­
ment, or acceptance of debt instruments for
the borrower's own account, for the pur­
pose of relending or purchasing of receiv­
ables and other obligations (Sec. 95, New
Central Bank Act, NCSA for short).
1.01. NATUREOF BUSINESS
A bank has a vital role in providing an environ­
ment conducive to the sustained national economy.
Banking is fiduciary in nature that requires high
standards of integrity and performance (Sec. 2, GBL).
a)
Consequences of nature of business:
1)
(Sec. 8, GBL).
------------- -b)— An4weid33xes±rr>rnpany that performs functions
as such is not a bank. Thus, an investment
company that is engaged solely in investing,
reinvesting or trading in securities is not
engaged in banking (Bahas v. Asia Pacific Finance
Corp., G.R. No. 128703, Oct. 18, 2000). However,
an investment company which loans out the
money of its customers, collects the interests,
and charges a commission to both lender and
borrower is engaged in banking (Republic v.
301
It is subject to heavy and close supervision
and/or regulation h y the Bangko Sentral ng
Pilipinas or BSP (Central Bank o f the Phil. v.*23
CA,208 SCRA 652).
___
2)
It is required to exercise utmost diligence
in the handling of deposits (Simex Interna­
tional [Manila] Incorporated v. CA, 183 SCRA
361).
3)
There are special rules on strikes and lock­
outs -— any strike or lockout involving
banks, if unsettled after seven (7) calendar
days shall be reported by the BSP to the
Secretary of Labor who has two (2) options:
(1) he may assume jurisdiction over and
decide the dispute or (2) certify the same to
the National Labor Relations Commission
(NLRC for Short) for compulsory arbitration.
The law also allows the President of the
Philippines to, at any time, intervene and
assume jurisdiction over such labor dispute
in order to settle or terminate the same (Sec.
22, GBL).
■
REVIEWER ON COMMERCIAL LAW
302
PART IV — GENERAL BANKING LAW (R.A. NO. 8791),
LAW ON SECRECY OF DEPOSITS AND RELATED LAWS
to cooperative organizations and their members
1.02. AUTHORITY TO INCORPORATE AND OPERATE
a)
b)
A banking or quasi-banking corporation cannot
be incorporated without authority from the BSE
The Articles of Incorporation to be filed with the
Securities and Exchange Commission (SEC for
short) should be accompanied by the favorable
recommendation of the BSP, otherwise, it shall
not be accepted or approved (Sec, 14, GBL).
An entity that is performing banking or a quasibanking function cannot operate without a cer­
tificate of authority from the BSP (Sec. 6, GBL).
(Sec. 100, FLA. No. 6938 as amended by R.A. No.
9520).
f)
Islamic Banks (R.A. No. 6848).
g)
Other classification of banks as determined by
the MB of the BSP.
2.02. DISTINCTIONS
a)
a)
Universal Banks — banks that have authority to
exercise, in addition to the powers and functions
of commercial banks, powers of an investment
______________ house and thfi-pmyer to invest in non-alfied
enterprises.
b)
Commercial Banks — banks that are given all
such power necessary to engage in commercial
banking in addition to general corporate powers;
commercial banking includes the power to
accept drafts, issue letters of credits, discounting
and negotiation of negotiable instruments and
evidence of debt, accept and create demand
deposits and the like. ,
c)
Rural banks — banks that are created to make
needed credit available and readily accessible
in the rural areas for the purpose of promot­
ing comprehensive rural development (R.A. No.
7353).
d)
Thrift banks — include savings and mortgage
banks, private development banks, and . stock
. savings and loan .associations (R.A. No. 7906).
e)
Cooperative banks -—- banks that primarily
provide financial, banking and credit services
As to capitalization — They have different mini­
mum capitalization requirements.
b)
As to purpose — Some of the banks have specific
purposes and social functions. For instance, Rural
Banks are meant to hasten rural development.
2. CLASSIFICATION OF BANKS
2.01. Banks are classified under Section 3.2 of the GBL into:
303
c)
As to powers or functions — There are functions
and powers that are not exercised by one that are
exercised by others. Some banks may exercise
certain powers only upon prior approval of the
__________ Monetary Board. Thus: (i) only universal bank
and commercial banks can create and accept
demand deposits without separate authority
from the Monetary Board while other banks
must secure authority from the Monetary
Board; (ii) only universal banks may act as an
investment house; (iii) generally, only universal
banks and commercial banks may be involved in
quasi-banking functions.
d)
As to who can be directors — Public officers can
be directors of Rural Banks while such officers
are prohibited from being directors or officers of
other types of banks.
e)
As to incorporators — Consistent with the provi­
sions of the Corporation Code, incorporators of
banks are natural persons. The exception is with
respect to rural banks which can be organized
or established by cooperatives and corporations
primarily organized to hold equities in rural
banks.
REVIEWER ON COMMERCIAL LAW
304
f)
As to foreign equity— A rural bank must be whol­
ly owned by Filipinos while other banks require
only forty percent (40%) Filipino ownership of
their voting stocks.
g)
FART IV — GENERAL !>ANKIN( - l AW (K..A. NC. o79s}.
LAW ON SECRECY OF DEPOSITS AMD RELATED LAWS
3.03. PROHIBITED ACTS
a)
Banks are prohibited from engaging in insur­
ance business.
b)
Outsourcing of functions are generally prohib­
ited. Example: A bank cannot hire another com­
pany to accept deposits.
As to -necessity,of public offering — Public offering
of shares is necessary for domestic banks seek­
ing authority to act as universal bank while there
is no such requirement for other banks.
305
4. DEPOSIT FUNCTION
4.01. Simple Loan
3. FUNCTIONS OF BANKS
3.01. BASIC FUNCTIONS
a)
Deposit Function
b)
Loan Function
3.02. OTHER FUNCTIONS
Universal banks and commercial banks (as well
as other banks depending on the type of bank and/or
-------------- ihe-^ot^asponding-auth^
by the Monetary
Board) may also exercise any of the following
functions:
a)
Receive in custody funds, documents and valu­
able objects;
b)
Act as financial agent and buy and sell, by order
of and for the account of their customers, shares,
evidences of indebtedness and all types of secu- rities;
c)
Make collections and payments for the account
of others and perform such other services for
their customers as are not incompatible with
banking business;
d)
■ e)
Upon prior approval of the Monetary Board,
act as managing agent, adviser, consultant or
administrator of investment management/advisory/consultancy accounts; and
Rent out safety deposit boxes.
Fixed, savings and current deposits of money in
banks and similar institutions shall be governed by
the provisions concerning simple loan (Art 1980, Civil
Code). Under the rule, the bank is the debtor while the
depositor is the creditor.
Consequences:
a)
The bank can make use as its own the money
deposited. Said amount is not being held in trust
for the depositor nor is it being kept for safe­
keeping (Tang Tiong Tick v. American AphothecarTes, 65 PHir414). ~
— ---------------
b)
Third persons who may have a right to the money
deposited cannot hold the bank responsible
unless there is a court order or garnishment.
The duty of the bank is to its creditor-depositor
and not to third persons (Fulton Iron Works v.
Chinabank, 55 Phil. 208). If a third person has a
valid right over the money deposited, he must
prove the same before a court of competent
jurisdiction.
c)
The officers of the bank cannot be held liable for
estafa if they authorized the use of the money
deposited by the depositor. There would be no
liability for estafa under Article 315(l)(b) of the
Revised Penal Code even if the bank failed to
return the amount deposited (Guingona v. City
Fiscal of Manila, 128 SCRA 577).
d)
The bank has the right to compensation. It can
set off the deposits with the indebtedness of the
REVIEWER ON COMMERCIAL LAW
306
Pa RL ; v ■—- N gN E R /W L a N R iN N LAW \K.,A, N O . o79’lj,.
LAW ON 3EC R EC V OF DEPOSITS AND RELATED LAWS
depositor that are due and demandable (Gullas
v. PNB, 62 Phil 519).
merciai bark can accept oi create demand
deposits.
4.02, DEPOSITORS
a)
they are at least seven years of age,
2)
they are able to read and write and have
sufficient discretion,
-
3)
they are not otherwise disqualified by any
other incapacity,
4)
it should'only be savings or time deposits
(Sec. I, P.D. No. 734).
b)
N ote: Parents may nevertheless deposit
for their minor children and guardians for their
wards (Sec. 1, P.D. No. 734).
3)
Temporary overdrawing against current
accounts shall not be allowed unless caused
by normal bank charges and other fees
incidental to handling such accounts.
4)
Drawings against uncollected deposits {i.e.r
uncleared checks) are generally prohibited.
SAVINGS ACCOUNT. This is the most com­
mon type of deposit and is usually evidenced by
a passbook.
Banks are prohibited from issuing/accepting withdrawal slips or any other similar
_________ instruments designed to effect withdrawals
of savings deposits without requiring the
depositors concerned to present their pass­
books and accomplishing the necessary
withdrawal slips, except for bank autho­
rized by the BSP to adopt the no passbook
withdrawal system (Sec. X214, Manual of
Banks Act o f 1995).
Married Women — they are allowed to open
. bank accounts without the assistance of their
husbands (R.A. No. 7192).
Regulations for Banks, or "Manual").
2)
4.03. KINDS OF DEPOSITS
The basic types of deposits are: a) demand
deposits, b) savings account, c) NOW Accounts, and
d) time deposits.
a)
A bank, other than a universal bank or
commercial bank cannot accept demand
deposits except upon prior approval of the
Monetary Board.
1)
With respect to Thrift Banks, the law states
----------------thaiu£-any-gm
notice in writing to any thrift bank not to make payments of
deposits, dividends, or interest to the minor of
whom he is the guardian, then such payment
shall be made only to the guardian (Sec. 22, Thrift
b)
2)
Minors — they can open bank accounts in their
own right provided that:
1)
307
The requirement of presentation of pass­
books is usually included in the terms and
conditions printed in the passbooks. A bank
is negligent if it allows the withdrawal
without requiring the presentation of a
passbook (BP1 v. CA).
DEMAND DEPOSITS — all those liabilities of
banks which are denominated in Philippine cur­
rency and are subject to payment in legal tender
upon demand by presentation of checks subject
to the following rules:
c)
NEGOTIABLE ORDER OF WITHDRAWAL
ACCOUNTS (NOW )— interest-bearing deposit
accounts that combine the payable on demand
feature of checks and investment feature of
savings accounts.
Generally, only a universal bank or com-
d)
TIME DEPOSIT — an account with fixed term.
1)
SHIttie
308
REVIEWER ON COMMERCIAL LAW
e)
INTERESTS — Demand, savings, NOW
accounts, time deposits and deposit substitutes
shall not be subject to interest ceilings (Sec. X242,
Manual).
4.04, Other Accounts, — Bank account may be opened by
one individual or by two or more persons. Whenever
two (2) or more persons open an account, the same
may be an "and / or account" or an "and" account.
a)
Anonymous Accounts are prohibited (R.A. No.
9160 as amended by R.A. No. 9194; BSP Circular No.
251, July 21, 2000). Exception: Foreign currency
deposits which may be a "numbered account."
However,
the law requires that necessary
measures are undertaken by the bank to record
and establish the true identity of the depositor
(Sec. 8, R.A. No. 6426 as amended, Foreign Currency
Deposits Act).
b)
Joint accounts may be the subject of a survi­
vorship agreement whereby the co-depositors
agree to permit either of them to withdraw the
whole deposit during their lifetime and transfer­
ring the balance to the survivor upon the death
of one of them (Vitug v. CA, G.R. No. 82027, March
29,1990).
4.05. SECRECY OF BANK DEPOSITS
A.
PESO DEPOSITS
All deposits of whatever nature with banks
or banking institutions in the Philippines includ­
ing investments in bonds issued by the Govern­
ment of the Philippines, its political subdivisions
and its instrumentalities, are considered abso­
lutely confidential and may not be examined,
inquired or looked into by any person, govern­
ment official, bureau or office (Sec. 2, R.A. No.
1405).
a)
Exceptions: ■
1) When there is written permission of
the depositor or investor;
PART j V — GENERAL BANKING LAW {R.A. NO o7L ),
LAW ON SECRECY OF DEPOSITS AND RELATED LAWS
2) Impeachment cases;
3) Upon the order of a competent court
in cases of bribery or dereliction of
duty of public officials;
4) Upon the order of a competent court
in cases where the money deposited or
invested is the subject of litigation;
5) Upon order of the competent court
or tribunal in cases involving unex­
plained wealth under the Anti-Graft
and Corrupt Practices Act, R.A. No.
3019 (Bangko Filipino v. Purisima, 161
SCRA 576);
6) Upon inquiry by the Commissioner
of Internal Revenue for the purpose
of determining the net estate of a de­
ceased depositor;
7) Upon the order of a competent court
or in proper cases by the Anti-Money
Laundering Council where there is
probable cause of money laundering
and in some instances even without
court order (Sec. 11, R.A. No. 9160);
8) Disclosure to the Treasurer of the
Philippines for dormant deposits
for at least ten (10) years under the
Unclaimed Balances Act (Sec. 2, R.A.
No. 3936).
9) Report of banks to Anti-Money Laun­
dering Council (AMLC) of covered
and/or suspicious transactions (Sec. 9,
R.A. No. 9160 as amended).
10) Upon order of the Court of Appeals,
examination by law enforcement
officers in terrorism cases under the
Human Security Act of 2007 (Secs. 27
and 28, RA. No. 8372).
310
REVIEWER ON COMMERCIAL LAW
b)
PART IV — GENERAL BANKING LAW ULA. NO. ETA;},
LAW ON SECRECY OF DEPOSITS AND RELATED LAWS
kept in it. It constitutes an attempt by
the prosecution at an impermissible
inquiry into a bank deposit account
the privacy and confidentiality of
which is protected by law (BSB Group,
Non-disclosure without Court order of any
information relative to the funds or proper­
ties of its -clients is also required (Sec. 55[b],
GBL). However, bank deposits shall con­
tinue to be governed by the Law on Secrecy
of Bank Deposits. Example: A bank cannot
disclose matters relating to the trust ac­
counts of tine client with the bank both un­
der Section 55(b) of the GBL and R.A. No.
1405 (Ejercito v. Sandiganbayan, 509 SCRA
Inc. v. Sally Go, G.R. No. 168644, Feb. 16,
2010) .
B.
The above-enumerated exceptions do not
apply to foreign currency deposits. There is
only one exception under the Foreign Currency
Deposits Act (Intengan v. CA, G.R. No. 128996, Feb.
15,2002) although another is provided for under
the Anti-Money Laundering Law. Therefore, the
exceptions are:
140 [2006]).
c)
FOREIGN CURRENCY DEPOSITS
Subject matter of litigation. The inquiry
into bank deposits allowable under R.A.
No. 1405 must be premised on the fact that
the money deposited in the account is itself
the subject of the action.
a)
-
Example: The criminal Information
filed with the trial court charged the
_________accused with qualified theft by abusing
(1)
when there is written consent of depositor
under Section 8 of the Foreign Currency
Deposits Act;
his employer's trust and confidence
and stealing cash in the amount of
P I,534,135.50. On the premise that
the accused had deposited the stolen
amounts to her personal banking
account, the prosecution moved for
the issuance of subpoena duces tecum!
------- b)— under Section 11 of the Anti-Money Laundering Act; and
ad testificandum against the respective
The Anti-Money Laundering Council
(AMLC) may inquire into deposits upon order
of the court when there is probable cause that
the deposits are related to the crime of unlawful
activities defined in Section 3(1) and Section 4 of
Republic Act No. 9160 as amended by Republic
Act No. 9194. However, a court order is not even
necessary when the offense or unlawful activity
involved is any of the following:
managers or records custodians of
the bank. The trial court granted the
motion and issued the corresponding
subpoena. The Supreme Court ruled
that there is violation of the law on
secrecy of bank deposits. The High
Court explained that the admission of
testimonial and documentary evidence
relative to respondent's Security Bank
account serves no other purpose than
to establish the existence of such
account, its nature and the amount
c)
C
under Sections 27 and 28 of the Human
Security Act.
SECRECY OF DEPOSITS UNDER THE ANTI­
MONEY LAUNDERING LAW
a)
Kidnapping for ransom under Article 267
of Act No. 3815, otherwise known as the
Revised Penal Code, as amended;
312
REVIEWER ON COMMERCIAL LAW
b)
Sections 4, 5, 7, 8, 9,10,12,13,14,15 and 16
of Republic Act No, 9165 otherwise known
as the Comprehensive Dangerous Drags
Act of 2002; and
c)
Hijacking and other violations under
Republic Act No. 6235; destructive arson
and murder, as defined under the Revised
Penal Code, as amended, including those
perpetrated by terrorists against noncombatant persons and similar targets.
PART IV — GENERAL BANKING LAW (R.A. NO. 8791),
LAW ON SECRECY OF DEPOSITS AND RELATED LAWS
a)
4.06. GARNISHMENT
Bank accounts may be garnished by the creditors
of the depositor. There is no violation of the Law on
Secrecy of Bank Deposits if the accounts are garnished
(China Bankv. Ortega, 49 SCRA356 [1973]), The amount
of deposit is actually not disclosed and the intent of
the legislature does not cover garnishment (Philippine
Commercial and Industrial Bank, et al. v. The Hon. CA, et
--------- a l, 193 SCRA 452).-------------------------------------------------a)
Deposits that are exempt from garnishment
1)
Foreign Currency Deposits (Sec. 8, PCDA).
N ote; The Supreme Court ruled in
Salvation, et al. v. Central Bank o f the Phil­
ippines/ et al, (Aug. 21, 1997), by way of
exception that foreign currency deposits of
Meaning of Deposit — the unpaid balance of
money or its equivalent received by a bank m
the usual course of business and for which if has
given or is obliged to give credit to a commer­
cial, checking, savings, time or thrift account, or
issued in accordance with BSP rules and regu­
lations and other applicable laws. Additionally,
this may also include such other obligations of a
bank, which, consistent with banking usage and
practices, the PDIC Board shall determine and
prescribe by regulations to be deposit liabilities
of the bank.
(1)
Insured deposit — the amount due to any bona
fide depositor for legitimate deposits in an insured*1
------------bank net of any obligation of the depositor to
the insured bank as of the date of closure, but
not to exceed Five Hundred Thousand Pesos
(P500,000.00).
(1)
Those exempt under the Rules of Civil Pro­
cedure like provision for the family for four
months (Sec. 13 o f Rule 39 of the 1997 Rules o f
Civil Procedure).
4.07. DEPOSIT INSURANCE (R.A. No. 3591)
All deposits- in banks- are insured with the Phil­
ippine Deposit Insurance Corporation or PDIC (Sec.
4, R.A. No. 3591 as amended).
In the case of any negotiable certificate of
deposit, the owner or holder thereof shall
be recognized as a depositor ONLY if his
name is registered as owner/holder thereof
in the books of the issuing bank.
b)
an American tourist who was found guilty
of repeatedly raping a twelve (12)-year old
child is subject to garnishment.
2)
313
-
Can the maximum deposit insurance
be adjusted? Yes, the maximum deposit
insurance cover may be adjusted in such
amount, for such a period, and/or for such
deposit products, provided the following
are complied with: (i) The Monetary Board
has determined that there is a condition
that threatens the monetary and financial
stability of the banking system that may
have systemic consequences, as defined in
Section 17 of Republic Act No. 3591; (ii) the
adjustments is approved by a unanimous
vote of the Board of Directors of PDIC in a
- meeting called for the purpose and chaired
by the Secretary of Finance; and (iii) the
adjustments are approved by the President
of the Philippines.
REVIEWER ON COMMERCIAL LAW
c)
FART IV — GENERAL BANKING LAW (E.A. MO. 8791),
LAW ON SECRECY OF DEPOSITS AND RELATED LAWS
Deposits Not Covered by Insurance, The PDIC
shall not pay deposit insurance for the following
transferred deposits in their names within 120
days immediately preceding or during a bankdeclared bank holiday or immediately preceding
a closure order issued by the Monetary Board for
the purpose of availing the maximum deposit
insurance coverage. This is a criminal act and
accounts or transactions, whether denominated,
documented, recorded or booked as deposit by
the bank:
(1)
The amount in excess of insured deposit
of Five Hundred Thousand Pesos
(P500,000.00);
(2)
Deposit that is payable in a place outside
the Philippines (Example: in foreign branch­
es);
(3)
Investment products such as bonds and
securities, trust accounts, and other similar
instruments;
(4)
Deposit accounts or transactions which are
unfounded, or that are fictitious or fraudu­
lent;
(5)
Deposit accounts or transactions constituting, and/or emanating from, unsafe and.
unsound banking practice /s; and
(6)
Deposits that are determined to be the pro­
ceeds ' of an unlawful activity as defined
under Republic Act No. 9160 or the AntiMoney Laundering Law;
(7)
Deposit accounts that resulted from split­
ting of deposit; and
(8)
Money placements by the head office of
a foreign bank in its branch in the Phils.
There is only one entity. (PDIC v. Citibank,
the deposits are not entitled to any insurance
payment.
e)
Splitting of Deposit — this occurs whenever
a deposit account with an outstanding balance
- of more than P500,000.00 under the name of
persons is broken down and transferred to two
or more accounts in the name of persons or
entities who have no beneficial ownership in the
Determination of Amount Due: In determin­
ing such amount due to any depositor, there
shall be added together all deposits in the bank
maintained in the same right and capacity for his
benefit either in his own name or in the name of
others.
(1)
A joint account regardless of whether the
conjunction "and," "or," "and/or" is used,
shall be insured separately from any indi­
vidually-owned deposit account;
(2)
If the account is held jointly by two or more*34
persons or entities, the maximum insured
deposit shall be divided into as many equal
shares as there are individuals, juridical
persons or entities, unless a different shar­
ing is stipulated in the document of depos­
it;
N.A., No. 170290, April 11, 2012).
d)
315
.. ; ; .
(3)
If the account is held by a juridical person
or entity jointly with one or more natural
persons, the maximum insured deposit
shall be presumed to belong entirely to
such juridical person or entity;
(4)
The aggregate of the interest of each co­
owner over several joint accounts, whether
owned by the same or different combinations of individuals, juridical persons or
entities, shall likewise be subject to the
maximum insured deposit of Five Hundred
Thousand Pesos (P500,000.00).
PART IV — GENERAL BANKING LAW (R.A. NO. 8791),
LAW ON SECRECY OF DEPOSITS AND RELATED LAWS
REVIEWER ON COMMERCIAL LAW
316
£)
amended by R.A. No. 7400).
g)
The liability of the PDIC for insured deposits
rests upon the existence of deposits with insured
bank, not on the negotiability or non-negotiabil­
ity of the certificates evidencing these deposits.
In fact, the claimant cannot recover even if he
can present a negotiable certificate of deposit if
there is actually no deposit (Philippine Deposit In­
surance Corp. v. CA, 283 SCRA 462 [1997]).
h)
The claim must be .filed within 2 years from
actual takeover by the receiver.
PROBLEMS:
1.
'When a claim was made on the remaining 20 time
deposits, the PDIC rejected the claim on the ground
that they were not deposits made in the usual course
of business. Did PDIC validly reject the claim?
WHEN PAYMENT IS MADE, The proceeds of
the insurance shall he paid hv the PDIC to the
depositor whenever the insured bank is closed
on account of insolvency. An insured bank shall
be deemed to have been closed on account of in­
solvency when ordered closed by the Monetary
Board of the BSP (Sec. I0[b]r R.A. No. 3591 as
A:
No, PDIC did not validly reject the claim. MB Bank
and its client should be given the benefit of the doubt
that they were not aware that the Monetary Board
Resolution had been passed. Mere conjectures that
MB Bank had actual knowledge of its impending
closure do not suffice. The Resolution could not thus
have nullified, the transactions that were entered into
prior to the receipt of the Resolution by MB Bank
(Philippine Deposit Insurance Corp. v. CA, eta l, G.R. No.
126911, April 30,2003).
4.08. UNCLAIMED BALANCES
a)
Deposits that have become dormant for a period
of ten (10) years may be escheated in favor of the
government.
b)
Initially, there should be notice to the depositor
of the unclaimed balance (Sec. 2, R.A. No. 3936;
X Bank was closed by the Monetary Board on account
of insolvency. At the time it was closed, A has three
accounts with X Bank and each account has an out­
standing balance of P250,000.00 or a total amount of
P750,000.00. How much can A recover from the PDIC?
A:
A can recover only P500,000.00. The PDIC law
provides that if a depositor has two or more accounts
with the same bank, the maximum coverage pertains
to the sum of all such accounts.
2.
JA has a time deposit with MB Bank. On May 22,
1999, the Monetary Bank issued a resolution placing
MB Bank under receivership. After the issuance of
such Resolution but before the receipt thereof by
MB Bank on May 26, 1987, JA went to MB Bank pre­
terminating his time deposits and re-depositing the
funds into 28 new time deposits under the names of
several co-depositors. Of the new time deposits, JA
pre-terminated 8 and withdrew the value thereof.
317
RCBC v. Hi-Tri Dev. Corp., G.R. No. 192413, June
13, 2012). Thereafter, the bank (including build­
ing and loan associations and trust companies)
is required to report (sworn statement) to the
Treasurer of the Philippines the existence of such
deposits. The Treasurer will in turn inform the
Solicitor General who will then initiate the prop­
er escheat proceedings in Court.
c)
Publication of a list of unclaimed balances is also
required in order to safeguard the right of the
depositors, their heirs and successors in interest
to due process (Act No. 3936).
d)
Such unclaimed balances, together with the in­
crease and proceeds thereof, shall be deposited
with the Treasurer of the Philippines to the credit
of the Government of the Republic of the Philip­
pines to be used as the Congress may direct.
REVIEWER ON COMMERCIAL LAW
318
LA K E f\. — D c,N l R/LL LAN iCLN iL i,A rv
lA W
e)
k)N s e c r e c y
Unclaimed balances — include credits or depos-
its of money, bullion, security or other evidence
of indebtedness of any kind, and interest there­
on with banks, buildings and loan associations,
and trust corporations, as hereinafter defined, in
e)
SINGLE BORROWER'S LIMIT
1)
Act No. 3936).
LOAN FUNCTION OF BANKS
5.01. BASIC RULES/RESTRICTIONS
a)
A bank shall grant loans and other credit accom­
modations only in amounts and for the periods
of time essential for the effective completion of
the operations to be financed.
b)
Such grant of loans and other credit accommo­
dations shall be consistent with safe and sound
______________banking practices._____________________________
c)
Before granting a loan or other credit accom­
modation, a bank must ascertain that the debtor
is capable of fulfilling his commitments to the
bank.
d)
PAYMENTS
1)
2)
..
..
Amortization schedule of bank loans and
other credit accommodations shall be
adapted to the nature of the operations to
be financed (Sec. 44, GBL).
Loans and other credit accommodations
with maturities of more than five years,
provisions must be made for periodic
amortization payments, but such payments
must be made at least annually (Ibid.).
3) A borrower may at any time prior to the
. . agreed maturity date prepay, in whole or in
part, the unpaid balance of any bank loan
and other credit accommodation, subject
319
LAWS
to such reasonable terms and conditions as
may be agreed upon between the bank and
its borrower (Sec. 45, GBL).
favor of any person known to be dead or who
has not made further deposits or withdrawals
during the preceding ten years or more (Sec. 1,
5.
h k \ 8 7 v l j.
or d e p o b w s a n d r e l a t e d
CEILING — the total amount of loans,
credit accommodations and guarantees
that may be extended by a bank to any
person, partnership, association, corpora­
tion or other entity shall at no time exceed
twenty-five percent (25%) of the net worth
of such bank (as increased by BSP Circular
425). The basis for determining compliance
with single-borrower limit is the total credit
commitment of the bank to the borrower
(Sec. 35.1, GBL).
The total amount of loans, credit ac­
commodations and guarantees prescribed
in the preceding paragraph may be in----------------------- creased by an additional ten percent (10%)
of the net worth of such bank provided
the additional liabilities of any borrower
are adequately secured by trust receipts,
shipping documents, warehouse receipts
or other similar documents transferring or
securing title covering readily marketable,
non-perishable goods which must be fully
covered by insurance (Sec. 35.2, GBL).
5.02. DOSRI ACCOUNTS
Restrictions (not total prohibition) are imposed
on borrowings and security arrangement by directors,
officers and stockholders of the bank directors,
officers, stockholders and their related interests
(hence, the term DOSRI).'
a)
REQUISITES UNDER ART. 26, NCBA
1)
The borrower is a director, officer or any
stockholder of a hank (and related inter­
ests);
rAK* i v — CjN'MixAl fi.'-xNjtLsf-i'A —rivV (K.U. N-i.'. fvV; j
A W ON SECRECY OF DEPOSITS AND RELATED LAWS
REVIEWER ON COMMERCIAL LAW
2}
merits of such bank in enterprises owned
or controlled by said directors, officers,
stockholders and their related interests. The
Manual of Regulations for Banks provide
that the aggregate is fifteen percent (15%)
of the total loan portfolio of the bank or one
He contracts a loan or any form of financial
accommodation;
3)
The loan or financial accommodation is
from; (1) his bank, or (2) a bank that is a
subsidiary of a bank holding company ;
which both his bank and lending bank are -
hundred percent (100%) of the combined
capital accounts whichever is lower.
subsidiaries, (3) a bank in which a control­
ling proportion of the shares is owned by
the same interest that owns a controlling
proportion of the shares of his bank; and
4)
5)
The loan or financial accommodation of the
director, officer or stockholder, singly or
with that of his related interest, is in excess
of 5% of the capital and surplus of the
lending bank or in the maximum amount
permitted by law, whichever is lower.
DOSRI Accounts are subject to the follow-
_______ __
Procedural Requirement. The account
should be upon written approval of the
majority of all the directors of the lending
bank excluding the director concerned.
2)
Arms Length Rule. The account should be
upon terms not less favorable to the bank
than those offered to others.
3)
4)
Individual Ceilings. The outstanding
loans, credit accommodations and guar­
antees which a bank may extend to each of
its stockholders, directors, or officers and
their related interests, shall be limited to an
amount equivalent to their respective unen­
cumbered deposits and book value of their
paid-in capital contribution in the bank.
It should be noted however that the
ceilings do not apply to loans, credit accom­
modations and guarantees (1) secured by*1
assets considered by the Monetary Board
as non-risk items, (2)lIndef~aTfinge"BenSfir
plan approved by the BSP, and (3) extend­
ed by cooperative banks to its cooperative
stockholders.
RESTRICTIONS UNDER THE GBL
1)
a2i
c)
Reportorial Requirem ent The resolution
approving the loan shall be entered in the
records of the bank and a copy of the entry
shall be transmitted forthwith to the Super­
vising and Examination Sector of the BSP.
m
Aggregate Ceilings. The Monetary Board
may regulate the amount of loans, credit
accommodations and guarantees that may
be extended, directly or indirectly, by a
bank to its directors, officers, stockholders
and their related interests, as well as invest-
m am
RESTRICTIONS UNDER SEC. 26, NCBA
1)
The borrower shall be required by the lend­
ing bank to waive the secrecy of his depos­
its of whatever nature in all banks in the
Philippines. The directors, officers or stock­
holders are required to make such waiver if
they themselves are the borrowers.
2)
The accounts are subject to examination but
any information obtained from an exami­
nation of his deposits shall be held strictly
confidential and may be used by examin­
ers only in connection with the supervisory
and examination responsibility or by the
Bangko Sentral in an appropriate legal ac~
■'iiijgg
iiiis
ip
i l l
::i i i n
®1J1SS
-:1firtilfS
m
REVIEWER ON COMMERCIAL LAW
322
PART IV — CNNEiLAL BANKING LAW
NIL WM/,
LAW ON SECRECY OF DEPOSITS AND RELATED LAW:,
more than three (3) months after fore-
tion it has initiated involving the deposit
account.
closure, whichever is earlier,
b)
5,03. COLLATERALS
A.
38, GBL).
47, GBL).
FORECLOSURE OF MORTGAGE (Sec. 47,
GBL)
a)
Redemption Period
1)
Redemption Period for Natural Per­
sons
The mortgagor or debtor, who is
a natural person, whose real property
____________________has been sold for the full or partial
payment of his obligation shall have
the right within one year after the sale
of the real estate, to redeem the prop­
erty. The one-year redemption period
should be counted from the date of
the registration of the certificate of sale
with the Register of Deeds (See Section
c)
'
Redemption Period for Juridical Per­
sons
A juridical person, whose property
has been sold pursuant to an extraju­
dicial foreclosure, shall have the right
to redeem the property but not after
the registration of the certificate of
. foreclosure sale with the proper Register of Deeds which in no case shall be
Possession
The purchaser at the auction sale con­
cerned whether in a judicial or extrajudi­
cial foreclosure shall have the right to enter
upon and take possession of such property
immediately after the date of the confirma­
tion of the auction sale and administer the
----------------------- same in accordance with law (Ibid.),-----------
d)
Injunction and Bond
Any petition in court to enjoin or res­
train the conduct of foreclosure proceedings
instituted pursuant to this provision shall
be given due course only upon the filing by
the petitioner of a bond in an amount fixed
by the court conditioned that he will pay all
the damages which the bank may suffer by
the enjoining or the restraint of the foreclo­
sure proceeding (Ibid.).
1[3] o f Supreme Court Circular AM. No.
99-10-05, as further amended on Aug. 7,
2001) .
2)
Redemption Price-
Redemption may be exercised by pay­
ing the amount due under the mortgage
deed, with interest thereon at the rate speci­
fied in the mortgage, and all the costs and
expenses incurred by the bank or institu­
tion from the sale and custody of said prop­
erty less the income derived therefrom (Sec.
VALUE OF COLLATERALS
The loan shall not exceed 75% of the ap­
praised value of the real property plus 60% of
the appraised value of the improvement or 75%
of the appraised value of the chattel (Secs. 37 and
B.
323
PROHIBITED ACTS OF BORROWERS (Sec. 55.2)
N o borrower of a bank shall:
a)
Fraudulently overvalue property offered as
security for a loan or other credit accommodation
from the bank;
b)
Furnish false or make misrepresentation or
suppression of material facts for the purpose
REVIEWER ON COMMERCIAL LAW
CART; v — lS N tSRALBANK'- i-L L A
W
(«.A . WA. <v’L •
325
l,AW ON SECRECY OF D E PO S-5 AND RELATER 1 LAW
c)
the 60% limit within a period of seven
(7) years from the effectivity of the GBL.
of obtaining, renewing, or increasing a loan or
other credit accommodation or extending the
beyond
period thereof;
Within that seven (7) year period, with pri­
or authority from the Monetary Board, foreign
banks m ay acquire 100% of the voting stocks of
Attempt to defraud the said bank in the event
of a court action to recover a loan or other credit
accommodation; or
d)
Offer any director,,: officer, employee or agent of
a bank any gift, fee, commission, or any other
form of compensation in order to influence such
persons into approving a loan or other credit
accommodation application.
an existing bank or invest in up to 100% of the
voting stocks of a new subsidiary (Sec. 73, GBL).
7.02. FILIPINO STOCKHOLDINGS
a)
Section 11 of the GBL provides that the rule
— limiting ownership and control of voting
stocks to forty percent (40%) of voting stock —
shall apply to Filipinos and domestic non-bank
corporations.
b)
While the restriction on foreigners refers to the
7. OWNERSHIP OF BANKS
7.01. FOREIGN OWNERSHIP
Individuals and non-banks (Sec, 11, GBL)
a)
1)
~
~
bank.
2)
b)
total equity participation, the restriction on Fili­
pinos and domestic non-bank corporations refer
to individual equity participation.
Foreign individuals and non-bank corpora­
tions may ow n or control up to forty per­
cent (40%) of the voting stock of a domestic*2
-----— ------------------- —-------- —
The percentage of foreign-owned voting
stocks in a bank shall be determined by the
citizenship of the individual stockholders
in that bank. The citizenship of the corpora­
tion which is a stockholder in a bank shall
follow the citizenship of the controllingstockholders of the corporation, irrespec­
tive of the place of incorporation. Control­
ling stockholders refer to individuals hold­
ing more than fifty percent (50%) of the
voting stock of the corporate stockholder of
the bank.
-7^3^-^IQCKHQLDINGS—£ffi—EAMIQl_GROUPS OR
RELATED INTERESTS
a)
The law does not prohibit ownership of the
stock by members of the same family or related
interests. However, the law provides that
stockholdings of individuals related to each
other within the fourth degree of consanguinity
or affinity, legitimate or common-law, shall be
considered family groups or related interests
and must be fully disclosed in all transactions by
such an individual with the bank (Sec. 12, GBL).
b)
Two or more corporations owned or controlled
by the same family group or same group of per­
sons shall be considered related interests and
must be fully disclosed in all transactions by
such corporations or related groups of persons
Foreign Banks
Foreign banks are not subject to the 40%
limitation prescribed tra d e r Section 11 of the
GBL. The law prescribes 60% as the maximum
foreign bank equity (R.A. No. 7721). However,
Section 73 of the GBL allows the acquisition
with the bank (Sec. 13, GBL).
c)
Unlike the former law, the GBL does not im­
pose a limit on the number .of shares that can be
REVIEWER ON COMMERCIAL LAW
326
owned by the same family or related interest
However, this should be without prejudice to
the forty percent (40%) restrictions imposed by
Section 11 of the GBL,
I . DIRECTORS AND OFFICERS
EARTIV — GENERAL BANKING LAW (R.A. NO. 8791),
LAW ON SECRECY OF DEPOSITS AND RELATED LAWS
but not limited to, teleconferencing and video-confe­
rencing (Sec, 15, GBL),
8.03. QUALIFICATIONS
a)
There shall be at least five (5), and a maximum
of fifteen (15) members of the board of directors
of a bank, two (2) of whom shall be independent
directors. However, in case of merged or consoli­
dated banks, the maximum number of directors
The law further provides that "In deter­
mining whether an individual is fit and proper to
hold the position of a director or officer of a bank,
regard shall be given to his integrity, experience,
education, training, and competence." (Sec. 16,
is twenty-one (21).
b)
An "independent director" shall mean a person
other than an officer or employee of the bank, its
subsidiaries or affiliates or related interests.
c)
Non-Filipino citizens may become members of
the board of directors of a bank to the extent of
■
----- ---- --------- the foreign participation in the equity of said
bank.
d)
The law provides that no appointive or elective
public official, whether full-time or part-time,
shall at the same time serve as officer of any
private bank, save in cases where such service
is incident to financial assistance provided by
the government or a government-owned or con­
trolled corporation to the bank or unless other­
wise provided under existing laws.
GBL).
9. REGULATIONS TO MAINTAIN LIQUIDITY AND SECURITY
Certain regulatory provisions in the General Banking
Law as well as the New Central Bank Act are geared
towards the purpose of maintaining liquidity and security.
These regulations include those relating to loans and other
matters:
a)
The Monetary Board shall prescribe the mini­
mum ratio which the net worth of a bank must
bear to its total risk assets which may include
contingent accounts (Sec. 34, GBL).
b)
The law imposes limits on loans, credit accom­
modations and guarantees that may be extended
by banks.
c)
Limitation is placed on the bank's exposure to
directors, officers, stockholders and their related
interest (DOSRI Accounts, See Sec. 36, GBL).
d)
The law imposes restrictions on the value of
collaterals on loans.
By way of exception, Section 5 of the Rural
Banks Act of 1992 provides that nothing in the
said Act "shall be construed as prohibiting any
appointive or elective official from serving as
director, officer, consultant or in any capacity in
the bank." '
8.02. MEETINGS
The meetings of the board of directors may be
conducted through modern technologies such as,
Fit and Proper Rule
Under the "fit and proper rule," the Mone­
tary Board is authorized to pass rules providing
for the qualifications and disqualifications of in­
dividuals elected or appointed bank directors or
officers and to disqualify those found unfit after
due notice (Sec. 16, GBL).
8.01. COMPOSITION OF BOARD (Secs. 15 an d 19, GBL)
a)
327
REVIEWER ON COMMERCIAL LAW
e)
f)
g)
The Monetary Board may prescribe the maturi­
ties and other terms and conditions for various
types of loans and accommodations (Sec, 43,
GBL).
The law provides restrictions on dividend decla­
rations (Sec. 57, GBL).
Dividend declaration is prohibited in the follow­
ing instances:
if it is greater than its accumulated net profits
then on hand, deducting therefrom its losses and
bad debts;
b)
if its clearing account with the Bangko Sentral is
overdrawn; or
__________ r)
if it is deficient in the required liquidity floor for
government deposits for five (5) or more consec­
utive days; or
d)
e)
if it does not comply with the liquidity standards/ratios prescribed by the Bangko Sentral
for purposes of determining funds available for
dividend declaration; or
if it has committed a major violation as may be
determined by the Bangko Sentral.
10. OWNERSHIP OF REAL PROPERTY
10.01. Any bank may acquire real estate as shall be neces­
sary for its own use in the conduct of its business.
However, the total investment in such real estate and
improvements thereof, including bank equipment,
shall not exceed fifty percent (50%) of combined capi­
tal accounts.
a)
Unless otherwise provided by the Monetary
Board, the equity investment of a bank in
329
another corporation engaged primarily in real
The Monetary Board may provide for restric­
tions on unsecured loans (Sec, 41, GBL),
9.01. DIVIDENDS
a)
RAKT i V —-GENERAL SANK IN A i_AvV (K.A, NO, S79J),
LAW ON SECRECY OF DEPOSITS AND RELATED LAWS
estate shall be considered as part of the bank's
total investment in real estate (Sec. 51, GBL).
10.02. However, a bank may acquire, hold or convey real
property under the following circumstances:
a)
Such as shall be mortgaged to it in good faith by
way of security for debts;
b)
Such as shall be conveyed to it in satisfaction of
debts previously contracted in the course of its
dealings; or
c)
Such as it shall purchase at sales under judg­
ments, decrees, mortgages, or trust deeds held
by it and such as it shall purchase to secure debts
due it
Any real property acquired or held under
the circumstances enumerated in the above para­
graph shall be disposed of by the bank within a
by the Monetary Board. After said period, the
bank may continue to hold the property for its
own use, subject to the limitations mentioned
earlier, that is, the investment should not be
more than 50% of the combined capital accounts
(Sec. 52, GBL).
LOAN TO BANKS
11.01. LOANS WITHOUT COLLATERAL
The BSP may extend loans and advances to
banking institutions for a period of not more than
seven (7) days without any collateral for the purpose
of providing liquidity (Sec. 83, NCSA).
11.02. EMERGENCY LOANS
The BSP, upon the approval of at least five (5)
members of the Monetary Board, may also grant
emergency loans or advances in the amount not
exceeding fifty percent (50%) of its total deposits and
REVIEWER OH COMMERCIAL LAW
330
EARI IV — GENERAL BANKING LAW (ILA. NO.
LAW ON SECRECY OF DEPOSITS AND RELATED LAWS
331
deposit substitutes. The loans shall be released in two
Provided, That this shah not include inability to
tranches (Sec. 84, NCBA).
pay caused by extraordinary demands induced
by financial panic in the banking community;
12. CONSERVATORSHIP (S ec , 29, NCBA J
b)
12.01. GROUNDS — whenever, on the basis of a report
submitted by the appropriate supervising or
examining department, the Monetary Board finds
that a bank or a quasi-bank is in a state of continuing
inability or unwillingness to maintain a condition
of liquidity deemed adequate to protect the interest
of depositors and creditors, the Monetary Board
may appoint a conservator with such powers as
the Monetary Board shall deem necessary. The
conservatorship shall not exceed one (1) year.
12.02. POWERS OF CONSERVATOR
The powers that may be conferred to the conser­
vator are such powers as may be necessary for the
following purposes:_____
a)
To take charge of the assets, liabilities, and the
management thereof;
b)
To reorganize the management of the subject
bank;
c)
To collect all monies and debts due said institu­
tion; and
d)
To exercise all powers necessary to restore its
viability.
-
liabilities; or
c)
d)
The bank has willfully violated a cease and
desist order under Section 37 that has become
final, involving acts or transactions which
amount to fraud or a dissipation of the assets of
the institution.
13.02. DUTIES OF RECEIVER
a)
The receiver shall immediately gather and take
charge of all the assets and liabilities of the insti— ------------ tution. administer the same for the benefit of its
creditors;
b)
The receiver shall exercise the general powers of
a receiver under the Revised Rules of Court;
c)
The receiver may deposit or place the funds of
the institution in non-speculative investments;
d)
The receiver shall determine as soon as possible,
but not later than ninety (90) days from take over,
whether the institution may be rehabilitated or
otherwise placed in such a condition so that it
may be permitted to resume business with safe­
ty to its depositors and creditors and the general
public: Provided, That any determination for the
resumption of business of the institution shall be
subject to prior approval of the Monetary Board;
and
e)
The receiver shall not, with the exception of
administrative expenditures, pay or commit any
13.01. GROUNDS
The PDIC, as the statutory receiver, of a bank,
may be appointed whenever, upon report of the head
of the supervising and examining department, the
Monetary Board finds that.
The bank is unable to pay its liabilities as they
become due in the ordinary course of business:
The bank cannot continue in business without
involving probable losses to its depositors or
creditors; or
13. RECEIVERSHIP AND LIQUIDATION (S e c . 30, NCBA)
a)
The bank has insufficient realizable assets, as
determined by the Bangko Sentral, to meet its
REVIEWER ON COMMERCIAL LAW
332
' Ar-fl i V —- GENERAL, BANKING; LAW (K..A, NO. rf/91),
333
LAW ON SECRECY OF DEPOSITS AND RELATED LAWS
act that will involve the transfer or disposition of
any asset of the institution.
case should be initiated and prosecuted
through the liquidator (Manato v. CA, G.R.
No. 141297, Oct 8, 2001).
13.03. CLOSE NOW-HEAR LATER SCHEME
No prior hearing is necessary in appointing a
receiver and in closing the bank. It is enough that
subsequent judicial review is provided for. Indeed,
to require such previous hearing would not only be
impractical but would tend to defeat the very purpose
of the law when it invested the Monetary Board with
such authority (Rural Bank o f Lucena v. Area, G.R. No.
2)
L-21146, Sept 20,1965).
3)
2004).
13.04. EFFECT OF RECEIVERSHIP AND LIQUIDATION
a)
An insolvent bank that was closed by the
BSP is not liable to pay interests on deposits
Garnishment, Levy, Attachment, or Execution
(Fidelity Savings and Mortgage Bank v. Cenzon,
184 SCRA 141). However, interests on loans
1)
extended by the BSP are still demandable
Section 30 of the New Central Bank Act pro­
vides that the assets of an institution under
receivership or liquidation shall be deemed
in custodia legis in the hands of the receiver*1
-------------- and shall, from the moment the institution was placed under such receivership
or liquidation, be exempt from any order
of garnishment, levy, attachment, or execu­
tion (Lipana v. Development Bank ofRizal, 154
(Sec. 82, NCBA).
13.05. JUDICIAL REVIEW
a)
2)
There will be no preference even if the
claimant-depositor obtained a writ of pre­
liminary attachment. After the declaration
of insolvency, the remedy of the deposi­
tors is to intervene in the liquidation pro­
ceedings (Provident Savings Bank v. CA, 222
The petition for certiorari may only be filed
by the stockholders of record representing the
majority of the capital stock within ten (10) days
from receipt by the board of directors of the
institution of the order directing receivership,
liquidation or '.conservatorship.
SCRA125).
Other Effects
1)
The appointment of a receiver does not dis­
solve the corporation nor does it interfere
with the exercise of corporate rights. Banks
under liquidation retain their legal person­
ality. The bank can sue and be sued but any
Remedy under Section 30 of NCBA___________
. The. actions. of the Monetary Board taken
under Section 30 or under Section 29 of this
Act shall be final and executory, and may not
be restrained or set aside by the court except
on petition for certiorari on the ground that the
action taken was in excess of jurisdiction or with
such grave abuse of discretion as to amount to
lack or excess of jurisdiction.
SCRA257).
b)
The BSP may also forbid the bank from
doing business. However, when a bank is
not allowed to do business by the BSP, it can
still foreclose mortgage and the prescriptive
period to foreclose is not tolled (Larrobis v.
Phil. Veterans Bank, G.R. No. 135706, Oct. 1,
b)
Ground: Grave abuse of discretion
The power and authority of the Monetary
Board to elosebanks and liquidate them thereafter
when public interest so'requires is an exercise of
lliissitf
llijllS f
334
Vhtki
F.EVJSvvisR ON COMMERCIAL LAW
discriminatory, whimsical, arbitrary, unjust, or is
tantamount to a denial of due process and equal
protection clauses of the Constitution (Central
Bank v. CA, 106 SCRA143; Banco Filipino Savings
and Mortgage Bank v. Monetary Board, 204 SCRA
747).
Who may question
Section 30 of the NCBA provides that the
petition for certiorari may only be filed by the
stockholders of record representing the majority
of the capital stock. The petition may not be
filed by the receiver or the conservator that was
appointed.
14. TRUST OPERATIONS OF BANKS
14.01. Priur auiliuiity — A bank may be authorized by
the Monetary Board to engage in trust business
and act as a trustee or administer any trust or hold
property in trust or on deposit for the use, benefit,
or behoof of others (Sec. 79, GBL). The Securities and
Exchange Commission shall not register the articles
of incorporation and by-laws or any amendment
thereto, of any trust entity, unless accompanied by a
certificate of authority issued by the Bangka Sentral
(Sec. 80, GBL).
14.02. Trust Business — Any activity resulting from a
trustor-trustee relationship (trusteeship) involving
the appointment of a trustee by a trustor for the
administration, holding, management of funds and/
or properties of the trustor by the trustee for the use,
benefit or advantage of the trustor or of others called
beneficiaries (Sec. X403[a], Manual).
a)
A trust-licensed bank may also be involved in
other fiduciary business which refer to any ac~
u\.A. i-j u .
o/yij,
tivity resulting from a contract or agreement
whereby a bank binds itself to render services
or to act in a representative capacity such as in
an agency, guardianship, administratorship or
wills, properties or estates, executorship, receiv­
ership, and other similar services which do not
create or result in a trusteeship (Ibid., par. b).
police power of the State. Police power, however,
may not he exercised arbitrarily or unreasonably
and could be set aside if it is either capricious,
c)
iv — ABmcKAL: iiAiErslis'vi
LAW ON SECRECY OF DEPOSITS AND RELATED LAWS
14.03. POWERS OF TRUST ENTITY
im
i®
■ ill
ililiS A
A trust entity, in addition to the general powers
incident to corporations, shall have the power to:
a)
Act as trustee on any mortgage or bond issued
by any municipality, corporation, or any body
politic and to accept and execute any trust con­
sistent with law;
Act under the order or appointment of any court
as guardian, receiver, trustee, or depositary of the
estate of any minor or other incompetent person,
-and-as-receiver and depositary of any moneys
paid into court by parties to any legal proceed­
ings and of property of any kind which may be
brought under the jurisdiction of the court;
Act as the executor of any will when it is named
the executor thereof;
Act as administrator of the estate of any de­
ceased person, with the will annexed, or as ad­
ministrator of the estate of any deceased person
when there is no will;
Accept and execute any trust for the holding,
management, and administration of any estate,
real or personal, and the rents, issues and profits
thereof; and
Establish and manage common trust funds, sub­
ject to such rules and regulations as may be pre­
scribed by the Monetary Board.
336
REVIEWER ON COMMERCIAL LAW
PART IV — GENERAL BANKING LAW (R.A. NO. 8791),
LAW ON SECRECY OF DEPOSITS AND RELATED LAWS
4) It shall have the sole power and authority
14.04. SEPARATION OF TRUST BUSINESS OF BANKS
to issue currency within the territory of the
Republic of the Philippines;
The law prohibits the integration of the properties
and funds of all the other businesses of the bank with
those of the trust business. The trust business and all
funds, properties or securities received by any trust
entity as executor, administrator, guardian, trustee,
receiver, or depositary shall be kept separate and
distinct from the general business including all other
funds, properties, and assets of such trust entity. The
accounts of all such funds, properties, or securities
shall likewise be kept separate and distinct from the
accounts of the general business of the trust entity
5) The power to issue regulations to prevent
the circulation of foreign currencies, or cur­
rency substitutes as well as the reproduc­
tion of facsimiles of BSP notes;
6) It has the power to investigate, make
arrests, conduct searches and seizure for
the purpose of maintaining the integrity of
the currency;
7) To engage in foreign exchange transactions
in order to maintain price stability;
(Sec. 87, GBL).
8) To make rediscounts, discounts, loans and
advances to banking and other financial in­
stitutions to influence the volume of credit
consistent with the objectives of price sta­
bility;*1
15. THE BANGKO SENTRAL NG PILIPINAS
15.01. The Bangko Sentral ng Pilipinas (BSP for brevity) is
the central monetary authority maintained by the
State to function and operate as an independent
and accountable body corporate in the discharge
of its mandated responsibilities concerning money,
banking and credit (Sec. 1, NCBA, R.A. No. 7653).
9) lb engage in open market operations —
purchase and sale of securities ■
— exclu­
sively in accordance with its objective of
achieving price stability;
15.02. RESPONSIBILITIES AND OBJECTIVES
a)
10) To act as the banker of the government;
Primary objective — to maintain price stability
conducive to a balanced and sustainable growth
of the economy. It shall promote and maintain
monetary stability and the convertibility of the
11) To engage in marketing and stabilization
of securities for the account of the govern­
ment; and
p eso(Sec. 3, NCBA).
b)
12) To act as the financial advisor of the gov­
ernment.
Basic Functions:
1) It provides policy directions in the areas of
money, credit and banking;
2) It shall have supervision over the opera­
tions of banks;
3) It shall exercise regulatory powers over the
operations of finance companies, and non­
bank financial institutions performing qua­
si-banking functions;
337
15.03. CORPORATE POWERS
The BSP is a government-owned and controlled
corporation that is invested by law with corporate
powers (Sec. 1, NCBA). The corporate powers speci­
fied in Section 5 of the New Central Bank Act are as
follows: ...
.
.
' a)
the power to adopt, alter and use a corporate
seal which shall be judicially noticed;
REVIEWER ON COMMERCIAL LAW
b)
to enter into contracts;
c)
to lease or own real and personal property;
d)
to sell or otherwise dispose of its real and
personal property;
e)
to sue and be sued;
f)
to perform any and all things that may be neces­
sary or proper to carry out the purposes of the
New Central Bank Act; and
g)
to compromise, condone or release, in whole or
in part, any claim of or settled liability.
M R T IV — GENERAL BANKING LAW (R.A. NO. 8791),
LAW ON SECRECY OF DEPOSITS AND RELATED LAWS
e)
a)
b)
Issuance of rules of conduct or the establishment
of standards of operation for uniform appiication to all banking and financial institutions;
f)
No. 9302]).
MB approval may be made by PDIC if there is
an impending bank closure (PDIC Reg. No. 200905).
c)
Overseeing to ascertain that laws and regula­
tions are complied with;
d)
Regular investigation which shall not be oftener
than once a year from the last date of examina­
tion to determine whether an institution is con­
ducting its business on a safe or sound basis;
Enforcing prompt corrective action.
15.05. BANKER AND FINANCIAL ADVISER OF GOV­
ERNMENT
a)
The BSP is designated as the official depositary
of the Government, its political subdivisions and
instrumentalities (Sec. 113, NCSA).
b)
It is authorized to engage the services of the
other banking institutions to act as its agent (Sec.
115, NCBM
c)
It is also authorized to act as agent of the Gov­
ernment, its instrumentalities and subdivisions
in the issuance of securities representing the ob­
ligations of the Government, its instrumentali­
ties and subdivisions (Secs. 117-119, NCSA).
______ d)__ lhfiLBSRJsJikewiseJhe_fiiiancial advisor of the
Government. Section 123 of the NCBA provides
that before undertaking any credit operation
abroad, the Government, through the Secretary
of Finance, shall request the opinion, in writing,
of the Monetary Board on the monetary implica­
tions of the contemplated action.
The conduct of examination of the bank and its
wholly owned or controlled enterprise;
N ote: The PDIC may also conduct a regular
annual examination upon prior approval of the
MB (Sec. 8[8], R.A. No. 3591 as amended by R.A.
Inquiring into the solvency and liquidity of the
institution; or
04. BANK SUPERVISION
Operations and activities of banks shall be
subject to supervision of the Bangko Sentral (Busuego
v. CA, 394 SCRA 473). Section 4 of the GBL provides
that "supervision" shall include the following:
339
15.06. THE GOVERNOR (Sec. 17, NCBA)
The Governor shall be the chief executive officer
of the BSP. His powers and duties shall be to:
a)
prepare the agenda for the meetings of the Mon­
etary Board and to submit for the consideration
of the Board the policies and measures to imple­
ment the NCBA;
b)
execute and administer the policies and mea­
sures approved by the Monetary Board;
c)
direct and supervise the operations and internal
administration of the Bangko Sentrab,
REVIEWER ON COMMERCIAL LAW
340
M K T IV — GENERAL BANKING LAW (R.A. NO. 8791),
LAW ON SECRECY OF DEPOSITS AND RELATED LAWS
laws, rales and regulations. Such a process then
involves an intrusion into a bank's records (PDIC
d) appoint and fix the remunerations and other
emoluments of personnel below the rank of a
v. Phil Countryside Rural Bank, Inc., ibid.).
department head;
e)
render opinions, decisions, or rulings, which
shall be final and executory on matters regarding
application or enforcement of laws pertaining
to banks, quasi-banks and financial institutions
supervised by the BSP (Note: May be reversed
or modified by the Monetary Board); and
f)
exercise such other powers as may be vested in
him by the Monetary Board.
B. OTHER RELATED LAWS
1. PHILIPPINE DEPOSIT INSURANCE
(R.A. No. 3591 as amended).
b) Investigation is conducted based on specific
findings of certain acts or omissions which are
subject of a complaint or a Final Report of Exam­
ination made by PDIC. Investigation does not
involve a general evaluation of the status of a
bank. An investigation zeroes in on specific acts
and omissions uncovered via an examination, or
which are cited in a complaint. Although it also
involves a detailed evaluation, an investigation
centers on specific acts of omissions and, thus,
requires a less invasive assessment (PDIC v. Phil
Countryside Rural Bank, Inc., ibid.).
CORPORATION
c)
Phil. Countryside Rural Bank, Inc., G.R. No. 176438, Jan.
24,2011).
1.02. INSURER OF DEPOSIT. The PDIC shall, as a basic
policy, promote and safeguard the interest of the
depositing public by way of providing permanent
and continuing insurance coverage on all insured
(Sec. 1, R.A. No. 3591 as amended by R.A. No. 9302. See
page 313 of this work).
1.03. REGULATOR: EXAMINATION AND INVESTI­
GATION OF BANKS. As a bank regulator, the PDIC
is empowered to examine and investigate banks.
These are two different processes.
Examination involves an evaluation of the cur­
rent status of a bank and determines its compli­
ance with the set standards regarding solvency,
liquidity, asset valuation, operations, systems,
management, and compliance with banking
Prior Consent for Examination. An examina­
tion of banks requires the prior consent of the
Monetary Board (MB), whereas an investigation
does not require prior MB consent (PDIC v. Phil
Countryside Rural Bank, Inc., ibid.h-------------- -----
1.01. Primary functions: to act as (1) deposit insurer, (2) co­
regulator of banks, and (3) receiver and liquidator of
closed banks (R.A. No. 3bvl, as amended, Sec. 1; PDIC v-.-
a)
341
d)
Reasons why Prior Consent of BSP Not
Necessary for Investigation: (1) Time is always
of essence, and it is prudent to expedite the
proceedings if an accurate conclusion is to be
arrived at, as an investigation is only as precise
as the evidence on which it is based; (2) An
investigation is based on reports of examination
and an examination is conducted with prior
Monetary Board approval; (3) A lengthy pro­
cess provide unscrupulous individuals the
opportunity to cover their tracks (PDIC v. Phil
Countryside Rural Bank, Inc., ibid.).
1.04. REHABILITATION RECEIVER OF BANKS (Sec.
1% R.A. No. 3591 as amended)
The PDIC as receiver shall control, manage and
administer the affairs of the closed bank.
342
REVIEWER ON COMMERCIAL LAW
a)
Suspension of Powers and Benefits
Effective immediately upon takeover as
receiver of such bank, the powers, functions and
duties, as well as all allowances, remunerations
and perquisites of the directors, officers, and
stockholders of such bank are suspended,
and the relevant provisions of the Articles of
Incorporation and By-laws of the closed bank
are likewise deemed suspended.
b)
: Properties in Custodia Legis
The assets of the closed bank under receiv­
ership shall be deemed in custodia legis in the
hands of the receiver. From the time the closed
bank is placed under such receivership, its assets
shall not be subject to attachment, garnishment,
execution, levy or any other court processes.
Note: A judge, officer of the court or any
p^Tsurrwho-i^mifiBmE^mUErrpT^sm^m^Mme
the issuance or implementation of the writ of
garnishment, levy, attachment or execution shall
be criminally liable under Section 21 of Republic
Act No. 3591 as amended.
c)
The powers of PDIC as receiver includes the
power to: (1) collect loans and other claims of
the closed bank, and for the purpose, modify,
compromise or restructure the terms and condi­
tions of such loans or claims as may be deemed
advantageous to the interest of the creditors and
claimants of the dosed bank; (2) if the stipulated
interest on deposits is unusually high compared
with the prevailing applicable interest rate, the
PDIC as receiver may exercise such powers
which may include a reduction of the interest
rate to a reasonable rate; any modification or re­
duction shall apply only to unpaid interest (See
Sec. 10, R.A. No. 3591 as amended).
PA R T IV — GENERAL BANKING LAW (R.A. NO. 8791),
LAW ON SECRECY OF DEPOSITS AND RELATED LAWS
343
2. ANTE-MONEY LAUNDERING ACT
2.01. Money Laundering .... a crime committed by any
person who knowing that any monetary instrument
or property represents, involves, or relates to the
proceeds of any unlawful activity: (1) transacts
said monetary instrument or property; (2) converts,
transfers, disposes of, moves, acquires, possesses or uses
said monetary instrument or property; (3) conceals or
disguises the true nature, source, location, disposition,
movement or ownership of or rights with respect to
said monetary instrument or property; (4) attempts
or conspires to commit money laundering offenses
referred to in (1), (2) or (3); (5) aids, abets, assists in or
counsels the commission of the money laundering
offenses referred to in (1), (2) or (3); (6) performs or fails
to perform any act as a result of which he facilitates
the offense of money laundering referred to in (1), (2)
or (3) . (7) This is also committed by failure to report to
the Anti-Money Laundering Council (AMLC) by any
-------------- ciysze^j±^T^£m3a3nmm^lh^Ra.j:oAei£d or suspicious
transaction is required under the Anti-Money
Laundering Law to be reported thereto (RA 9160 as
amended by RA 10365 approved on 2115/13).
2.02. Covered Transactions — a transaction in cash or other
equivalent monetary instrument involving a total
amount in excess of Five hundred thousand pesos
(P500,000.00) within one (1) banking day (RA 9160 as
amended by RA 9194).
2.03. Covered Entities — include 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 Bangko Sentral ng Pilipinas (BSP),
insurance companies, pre-need companies, securities
dealers, brokers, salesmen, investment houses,
jewelry dealers in precious metals/stones, who,
as a business, trade in precious metals/stones, for
.JH
REVIEWER ON COMMERCIAL LAW
344
PART IV — GENERAL BANKING LAW (R.A. NO. 8791),
LAW ON SECRECY OF DEPOSITS AND RELATED LAWS
transactions in excess of Pl.,000,000.00 (NOTE; Other
entities are enumerated under Sec. 3[a], RA 9160, as
amended by RA10365). Lawyers and accountants acting
as independent legal professionals are NOT covered
with respect to privileged information covered by
confidentiality and attorney-client relationship (ibid.).
2.04. Suspicions transaction
lip i;:.
£-
Transactions with covered institutions, regard­
less of the amounts involved, where any of the fol­
lowing circumstances exist:
a)
[SKISiS/c
SSIISIIt-'
b)
the client is not properly identified;
■
c)
the amount involved is not commensurate with
the business or financial capacity of the client;
taking into account all known circumstances, it
may be perceived that the client's transaction is
structured in order to avoid being the subject of
reporting requirements under the Act;
e)
any circumstances 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)
g)
the transaction is in any way related to an un­
lawful activity or offense under this Act that is
about to be, is being or has been committed; or
(z)
Sections 4, 5, 6, 8, 9, 10, 11, 12, 13, 14, 15 and 16 of
Republic Act No. 9165, otherwise known as the Com­
prehensive Dangerous Drugs Act of 2002;
(3)
Section 3 paragraphs B, C, E, G, H and I of Republic
.Act No. 3019, as amended, otherwise known as the
Anti-Graft and Corrupt Practices Act;
(4)
Plunder under Republic Act No. 7080, as amended;
(5)
Robbery and extortion under Articles 294, 295, 296,
299, 300, 301 and 302 of the Revised Penal Code, as
amended;
there is no underlying legal or trade obligation,
purpose or economic justification;
d)
(6)
(7)
l l
Any act or omission or series or combination
thereof involving or having relation to the following:
"(1) Kidnapping for ransom under Article 267 of Act No.
3815, otherwise known as the Revised Penal Code, as
amended;
and M asiao punished as illegal gambling un­
der Presidential Decree No. 1602;
Ju e te n g
Piracy on the high seas under the Revised Penal
Code, as amended and Presidential Decree No. 532;
(8)
S 1 IS ISwiSS!?'
WyfOWwC■ ■
1
1
wToofvwiOf-'' -
(9)
Smuggling under Republic Act Nos. 455 and 1937;
(11)
Violations of Republic Act No. 8792, otherwise known
as the Electronic Commerce Act of 2000;
(12)
Hijacking and other violations under Republic Act
No. 6235; destructive arson and murder, as defined
under the Revised Penal Code, as amended;
(13)
Terrorism and conspiracy to commit terrorism as de­
fined and penalized under Sections 3 and 4 of Repub­
S S S S lfe '
ILWVLlifliWO;.;--
Swindling under Article 315 and Other Forms of
Swindling under Article 316 of the Revised Penal
~Gocte, as amended;--------- — -— -------------- ----- -------
(10)
WwJM nl.•
AAhjhkmm-
Qualified theft under Article 310 of the Revised Penal
Code, as amended;
any transaction that is similar or analogous to
any of the foregoing.
2.05. Unlawful activity
345
lic Act No. 9372;
-AOiAmMmAO .
i m tm s ^
W m fs h -.
W tK t.
'
-
IMfl l!3 ■
(14)
Financing of terrorism under Section 4 and offenses
punishable under Sections 5, 6, 7 and 8 of Republic
Act No. 10168, otherwise known as the Terrorism Fi­
nancing Prevention and Suppression Act of 2012;
(15)
Bribery under Articles 210, 211 and 211-A of the Re­
vised Penal Code, as amended, and Corruption of
Public Officers under Article 212 of the Revised Penal
Code, as amended;
i
i
i
346
REVIEWER ON COMMERCIAL LAW
(16)
Frauds and Illegal Exactions and Transactions under
Articles 213, 214, 215 and 216 of Lie Revised Penal
Code, as amended;
(29)
f
s
!
s
t
1
I
i
i
I
—
(24)
Violation of Section 7(b) of Republic Act No. 9072,
otherwise known as the National Caves and Cave
Resources Management Protection Act;
(25)
Violation of Republic Act No. 6539, otherwise known
as the Anti-Carnapping Act of 2002, as amended;
(26)
Violations of Sections 1,3 and 5 of Presidential Decree
No. 1866, as amended, otherwise known as the decree
Codifying the Laws on Illegal/ Unlawful Possession,
Manufacture, Dealing In, Acquisition or Disposition
of Firearms, Ammunition or Explosives;
(27)
Violation of Presidential Decree No. 1612, otherwise
known as the Anti-Fencing Law;
(28)
Violation of Section 6 of Republic Act No; 8042, oth­
erwise known as the Migrant Workers and Overseas
Filipinos Act of 1995, as amended bv Republic Act
No.40022;
347
Violation of Republic Act No. 8293, otherwise known
as.-the Intellectual Property Code of the Philippines;
(30) . Violation of Section 4 of Republic Act No. 9995, other­
wise known as the Anti-Photo and Video Voyeurism
Act of 2009;
(17)
!
Malversation -of Public Funds and Property under
Articles 217 and 222 or the Revised Penal Code, as
amended;
(18) Forgeries and Counterfeiting under Articles 163,166,
167, 168, 169 and 176 of the Revised Penal Code, as
amended;
(19) Violations of Sections 4 to 6 of Republic Act No. 9208,
otherwise known as the Anti-Trafficking in Persons
Act of 2003;
(20) Violations of Sections 78 to 79 of Chapter IV, of Presi­
dential Decree No. 705, otherwise known as the Re­
vised Forestry Code of the Philippines, as amended;
(21) Violations of Sections 86 to 106 of Chapter VI, of Re­
public Act No. 8550, otherwise known as the Philip­
pine Fisheries Code of 1998;
(22) Violations of Sections 101 to 107, and 110 of Repub--------- lir Art No._7942. otherwise known as the Philippine
Mining Act of 1995;
(23) Violations of Section 27(c), (e), (f), (g) and (i), of
Republic Act No. 9147, otherwise known as the
Wildlife Resources Conservation and Protection Act;
PART IV —•GENERAL BANKING LAW (E.A. MO. 8791},
LAW ON SECRECY OF DEPOSITS AND RELATED LAWS
(31)
Violation of Section 4 of Republic Act No. 9775, oth­
erwise known as the Anti-Child Pornography Act of
2009;
(32)
Violations of Sections 5, 7, 8, 9, 10(c), (d) and (e), 11,
12 and 14 of Republic Act No. 7610, otherwise known
as the Special Protection of Children Against Abuse,
Exploitation and Discrimination;
(33)
Fraudulent practices and other violations under Re­
public Act No. 8799, otherwise known as the Securities Regulation Code of 2000; and
(34)
Felonies or offenses of a similar nature that are punishable under the penal laws of other countries." (Sec,
3 (i) RA 9160, as amended by RA10365)
2.06. Prevention of Money Laundering (Sec. 9)
a)
Customer Identification. —- Covered institu­
tions shall establish and record the true identity
of its clients based on official documents. They
shall maintain a system of verifying the true
identity of their clients and, in case of corporate
clients, require a system of verifying their legal
existence and organizational structure, as well
as the authority and identification of all persons
purporting to act on their behalf.
b)
Record Keeping. — All records of all transac­
tions of covered institutions shall be maintained
and safely stored for five (5) years from the dates
of transactions. VYifh respect to closed accounts,
the records on customer identification/ account
files and business correspondence, shall be pre­
served and safely stored for at least five (5) years
from the dates when they were closed.
f
j:
348
RBViEVVM-, ON COMMERCIAL LAW
c)
PART IV — GENERAL BANKING LAW (RA. NO. 8791),
LAW ON SECRECY OF DEPOSITS AND RELATED LAWS
Reporting of Covered and Suspicions Trans­
actions. — Covered institutions shall report to
the Anti-Money Laundering Council (AMLC)
2.08. AUTHORITY OF AMLC TO INQUIRE INTO AMD
EXAMINE BANK DEPOSITS (Sec. t l f R A . No. 9160
a s amended by R A . No. 10167)
all covered or suspicious transactions within
The AMLC may inquire into or examine any
particular deposit or investment, including related
accounts, with any banking institution or non-bank
financial institution. This can be either upon order
of the court or even without court order in certain
exceptional cases.
five (5) working days from occurrence thereof,
unless AMLC prescribes a longer period not ex­
ceeding fifteen (15) working days. Conviction
of the unlawful activity is not necessary before a
report is made.
2.07. Freezing of Monetary Instrument or Property
The Court Appeals may issue a Freeze Order
under the following conditions: (1) There must be
a verified ex parte petition by the AMLC, (2) CA
must determine that probable cause exists that any
monetary instrument or property is in any way
related to an unlawful activity as defined in Section
3(i) of Republic Act No. 9160 (See enumeration in
1.05 above), (3) The freeze order shall be effective
immediately, (4) The freeze order shall be for a period
not exceeding six (6) months (Sec. 10, R.A. No. 9160 as
a.
COURT ORDER REQUIRED: Examination
by AMLC based on a Court Order upon Ex
Parte Application — in cases of violations of
Republic Act No. 9160 as amended, when it has
been established that there is probable cause that
the deposits or investments, including related
accounts involved, are related to (1) an Unlawful
Activity (see enumeration in 1.05 above) or (2) a
money laundering offense.
----------------(1)
Note: Related accounts shall refer to
accounts, the funds and sources of which
originated from and/or are materially
linked to the monetary instrument(s) or
property(ies) subject of the freeze order(s).
The Court of Appeals should act on the petition
to freeze within twenty-four (24) hours from
filing of the petition. If the application is filed a
day before a nonworking day, the computation
of the twenty-four (24)-hour period shall exclude
the nonworking days (Sec. 10, R.A. No. 9160 as
(2)
amended by R.A. No. 10167).
b)
c)
A person whose account has been frozen may
file a motion to lift the freeze order and the court
must resolve this motion before the expiration of
freeze order (Sec. 10, R.A. No. 9160 as amended by
RELATED ACCOUNTS. A court order
ex parte must first be obtained before the
AMLC can inquire into Related Accounts.
amended by R.A. Nos. 10167 and 10365).
a)
349
b.
The Court of Appeals must act on the
application within 24 hours from the filing.
NO COURT ORDER shall be required for the
examination of bank deposits by AMLC in cases
involving:
R.A,. No. 10167 and 10365).
(1)
No court shall issue a temporary restraining
order or a writ of injunction against any freeze
order, except the Supreme Court (Sec, 10, R.A.
Kidnapping for ransom under Article 267
of Act No. 3815, otherwise known as the
Revised Penal Code, as amended;
(2)
Sections 4,5, 7 , 8 , 9 , 1 0 , 1 2 , 1 3 , 1 4 , 1 5 and 16
of Republic Act No. 9165 otherwise known
No, 9160 as amended by R.A. No. 10167),
REVIEWER ON COMMERCIAL LAW
350
PART IV — GENERAL BANKING LAW (R.A. NO. 8791),
LAW ON SECRECY OF DEPOSITS AND RELATED LAWS
as the Comprehensive Dangerous Drugs
2)
the amounts, if any to be credited as down
payment and/or trade-in;
3)
the difference between the amounts set
forth under clauses (1) and (2);
4)
the charges, individually itemized, which
are paid or to be paid by such person in
connection with the transaction but which
are not incident to the extension of credit;
5)
the total amount to be financed;
Act of 2002;
(3)
Hijacking
and other violations under
Republic Act No. 6235; destructive arson
and murder, as defined under the Revised
Penal Code, as amended, including those
perpetrated by terrorists against noncombatant persons and similar targets;
(4)
(5)
Felonies or offenses of a nature similar to
those mentioned in Section 3(i)(l), (2), and
(12) which, are punishable under the penal
laws of other countries; and
Terrorism and conspiracy to commit terror­
ism as defined and penalized under Repub­
lic Act No. 9372.
The authority ofAMLC to inquire into or examine
the main account and the related accounts shall
comply with the requirements of Article III,
______ ________ Sections 2. and 3 of the 1987 Constitution._______
. 6)
the finance charge expressed in terms of
pesos and centavos; and
7)
the percentage that the finance bears to the
total amount to be financed expressed as a
simple annual rate on the outstanding un­
paid balance of the obligation.
c.
d.
Inquiry into deposits under Section 11 does not
require a pre-existing criminal case (Republic v.
Eugenio, G.R. No. 174.629, Feb. 14, 2008).
b)
The imposition of interest and finance charges is
void if not disclosed in the disclosure statement
(Heirs of Espiritu v. Landrito, G.R. No. 169618,
------- April 4, 2007).--------------— -----------------------—
1)
3. TRUTH IN LENDING
3.01. TRUTH IN LENDING ACT (R.A. No. 3765)
a)
Disclosure Requirement
The law assures full disclosure by requiring
the lender to give the borrower all the details
regarding the transaction. Under Section 4, any
creditor shall furnish to each person to whom
credit is extended, prior to the consummation
of the transaction, a clear statement in writing
setting forth, to the extent applicable and in
accordance with rules and regulations prescribed
by the Board, the following information:
1)
the cash price or delivered price of the
property or service to be acquired;
351
Although penalty charges are not stated in
the disclosure statement, reference to the
penalty charges in the promissory note con­
stitutes substantial compliance with the dis­
closure requirement of the Truth in Lending
Act (BPI v. Spouses Yu, G.R. No. 184122, Jan.
20, 2010).
2)
c)
Even if disclosed, exorbitant interest rate
may be declared unconscionable.
Rationale —- To protect users of credit from lack
of awareness of the true cost thereof, proceeding
from the experience that banks are able to con­
ceal such true cost by hidden charges, uncertain­
ty of interest rates, deduction of interests from
the loaned amount, and the like (United Coconut
Planters Bank [UCPB] v. Spouses Beluso, G.R. No.
159912, Aug. 17, 2007).
■
REVIEWER ON COMMERCIAL LAW
352
d)
I ‘ART IV
GENERAL BANKING LAW (R .A . NO
),
LAW ON SECRECY OF DEPOSITS AND RELATED LAWS
f)
Definitions
1)
Credit — any loan, mortgage, deed of trust,
advance, or discount; any conditional sales
contract; any contract to sell, or sale or con­
tract of sale of property or services, either
for present or future delivery, under which
part or all of the price is payable subsequent
to the making of such sale or contract; any
rental-purchase contract; any contract or
arrangement for the hire, bailment, or leas­
ing of property; any option, demand, lien,
pledge, or other claim against, or for the
delivery of, property or money; any pur­
chase, or other acquisition of, or any credit
upon the security of, any obligation of claim
arising out of any of the foregoing; and any
transaction or series of transactions having
a similar purpose or effect.
e)
21
Finance charge — interest, fees, service
charges, discounts, and such other charges
incident to the extension of credit as the
Board may, by regulation, prescribe.
3)
Creditor — any person engaged in the
business of extending credit (including any
person who as a regular business practice
make loans or sells or rents property or ser­
vices on a time, credit, or installment basis,
either as principal or as agent) who requires
as an incident to the extension of credit, the
payment of a finance charge.
when demand for payment was being made.
g)
Liability. Violation of the Truth in Lending
Act gives rise to both criminal and civil liabili­
ties (Sec. 6{c], TLA). The penalty therefor is an
amount of P100 or in an amount equal to twice
the finance charge required by the creditor in
connection with such transaction, whichever is
greater, except that the liability shall not exceed
P2,000.00 on any credit transaction. The action
to recover such penalty may be instituted by the
aggrieved private person separately and inde­
pendently from the criminal case for the same
offense (UCPB v. Spouses Beluso, ibid.).
h)
Fyescriptm d E m M J ^ n ^ ^
of the date of demand and not from the date of
execution of the promissory note (Ibid.).
CONSUMER ACT (R.A. No. 7394)
a)
'msmsKW'B S litt;
SSStlSBN
The Consumer Act of the Philippines (Repub­
lic Act No. 7394) requires disclosure for con­
sumer credits.
1)
■ 1 1 1 '
"Consumer" means a natural person who is
a purchaser, lessee, recipient or prospective
purchaser, lessor or recipient of consumer
■
products, services or credit.
Escalation Clause. Truth in Lending Act may
also be violated if the agreement provides for an
escalation clause on interest which is dependent
solely on the will of the bank (UCPB v. Spouses
Beluso, ibid.). For example, the following provision
is void: "The interest shall be at the rate indica­
tive of (the bank's) retail rate or as determined
by the Branch Head of the Bank."
Subsequent compliance. Subsequent compli­
ance with the disclosure requirement cannot
be deemed in substantial compliance with the
Truth in Lending Act (UCPB v. Spouses Beiuso,
ibid.). Example: The bank gave the details only
2)
"Consumer credit" means any credit ex­
tended by a creditor to a consumer for the
sale or lease of any consumer product or
service under which part or all of the price
or payment therefor is payable at some fu­
ture time, whether in full or in installments.
3)
"Consumer loan" means a loan made by
the lender to a person which is payable in
" !
f llilllL ■ '
miBBSS"
flM tilL
M v
- ■
m g m a to & i
f v
-Jfe -
■
REVIEWER ON COMMERCIAL LAW
PART IV —■GENERAL BANKING LAW (R.A. NO. 8791),
LAW ON SECRECY OF DEPOSITS AND RELATED LAWS
of the property to which the securityinterest
installments for which a finance charge Is or
m ay be im posed. This term includes credit
transactions pursuant to an open-end-cred­
it plan other than a seller credit card.
b)
relates.
c>
Exempted Transaction (Art. 1 4 5 , R.A. N o,
those involving extension of credits for
business or commercial purposes, or to the
Government and governmental agencies
and instrumentalities, juridical entities or
to organizations;
2)
those in which the debtor is the one specify­
ing the definite set of credit terms such as
bank deposits, insurance contracts, sale of
bonds or analogous transactions.
No. 7394)
1)
the amount of credit of which the debtor
will have the actual use, or which is or will
be paid to him or for his account or to an­
other person on his behalf;
2) all charges, individually itemized, which are
_________ included in the am ount of credit extended
but w hich are not part of the finance charge;
3)
the total amount to be financed or the sum
of the amounts referred to in paragraphs (a)
and (b);
4)
the finance charge expressed in terms of
pesos and centavos;
5)
the effective interest rate;
6)
the percentage that the finance charge bears
to the total amount to be financed expressed
as a simple annual rate on the outstanding
unpaid balance of the obligation;
7)
the default, delinquency or similar charges
payable in the event of late payments; and
8)
a description of any security interest held
or to be h e ld 1or to be retained or acquired
by the creditor in connection with the
extension of credit and a clear identification
7394)
1)
Required Disclosures on C onsum er Loans N ot
Under Open-End C redit Plan (Art. 142, R.A.
Any creditor extending a consumer loan
or in a transaction which is neither a consum­
er credit sale nor under an open-end consumer
credit plan shall disclose, to the extent applica­
ble, the following information:
355
HUMAN SECURITY ACT OF 2007
5.01. EXAMINATION
DEPOSITS
AND
SEQUESTRATION
OF
Republic Act No. 9372 which was passed on
March 6,2007 entitled "An Act to Secure the State and*12
ProtecfmrReopteTrorrrfeirerismz£toAerwfee-kROWftas the "Human Security Act of 2007" (HSA for short)
allows examination and sequestration of deposits
based on certain conditions.
5.02. EXAMINATION OF BANK DEPOSITS
The Court of Appeals designated as a special
court to handle anti-terrorism cases may authorize in
writing any police or law enforcement officer and the
members of his/her team duly authorized in writing
by the anti-terrorism council:
1)
to examine, or cause the examination of, the
deposits, placements, trust accounts, assets
and records in a bank or financial institu­
tion; and
2)
to gather or cause the gathering of any
relevant information about such deposits,
placements, trust accounts, assets, and
REVIEWER ON COMMERCIAL LAW
356
8) Republic Act No. 6969 (Toxic Substances
and Hazardous and Nuclear Waste Control
Act of 1990);
records from a bank or financial institution
(Sec. 27, USA).
a)
Grounds, The Court of Appeals may authorize'
the examination after satisfying themselves;
of the existence of probable cause in a hearing"
called for the purpose that:
1)
9) Republic Act No. 5207 (Atomic Energy
Regulatory and Liability Act of 1968);
10) Republic Act No. 6235 (Anti-Piracy and
Anti-Highway Robbery Law of 1974); or
a person charged with or suspected of the
crime of terrorism or, conspiracy to commit
11)
terrorism;
b)
2)
of a judicially declared and outlawed ter­
rorist organization, association, or group of
persons; and
3)
of a member of such judicially declared
and outlawed organization, association, or
group of persons (Sec. 27, HSA).
Definition of Terrorism. Terrorism is committed
by any person who commits an act punishable
under any of the following provisions of the1234567
Revised Penal Code thereby sowing and creating
a condition of widespread and extraordinary
fear and panic among the populace, in order to
coerce the government to give in to an unlawful
demand:
1) Article 122 (Piracy in General and Mu­
tiny in the High Seas or in the Philippine
Waters);
c)
Presidential Decree No. 1866, as amended
(Decree Codifying the Laws on Illegal and
Unlawful Possession, Manufacture, Deal­
ing in, Acquisition or Disposition of Fire­
a rm s, Ammunitions or Explosives).
Penalty. A person convicted of the crime of ter­
rorism shall suffer the penalty of forty (40) years
of imprisonment, without the benefit of parole
as provided for under Act No. 4103, otherwise
known as the Indeterminate Sentence Law, as
____ amended (Sec. 28, Act No. 9372)._______________
d)
Effective Period. Thirty (30) days from the date
of receipt of the written order of the authorizing
division of the Court of Appeals by the applicant
police or law enforcem ent official renewable for
another period which shall not exceed thirty (30)
days renewable to another thirty (30) days from
the expiration of the original period.
2) Article 134 (Rebellion or Insurrection);
SEQUESTRATION
3) Article 134-A (Coup d' Etat), including acts
committed by private persons;
4) Article 248 (Murder);
The Court of Appeals may likewise order the
sequestration of deposits belonging:
5) Article 267 (Kidnapping and Serious Illegal
1)
to any person suspected of or charged
before a competent Regional Trial Court
for the crime of terrorism or the crime of
conspiracy to commit terrorism;
2)
to a judicially declared and outlawed orga­
nization, association, or group of persons;
Detention);
6) Article 324 (Crimes Involving Destruction),
or under .
7) Presidential Decree No. 1613 (The Law on
Arson);
REVIEWER ON COMMERCIAL LAW
358
3)
a)
a
to a m em ber of such organization, asso­
ciation, or group of persons. They shall be
seized, sequestered, and frozen in order to
prevent their use, transfer, or conveyance
b)
359
An attempt or conspiracy to commit the same
crime are also penalized (Sec. 5, R.A No. 10168).
6.02. Authority of AMLC to Investigate
for purposes that are inimical to the safety
and security of the people or injurious to
the interest of the State (Sec, 38, HSA).
The AMLC is authorized to investigate: (a) any
property or funds that are in any way related to
financing of terrorism or acts of terrorism; (b) property
Meaning of Sequestration. The sequestered
bank deposits shall be deemed as property held
in trust by the bank or financial institution for
such person and the government during the
pendency of the investigation of the person sus­
pected of or during the pendency of the trial of
the person charged with any of the said crimes,
as the case may be and their use or disposition
while the case is pending shall be subject to the
approval of the court before which the case or
cases are pending (Sec. 40, HSA).
or funds of any person or persons in relation to whom
there is probable cause to believe that such person or
persons are committing or attempting or conspiring
to commit, or participating in or facilitating the
financing of terrorism, or acts of terrorism.
T H E T E R R Q R J S ir F I N A N C I N G A N D P R C T E N T K ffiT A N E r
SUPPRESSION ACT ( R . A . N o . 1 0 1 6 8 )
6.01. Financing of Terrorism
Republic Act No. 10168 imposes criminal liability
on any person who, directly or indirectly, willfully and
without lawful excuse, possesses, provides, collects or
uses property or funds or m akes available property,
funds or financial service or other related services, by
any means, with the unlawful and willful intention
that they should be used or with the knowledge that
they are to be used, in full or in part: (a) to carry out
or facilitate the commission of any terrorist act; (b) by
a terrorist organization, association or group; or (c)
by an individual terrorist. They shall be guilty of the
crime of financing of terrorism (Sec. 4, R.A. No. 10168).
a)
PART 1Y — GENERA), BANKING LAW (R.A MO 8791)..
LAW ON SECRECY' OF DEPOSIT b AND RELATED LAWS
The penalty is also imposed on any person who
organizes or directs others to commit financing
of terrorism (Sec. 4, R.A. No. 10168).
a)
The AMLC is authorized to inquire into or ex­
amine deposits and investments with any bank­
ing institution or non-bank financial institution
and their subsidiaries and affiliates without a
court order (notwithstanding the provisions of
Republic Act No. 1.405, otherwise known as the
---------------- "Law on Secrecy of Bank Deposits/' as amend ed; Republic Act No. 6426, otherwise known as
the "Foreign Currency Deposit Act of the Philip­
pines," as amended; Republic Act No. 8791, oth­
erwise known as "The General Banking Law of
2000" and other laws) (Sec. 10, R.A. No. 10168).
6.03. Authority to Freeze
The AMLC, either upon its own initiative or at
the request of the Anti-Terrorism Council (ATC), is
authorized to issue an ex parte order to freeze without
delay: (a) property or funds that are in any way related
to financing of terrorism or acts of terrorism; or (b)
property or funds of any person, group of persons,
terrorist organization, or association, in relation to
whom there is probable cause to believe that they are
com m itting sor attem pting or conspiring to commit,
or participating in or facilitating the commission of
financing of terrorism or acts of terrorism as defined
herein.
REVIEWER ON COMMERCIAL LAW
a)
P eriod o f Effectivity o f Freeze O rder issued
by AMLC — Twenty (20) days. Extendibly by
the C ourt of A ppeals up to a period not exceed­
ing six (6) months upon petition by AMLC. The
twenty-day period shall be tolled upon filing of
a petition to extend the effectivity of the freeze
: order,
b)
c)
PA RT ¥
CREDIT TRANSACTIONS
v
The AMLC is also authorized to issue a freeze
order with respect to property or funds of a
designated organization, association, group or
any individual to comply with binding terrorismrelated Resolutions, including Resolution No.
1373, of the UN Security Council pursuant to
Article 41 of the Charter of the UN. Said freeze
order shall be effective until the basis for the
issuance thereof shall have been lifted (hence,
the 20-day limit does not apply). During the
effectivity of the freeze order, an aggrieved party
m ayuwlihijiiw enty (20) davs from issuance, file
with the Court of Appeals a petition to determine
the basis of the freeze order according to the
principle of effective judicial protection.
If the property or funds subject of the freeze order
under the immediately preceding paragraph are
found to be in any way related to financing of
terrorism or acts of terrorism committed within
the jurisdiction of the Philippines, said property
or funds shall be the subject of civil forfeiture
proceedings.
A. W AREHOUSE RECEIPTS LAW
(Act No. 2137)
1. DEFINITIONS
1.01. Document of title to goods — includes any bill of
lading, dock warrant, "quedan," or warehouse receipt
or order for delivery of goods, or any other document
used in the ordinary course of business in the sale or
transfer of goods, as proof of possession or control of
the goods, or authorizing or purporting to authorize
the possessor of the document to transfer or receive
--------------ejiheiiiiy indorsement or bv delivery, goods repre­
sented by such document (Art. 1636, NCC).
1.02. Common types.
a)
Bill of Lading — a document that serves as
evidence of receipt of goods for shipment issued
by a common carrier.
b)
Warehouse Receipt —■a document of title which
is issued by a warehouseman. Under the said
law, the term "warehouseman" is defined as a
person lawfully engaged in the business of stor­
ing goods for profit (Sec. 58[a], Warehouse Receipts
Law, WRLfor short).
c)
Quedan — a warehouse receipt that covers
sugar.
d)
Dock Warrant — a warrant given by dock-own­
ers to the owner of merchandise imported and
361
REVIEWER ON COMMERCIAL LAW
362
warehoused on the dock, upon the faith of the
bills of lading, as a recognition of his title to the
goods (Black's Law Dictionary, p. 432).
2. THREE FUNCTIONS OF DOCUMENTS OF TITLE
a)
b)
c)
It is a contract ■— the underlying contract may
be contract of carriage (bill of lading) or deposit
(warehouse receipt).
Evidence of receipt of goods.
Represents the goods and therefore operates as
transferable document that carries with it con­
trol over the goods. It is used to pass title to the
goods. It can be a negotiable document of title.
Note: The Supreme Court, in a number of
cases limited the functions to two-fold — a con­
tract, and a receipt (Telengtan Bros. & Sons v. CA,
______________ 236 SCRA 617)._______________________________
3. NEGOTIABILITY OF WAREHOUSE RECEIPTS
3.01. A receipt in which it is stated that the goods received
will be delivered: (a) to the bearer, or (b) to the order
of any person named in such receipt is a negotiable
receipt (Sec. 5, WRL).
a)
No provision shall be inserted in a negotiable
receipt that it is non-negotiable. Such provision,
if inserted shall be void.
4. FORMALITIES
Additional terms for warehouse receipts are
prescribed in Sections 2 and 3 of the WRL. However,
the absence of any of the provisions will not
necessarily invalidate the receipt. As a rule, receipts
should be liberally construed in order for receipts to
better serve their purpose.
PART V — CREDIT TRANSACTIONS
363
SECTION 2. Form o f receipts: essen tial terms.
W arehouse receipts need not b e in m y particular
form but every such receipt must embody within its
written or printed terms:
(a)
The location of the w arehouse where the
goods are stored,
(b)
The date of the issue of the receipt,
(c)
The consecutive number of the receipt,
(d)
A statement whether the goods received
w ill be delivered to the bearer, to a specified person
or to a specified person or his order,
(e)
The rate of storage charges,
(f)
A description of the goods or of the pack­
ages containing them,
(g)
The signature of the warehouseman
which may be made by his authorized agent,
_____(h)___If-Jh e-jecejp i-is-fesn ed . for goods of
which the warehouseman is owner, either solely or
jointly or in common with others, the fact of such
ownership, and
(i)
A statement of the amount of advances
made and of liabilities incurred for which the
warehouseman claims a lien. If the precise amount
of such advances made or of such liabilities
incurred is, at the time of the issue, unknown to
the warehouseman or to his agent who issues it, a
statement of the fact that advances have been made
or liabilities incurred and the purpose thereof is
sufficient.
A warehouseman shall be liable to any person
injured thereby for all damages caused by the
omission from a negotiable receipt of any of the
terms herein required.
SECTION 3. Form o f receipts. W h at term s may
A warehouseman may in sert in a
be inserted.
REVIEWER ON COMMERCIAL LAW
364
PART V — CREDIT T R A N S A C T IO N S
receipt issued by Mm any other terms and conditions
provided that such terms and conditions shall not*
(a)
Be contrary to the provisions of this Act.
b)
specified person so named (indorsement plus
delivery).
EFFECTS; If indorsement is necessary but the
negotiable receipt was only delivered:
In any wise impair his obligation to exer­
cise that degree of care in the safekeeping of the
goods entrusted to him which a reasonably careful
man would exercise in regard to similar goods of his
own.
(b)
5. NEGOTIATION OF WAREHOUSE RECEIPTS
1)
The transferee acquires title against the
transferor;
2)
There is no direct obligation of the ware­
houseman;
3)
The transferee can compel the transferor to
complete the negotiation by indorsing the
instrument (Sec. 43, WRL). The negotiation
takes effect on the date of indorsement only.
5.01. Negotiation by delivery only (Sec. 37, WRL)
a)
Where, by terms of the receipt, the warehouse­
man undertakes to deliver the goods to the bear­
er, or
365
6. EFFECTS OF NEGOTIATION OF WR
Where, by the terms of the receipt, the ware­
houseman undertakes to deliver the goods to the
_____ ________ order of a specified person, and such person or a
subsequent indorsee of the receipt has indorsed
it in blank or to bearer.
6.01. Negotiation of the document has the effect of manual
delivery so as to constitute the transferee the owner of
the goods. Negotiation carries with it both the title to
Note; A bearer document of title is NOT ALWAYS
A BEARER DOCUMENT in the sense that a special
indorsement has the effect of converting the bearer
instrument into an order instrument (Sec, 37, WRL).
Example: A negotiable document of title states that the
goods are to be delivered to "A or bearer." A delivered
the document to B, who in turn specially indorsed the
same to C. C cannot negotiate the document by mere
delivery thereafter and indorsement is necessary for
its negotiation.
6.02. Transfer of title and possession is accomplished
because the person to whom the instrument is
negotiated acquires the following rights (Sec. 41,
b)
Trust Co. v.
National Bank, 42 Phil 413 [1922]).
WRL):
a)
5.02. Indorsement coupled with delivery
a)
A warehouse receipt is an order document if it
states that the goods are to be delivered to the
order of a person named therein. It can only
be negotiated through the indorsement of the
Such title to the goods as the person negotiating
the receipt to him had or had ability to convey
to a purchaser in good faith for value, and also
such title to the goods as the depositor or person
to whose order the goods were to be delivered
by the terms of the receipt had or had ability to
convey to a purchaser in good faith for value;
-and- .
b)
- :
The direct obligation of the warehouseman to
hold possession of the goods for him according
to the terms of the receipt as fully as if the ware­
houseman had contracted directly with him.
PART V — CREDIT TRANSACTIONS
REVIEWER ON COMMERCIAL LAW
not transfer such right of possession to Z, the good;:
having beers stolen by X. Furthermore, a person
to whom a negotiable warehouse receipt has been
negotiated acquires only such title to the goods as
the person negotiating the receipt to him had or had
the ability to convey to a purchaser in good faith for
value.
PROBLEMS;
1,
Maingat deposited her personal computer (PC)
machine in the warehouse of Bodeguero who issued
a negotiable receipt undertaking the delivery of the
computer to Mayaman or bearer. Mayaman entrusted
the receipt to Secretario, his secretary who, in turn,
delivered the receipt to Bumibili, a purchaser for
value and in good faith. Secretario needed the money
to pay his gambling debts, (a) Who has the better title
to the computer, Mayaman or Bumibili? (b) Would
the answer be the same if, by terms of Bodeguero's
receipt, the computer is deliverable to the order of
Mayaman?
A:
(a)
Bumibili has the better title. The negotiable
receipt involved is a bearer receipt, hence
whoever is in possession of the receipt has title
over the property covered by the receipt. A direct
obligation of the warehouseman is owed to the
__________ bearer of the receipt.__________________________
(b)
2.
A:
The answer would be different. If the receipt is an
order receipt, indorsement is necessary to acquire
the direct obligation of the warehouseman. In
addition, Bumibili would not be shielded from
the previous transfer which was in breach of
faith. (1986 Bar)
X stole certain goods from Y. The goods were then
deposited by X with W, a warehouseman, for which
W issued to X a negotiable warehouse receipt.
Thereafter, X negotiated the receipt to Z, a purchaser
in good faith and for value. W, upon being informed
of the theft of the goods, and upon demand by Y,
delivered the goods to Y, without the receipt being
surrendered to him. Can W be held liable by Z for his
subsequent failure to deliver the goods to him?
NO. The warehouseman would only be liable for his
failure to deliver the goods to Z if the negotiation
would transfer the right to the possession of the
goods. The negotiation of the receipt by X to Z did
367
6.03. Vendor's Lien
The transfer of title to the purchaser for value is
not affected by the rights of the vendor (Sec. 49, WRL).
PROBLEM:
1.
A purchased from S 150 cavans of palay on credit.
A deposited the: palay in W's warehouse. W issued
to A a negotiable warehouse receipt in the name of
A. Thereafter, A negotiated the receipt to B who
purchased the said receipt for value and in good faith.
(a) Who has better right to the deposit, S, the unpaid
seller, or B, the purchaser of the receipt for value arid
in good faith? Why? (b) When can the warehouseman
be obliged to deliver the palay to A?
A:
(a)
B has the better right. Section 49 of the WRL
provides that where a negotiable receipt has
been issued for goods, no seller's lien or right
of stoppage in transitu shall defeat the rights of
any purchaser for value in good faith to whom
such receipt has been negotiated, whether
such negotiation be prior or subsequent to the
notification to the warehouseman who issued
such receipt of the seller's claim to a lien or right
of stoppage in transitu.
(b)
The warehouseman cannot be obliged to deliver
the goods to an unpaid seller unless the receipt
is first validly surrendered for cancellation (Sec.
49, WRL). This means that the unpaid seller has
validly reacquired the receipt from the holder
for value (1993 Bar).
368
BART V — CREDIT TRANSACTIONS
REVIEWER ON COMMERCIAL LAW
houseman undertakes to deliver the goods to the
order of the person to whom the possession or
custody of the receipt has been entrusted, or if,
at the time of such entrusting, the receipt is in
such form that it may be negotiated by delivery
(Sec. 40, WRL).
6.04. Pledge of Receipt
Negotiation of the receipt may only h e by way
of pledge. In which case, the pledgee may also enjoy
preference. However, the Supreme Court observed
in Bank o f Philippine Islands v. J.R. Herridge (47 Phil
57), that Section 58 provides within the meaning of
the WRL, "to purchase" includes to take as mortgage
or pledge and "purchaser" includes mortgagee and
pledgee. Thus, "as to legal title to the property covered
by a warehouse receipt, a pledgee is on the same
footing as a vendee except that the former is under
obligation of surrendering his title upon the payment
of the debt secured." The Court believed that to hold
otherwise would defeat one of the principal purposes
of the law, i.e,, to furnish a basis for commercial credit.
Note: Under the second paragraph, even a
thief of the receipt or one who defrauds another can
negotiate the receipt but it should be in such aJfaim
that he need not forge any .si&nature (See also Sec. 47,
WRL).
Examples:
1.
X deposited certain goods with W for which
the latter issued a negotiable warehouse receipt
by the terms of which the goods are to be
delivered to bearer. The receipt was stolen by
Y and Y delivered the instrument to Z who has
no knowledge of the theft. In this case, Z who
is a bona fide transferee may be protected under
"~Sections40 and 47oFthe WRfc;
-------------------
2.
In the first example, the conclusion would be
different if the receipt is not a bearer receipt.
If the goods are to be delivered to the order
of X, it would be necessary for Y to forge the
signature of X in order to completely negotiate
the instrument to Z. Hence, the transfer to Z
would be inoperative if it is based on a forged
PROBLEM: 1.
X sold a quantity of hemp by quedan to Y who took
_________ possession of said quedan. X was not paid by Y for
the quedan for it was their agreement that the- price
of the hemp would be charged against such quedans.
Y delivered the quedans to A Bank to secure his
indebtedness. The day after delivery, Y died. May X
recover the quedans or their corresponding values?
A:
NO. X may not recover the quedans. A Bank is a
pledgee of the quedan for value and the right of the
pledgee cannot be defeated by the unpaid seller.
X may, however, still recover the price of the
goods from the estate of Y. Death of Y will not excuse
him from his contractual liability up to the extent of
his properties.
369
indorsement (1989 Bar).
WARRANTIES
8.01. NOT GUARANTOR
7. WHO MAY NEGOTIATE A WAREHOUSE RECEIPT?
a)
By the owner thereof, or
b)
By any person to whom the possession or cus­
tody of the receipt has been entrusted by the
owner, if, by the terms of the receipt, the ware-
If the warehouseman failed to deliver the goods,
the indorser or one who negotiates for value shall
not be liable to the bona fide purchaser. He does not
guarantee the performance of the obligation of the
warehouseman as the case may be (Sec. 45, WRL).
REVIEWER ON COMMERCIAL LAW
370
PART V — CREDIT TRANSACTIONS
8,02. WARRANTIES OF TRANSFEROR (Sec. 44}
acquire the direct obligation of the warehouse­
man to hold possession of the goods for him ac­
cording to the terms of the receipt.
A person who, for value, negotiates or transfers
a receipt by indorsement or delivery, including one
who assigns for value a claim secured by a receipt,
unless a contrary intention appears, warrants:
a)
That the receipt is genuine;
b)
That he has a legal right to negotiate or transfer
i t ;,
c)
That he has knowledge of no fact which would
impair the validity or worth of the receipt; and
d)
That he has a right to transfer the title to the
goods and that the goods are merchantable or fit
for a particular purpose whenever such warran­
ties would have been implied, if the contract of
the parties had been to transfer without a receipt
of the goods represented thereby
N ote: Prior to the notification of the warehouseman by
the transferor or transferee of a non-negotiable receipt, the
title of the transferee to the goods and the right to acquire
the obligation of the warehouseman may be defeated by
the levy of an attachment or execution upon the goods
by a creditor of the transferor or by a notification to the
warehouseman by the transferor or a subsequent purchaser
from the transferor of a subsequent sale of the goods by the
transferor.
PROBLEMS:
1.
On January 5, 1984, Juan delivered six (6) crates of
goods to Acme Warehousing Co. and received a nonnegotiable warehouse receipt. On January 14, 1984,
Juan transferred for value the receipt to Manuel.
Meanwhile, Jose oBtainedfa judgment against Juan forunpaid debt. A writ of execution followed, by virtue
of which the sheriff on June 18,1984 levied on the six
(6) crates of goods covered by the above receipt. What
are the obligations of Acme Warehousing Co. under
the circumstances?
A:
Acme Warehousing must honor the writ. The nonnegotiable warehouse receipt does not confer upon the
transferee the direct obligation of the warehouseman.
Prior to the notice to the warehouseman, the right
of the transferee may be defeated by a writ validly
issued by a competent court (1984 Bar).
9. NON-NEGOTIABLE RECEIPTS________________________
Warehouse receipt is a non-negotiable receipt if it states
that the goods received will be delivered to the depositor or
to any other specified person (Sec. 4, WRL).
Anon-negotiable receipt shall have plainly placed upon
its face by the warehouseman issuing it "non-negotiable,"
or "not negotiable." In case of the warehouseman's failure
to do so, a holder of the receipt who purchased it for value
supposing it to be negotiable, may at his option, treat such
receipt as imposing upon the warehouseman the same
liabilities he would have incurred had the receipt been
negotiable (Sec. 7, WRL).
9.01. RIGHTS OF TRANSFEREE OF NON-NEGOTIA­
BLE RECEIPT (Sec. 42, WRL)
a)
b)
The title of the goods subject to the terms of any
agreement with the transferor.
^ _
. .
The right to notify the warehouseman of the
transfer to him of such receipt and thereby to
371
10. WAREHOUSEMAN’S DEFENSES FOR NON-DELIVERY
OR MISDELIVERY
/
~ a) ~ Loss or destruction'of the goods without fine
fault of tine bailee;
.. •■
b)
Failure to satisfy the Bailee's Lien (Sec. 8);
372
REVIEWER ON COMMERCIAL LAW
PART V — CREDIT TRANSACTIONS
c)
failure to surrender the negotiable document' c .
title (Sec. 8);
1)
d)
Lack of willingness to sign acknowledgm ent
(Sec. 8);
e)
Receipt by the bailee of a request by or on behalf
of the person lawfully entitled to a right of prop­
erty-or possession in the goods, not to make such
delivery (Sec. 10);
f)
The bailee has information that the delivery
about to be made was to one not lawfully entitled
to the possession of the goods (Sec. 10);
g)
Delivery to a claimant with better right;
b)
Attachment or levy of the goods by a creditor
where the document is surrendered or its negoti­
ation is enjoined or the document is impounded
(Sec. 25);
................
______i)
Where the document of title is attached by a
creditor (Sec. 26).
That the holder of the receipt does not satisfy the
conditions prescribed in Section 8 of the Act (See
Sec. 8, Act No. 2137).
b)
That the warehouseman has legal title in himself
on the goods, such title or right being derived
directly or indirectly from a transfer made by
the depositor at the time of or subsequent to the
deposit for storage, or from the warehouseman's
lien (Sec. 16, Act No. 2137).
c)
That the warehouseman has legally set up the
' title or right of third persons as lawful defense
for non-delivery of the goods as follows:
Where the warehouseman has been
requested, by or on behalf of the person
lawfully entitled to a right of property of or
possession in the goods, not to make such
delivery (Sec. 10, Act No. 2137), in which
case, the warehouseman may, either as a
defense to an action brought against him for
non-delivery of the goods, or as an original
suit, whichever is appropriate, require all
known claimants to interplead (Sec. 17, Act
No. 2137);
10.01. In Philippine National Bank v. Sayo, Jr. (G.R. No. 12.9918,
July 9,1998), the Supreme Court adopted the following
enumeration of the reasons which a warehouseman
may invoke to legally refuse to effect delivery of the
goods covered by the document of title:
a)
373
2)
Where the warehouseman had information
that the delivery about to be made was to
one not lawfully entitled to the possession
of the goods (Sec. 10, Act No. 2137), in
which case, the warehouseman shall be
excused from liability for refusing to
deliver the goods, either to the depositor
or person claiming under him or to the
adverse claimant, until the warehouseman
has had a reasonable time to ascertain the
validity of the adverse claims or to bring
legal proceedings to compel all claimants
to interplead (Sec. 18, Act No. 2137); and
3)
Where the goods have already been law­
fully sold to third persons to satisfy a ware­
houseman's lien, or have been lawfully sold
or disposed of because of their perishable
or hazardous nature (Sec. 36, Act No. 2137).
d)
That the warehouseman having a lien valid
against the person demanding the goods refuses
to deliver the goods to him until the lien is satis­
fied (Sec. 31, Act No. 2137).
e)
That the failure was not due to any fault on the
part of &e warehouseman, as by showing that,
prior to demand for delivery and refusal, the
goods were stolen or destroyed by fire, flood,
374
TRANSACTIONS
REVIEWER ON COMMERCIAL LAW
11.02. Properties that are subject to lien (Sec. 28, WRL)
etc,, without any negligence on Ms part, unless
he has contracted so as to be liable in such case,
or that the goods have been taken by the mis­
take of a third person without the knowledge or
implied assent of the warehouseman, or some
other justifiable ground for non-delivery (67 C.J.
532).
a)
Against all goods, whenever deposited, belong­
ing to the person who is liable as debtor for the
claims in regard to which the lien is asserted;
and
b)
Against all goods belonging to others which
have been deposited at any time by the person
who is liable as debtor for the claims in regard
to which the lien is asserted if such person had
been so entrusted with the possession of goods
that a pledge of the same by Mm at the time of
the deposit to one who took the goods in good
faith for value would have been valid.
: : ‘ 10.02. If the warehouseman withholds delivery of the goods
without any valid reason, he is liable for the loss of
the goods and the liability cannot be eliminated by
proof of exercise of due diligence,
11. WAREHOUSEMAN’S LIEN
11.03. Loss of Lien (Sec. 29, WRL)
11.01. What claims are included in the warehouseman's
lien?
Subject to the provisions of section thirty, a
warehouseman shall have a lien on goods deposited or
__________ on the proceeds there o fjn his hands, for: (1) all lawful
charges for storage and preservation of the goods;
also for (2) all lawful claims for money advanced,
interest, insurance, transportation, labor, weighing,
coopering and other charges and expenses in relation
to such goods; also for (3) all reasonable charges and
expenses lor notice,, and advertisements of sale, and
for sale of the goods where default had been made in
satisfying the warehouseman's lien (Sec. 27, WRL).
a)
-
- — -
Must be stated. It is necessary, however, that the
charges that are present at the time of the issuance
of the receipt must be so stated in the receipt with
the amounts thereof specified. If the existing
charges are not stated, the warehouseman shall
have nolien thereon. He shall have a lien only for
charges for storage of goods subsequent to the
dat e of the receipt unless the receipt expressly
enumerated other charges for which a lien is
claimed (Sec. 30, WRL).
a)
By surrendering possession thereof; or
b)
By refusing to deliver the goods when a demand
is made with, which he is bound to comply.
12: ADVERSE CLAIMANT
If more than one person claims the title or possession
of the goods, the warehouseman may, either as a defense to
an action brought against him for non-delivery of the goods
or as an original suit, whichever is appropriate, require all
.known claimants to interplead (Sec. 17, WRL).
PROBLEM:
1.
What actions may be taken by the warehouseman in
case two or more persons claim the same goods in his
warehouse?
A:
'
The warehouseman may perform the following: (1)
he can refuse to deliver the goods to anyone of them
until he had reasonable time to check the validity of
the claims; (2) he may file an action for interpleader
and'allow the claims to prove their claim or in case
an action is filed against him, set up the defense that
there are two or more claimants (1976 Bar),
PARI V — CREDIT TRANSACTIONS
If goods are delivered to a warehouseman by the owner
or by a person whose act in conveying the title to them to
a purchaser in good faith for value would bind the owner,
and a negotiable receipt is issued for them, they cannot
thereafter, while in the possession of the warehouseman, be
attached by garnishment or otherwise, or be levied upon
under an execution unless the receipt be first surrendered
to the warehouseman or its negotiation enjoined (Sec. 25,
WRL).
B. GENERAL BONDED WAREHOUSE LAW
(Act No. 3893, R.A. No. 247)
1. OBLIGATIONS OF WAREHOUSEMAN
A warehouseman cannot receive goods for storage,
milling or commingling without performing the following:
a)
He must secure a license from Bureau of Com­
merce (Dept. of Trade and Industry).
b)
He must file a bond equivalent to 3 3 1 / 3% of the
market value of maximum quantity of goods to
be received for the protection of the depositors.
13.01. Creditor's remedies to reach negotiable receipts
A creditor whose debtor is the owner of a
negotiable receipt shall be entitled to such aid from
courts of appropriate jurisdiction, by injunction and
otherwise, in attaching such receipt or in satisfying
the claim by means thereof as is allowed at law or in
equity in these islands in regard to property which
cannot readily be attached or levied upon by ordinary*1
______legal process (Sec. 26, WRL).
c) 5 He must not discriminate and must open his
warehouse to the public.
d)
In case of damage to the goods because the
warehouseman accepts goods in excess of the
capacity of his warehouse, the latter is liable
in the amount equivalent to double the market
value of the goods.
-e)— ihe-good^iustheinsiuM agaillStfirei________
PROBLEM :
1.
A:
XYZ Corporation receives from A 30 bales of cotton for
deposit in the said warehouse for which a negotiable
receipt was issued. While the goods were stored in
the warehouse, C obtains judgment against A for the
recovery of a sum of money. The sheriff proceeded to
levy upon the goods and directed the warehouseman
to deliver the goods, a) Is the warehouseman under
obligation to comply with the sheriff's order? b) What
is the remedy of the attaching creditor?
a) NO, the warehouseman is not under obligation
to comply. The warehouseman can be compelled to
comply only if the negotiable receipt is surrendered
to him or if its negotiation is enjoined (Sec. 25, WRL).
b) The creditor may seek for the attachment of the
receipt or compel A to deliver the receipt by injunction
or otherwise (Sec. 26, WRL; see 1981 Bar).
2. The warehouse is not covered by the law if the owner
merely rents space to a certain group of persons because the
law covers warehouses that accepts goods for: (a) storage,
(b) milling, and (c) commingling with obligation to return
the same quantity or to pay their value (1974 Bar).
C. LETTERS OF CREDIT
1. LETTERS OF CREDIT
A letter of credit is an engagement by a bank or other
person made at the request of a customer that the issuer
will honor drafts or other demands for payment upon
compliance with the conditions specified in the credit
(Prudential Bank v. 1AC, 216 SCRA 257 [1992]).
2. GOVERNING LAWS
a)
Code of Commerce on Letters of Credit.
REVIEWER ON COMMERCIAL LAW
I
PART V — CREDIT TRANSACTIONS
AftMe 568 '-provides .-that .a letter .of credit
Stafibek
1)
.s :\ ,c
l
-a
..
known issuing bank; the confirming bank is
directly liable to pay the seller-beneficiary;
.
Issued in favor of a definite persomand not
ili) A paying bank which undertakes to encash
the drafts drawn by the exporter/seller;
to-order; and
. 2) C:Limited t©;a fixed, and.specified amount or
to oiie or more undetermined'amount but
" iwtb imximumdimit Stated exactly
b) Customs, primarily those embodied in the Uni­
Further, instead of going to the place of the
issuing bank to claim payment, the buyer may
approach another bank, termed the negotiating
bank to have the draft discounted (Ibid.; see also
Charles Lee v. CA, G.R. No. 117913, Feb. 1,2002).
form Customs and Practice for Documentary
L Credits-(UCP for short) which-was adopted by
Note: Unless the contrary is expressly pro­
vided for, the liability of the issuing bank is soli­
dary with the buyer-applicant (MWSS v. Daway,
G.R. No. 160732, June 21,2004).
the International Chamber of Commerce (Bank
of America, NT & SA v. CA, 228 SCRA 357 [1993]).
3. PARTIES
..
There are at least three (3) parties in a Letter of Credit
Transaction:
a)__ The buyer, who procures the letter of credit and
Qblig£S.Jiims£]f_fQ_xei.mbuj:s£__the issuing bank
upon receipt of the documents of title;
b)
The bank issuing the letter of credit known as
"issuing bank," which undertakes to pay the
seller upon receipt of the draft and proper docu­
ments of titles and to surrender the documents
Vto, the-buyer upon reimbursement; and'
[
c)
The seller, who in compliance with the contract
_
of sale ships-the goods to the buyer and delivers
the .documents -of title and draft to the issuing
bank to recover payment (Ib id .).
- -The number of the parties may be increased
and may include:
l.l :.t):y vf^n
- - --- - in
adyMhgj|iibtifylttg| bank which may
-- ■
, b e utilized to-convey to .the,'seller-the exis-fence of the credit; - - - - - - - ........... - - - -
ii) A confirming bank which will lend cre; : :<.4enmtwiheletter ofcredit issued by a lesser
379
4
INDEPENDENT CONTRACTS
There are at least three (3) distinct and independent
contracts involved in a letter of credit namely: (1) the
----- contract of sale between the buyer and the seller, (2) the
contract of the buyer with the issuing bank, and (3) the
letter of credit proper. In the second contract— between the
buyer and the issuing bank — the bank agrees to issue the
letter of credit in favor of the seller subject to reimbursement
or payment by the buyer of whatever is paid to the seller
plus proper consideration agreed upon by the parties. In
the third contract which is the letter of credit proper, the
bank obligates itself to pay the seller or to the order of the
seller (that is, it will honor the bills or drafts drawn by the
seller) after presentation to the bank of tender documents
stipulated upon, which normally includes the document of
title (Keng Hue Paper Products v. CA, 286 SCRA 257 [1998]).
401. INDEPENDENCE PRINCIPLE
It is important to emphasize in this connection
that few things are more clearly, settled in law
than that the contracts involved in- a letter of credit
arrangement are to be maintained in a state of
perpetual separation. The undertaking of the bank
380
PART V — CREDIT TRANSACTIONS
REVIEWER ON COMMERCIAL LAW
of the Credit. Documents that are not stipulated as
tender documents will not be examined (Art. 13, UCP
to pay, accept, and pay drafts or negotiate and/or
fulfill any obligation tinder the Credit is not subject tc
claims ox defenses by the Applicant resulting from his
relationship with the issuing bank or the beneficiary.
In the same manner, the beneficiary can, in no case,
avail himself of the contractual relationships existing
between the banks or between the applicant and the
issuing bank (Keng Hua Paper Products v. CA, ibid.).
500; Feati Bank & Trust Co. v. CA, G.R. No. 94209, April
30,1991).
5. KINDS OF LETTERS OF CREDIT
4.02. A direct consequence of the "independence principle"
is the rule that banks only deal with documents and
not with goods, services or obligations to which they
relate (BPI v. De Reny Fabric, 35 SCRA 256). Example:
The bank has no duty to verify whether what has
been described in the letters of credit or drafts or
shipping documents actually tallies with what was
loaded aboard the ship (See Transfield Phils, v. Luzon
a)
Confirmed LC — whenever the beneficiary
stipulates that the obligation o f the opening
bank shall also be made the obligation of another
bank (also bank that notifies) to himself.
b)
Irrevocable LC — is a definite undertaking on
the part of the issuing bank and constitutes the
engagement of that bank to the beneficiary and
bonafideholders of drafts drawn and or documents
presented thereunder, that the provisions for
payment, acceptance, or negotiation contained
in the credit will be duly fulfilled, provided that
all the terms and conditions of the credit are
complied with.
Hydro Corp., 443 SCRA307 [2004]; Land Bank v. Monet's
Export Mfg. Corp., G.R. No. 161865, March 10, 2005).
4.03. Fraud Exception
~c)
Under the "independence principle," the appli­
cant cannot enjoin the payment of the obligation of
the issuing bank under the Letter of Credit based on
any irregularity or non-performance of an obligation.
The exception is when there is fraud or forgery in the
underlying transaction or the tender documents (See
Revolving Letter of Lredic — one ihal provides for
renewed credit to become available as soon as the
opening bank has advised that the negotiating
or paying bank that the drafts already drawn
by the beneficiary have been reimbursed to the
opening bank by the buyer.
d)
Transfield Phils, v. Luzon Hydro Corp., 443 SCRA 307
[2004]).
4.04. Doctrine of Strict Compliance
The Issuing Bank or the Confirming Bank, as the
case may be, must examine the Tender Documents
(including shipping documents) and must make sure
that the terms and conditions of the Letter of Credit
- ^ are strictly complied with.: Thereds: no discretion on
the part of the bank to waive any requirement. The
tender documents must not only be complete but they
must on their faces be in compliance with the terms
381
Standby Letter of Credit —■a security arrangement
for the performance of certain obligations. It can
TT b e drawn.-against only if another business trans­
action is not performed. It may be issued in lieu
of a performance bond.
e)
T
Back-to-Back Letter of Credit — a credit with iden­
tical documentary requirements and covering
the same merchandise as another letter of credit,
except for a difference in the price of the mer­
chandise as shown by the invoice and the draft.
The second letter of credit can be negotiated only
after the first is negotiated.
REVIEWER ON COMMERCIAL LAW
382
1)
.
Thus, this should be distinguished from
an ordinary commercial credit where the
beneficiary will recover if he can show
that he performed his obligation (delivery
of the purchased goods). In a Standby LC,
the beneficiary will prove that the obligor
failed to perform the secured obligation.
Example: The contractor failed to construct
thehuildingon time.
D. TR U ST RECEIPTS LAW
(P.D. No. 115)
1. BACKGROUND Abank that issues a letter of credit has the right to ask for
reimbursement from the applicant-buyer. This obligation to
pay the issuing bank may also be secured by trust receipts.
Under the law, the bank becomes the entruster of the goods
----- white thp hnypr-importer is the entrustee. The goods will in
effect be released by the bank to the buyer by the delivery of
the document of title/bill of lading covering the goods. The
buyer as entrustee is obligated to sell the goods and to apply
the proceeds thereof to the payment of tihe loan extended by
the entruster-bank. The buyer will only get the balance of
the proceeds of the sale after making such application.
a) -
b)
c)
"Entrustee" shall refer to the person having or taking
possession *of goods, documents, or instruments
under a trust receipt transaction, and any successorin-interest of such person for the purpose or purposes
specified in the trust receipt agreement.
"Entruster" shall refer to the person holding title over
the goods, documents, or instruments subject of a
trust receipt transaction, and any successor-in-interest of such person.
"Goods^shalkMcIude diattels and personal property
other than money, things in action, or things so affixed
to land as to become a part thereof.
PART V — CREDIT TRANSACTIONS
d)
383
"Security Interest" means a property interest in goods,
documents, or instruments to secure performance of
some obligations of the entmstee or of some third
persons to the entruster and includes title, whether or
not expressed to be absolute, whenever such title is in
substance taken or retained for security only.
WHAT IS A TRUST RECEIPT?
A trust receipt is a security transaction intended to
aid in financing importers or dealers in a merchandise by
allowing them to obtain delivery of goods under certain
covenants.
2.01. The sale of goods, documents or instmments by a
person in the business of selling goods, documents
or instmments for profit who, at the outset of the
transaction, has, as against the buyer, general property
rights in such goods, documents or instruments, or
who sells the same to the buyer on credit, retaining
the purchase price, does not constitute a trust receipt
transaction and is outside the purview and coverage
of the Trust Receipt Law (Sec. 4, Trust Receipts Law or
TRLfor short).
2.02. Usually the entruster releases the goods to the
entrustee so that the latter may sell the goods.
However, the purpose is not limited to sale (DBF v.
Prudential Bank, 475 SCRA623 [2005]; Chingv. Secretary
o f Justice, 481 SCRA 601 [2006]). Hence, the goods
may also be released for other purposes substantially
equivalent to the following:
1)
2)
Their sale or the procurement of their sale;
Their manufacture or processing with the pur­
pose of ultimate sale, in which case the entruster
- —- retains Jhis-title overdbe said goods whether in
their original or processed form until the en­
trustee has complied fully with his obligation
under the trust receipt; or
REVIEWER ON COMMERCIAL LAW
384
3)
The loading, unloading, shipment or transship­
ment or otherwise dealing with them in a man­
ner preliminary or necessary to their sale.
N ote: The entrustee may still be criminally liable under
the TRL even if the goods that were released by virtue of the
trust receipt were not resold but were used as spare parts
for machineries.
3. OBLIGATIONS OF: (A) ENTRUSTER AND
(B) ENTRUSTEE
a)
b)
Entruster — releases the possession of the goods
to the entrustee upon the latter's execution of
the trust receipt.
Entrustee —
1)
Binds himself to hold the goods in trust for
the entrustor;
________ ____ 21
Sell or otherwise dispose of the goods and
to turn over to the entrustor the amount
still owing; and
3)
To return the goods if unsold.
Note: The entrustee is still liable to pay the
entruster (bank) even if the goods were returned to
the latter (Landl & Co. [Phil] v. Metrobank, G.R. No.
159622, July 30, 2004).
3,01. Remedies of the Entraster
a)
b)
PART V — CREDIT TRANSACTIONS
If the goods are sold or disposed by the entrustee
and the latter did not remit the proceeds: (1)
file estafa case against the entrustee; or (2) file
a separate case to collect the proceeds or the
money obligation secured by the trust receipt.
If the goods are unsold and are still with the
entrustee: (1) cancel the trust and take possession
of the goods, documents or instruments subject
of the trust; (2) after taking possession, sell the
385
goods and apply the proceeds of the sale to the
expenses of sale and retaking of the goods and
the indebtedness; and (3) as an alternative to
retaking possession and sale, the entruster can
file a case to collect the indebtedness secured by
the trust receipt.
Note: The obligation of the entrustee is not
extinguished in case of repossession and sale of the
goods, the entrustee is entitled to any surplus while
the entruster can still recover the balance of the
indebtedness in case there is a deficiency.
4. NO AGENCY IS ESTABLISHED
No agency relationship is established when the
entrustee executes the trust receipt. However, an entrustee's
breach will make him liable for estafa. As held by the
Supreme Court in People v. Cuervo (104 SCRA 312), the
enactment of Presidential Decree No. 115 within its penal
----- sandlQD_iS-_ in reality, merely confirmatory of existing
jurisprudence on situation covered by Article 315(l)(b) of
the Revised Penal Code. The entrustee in a trust receipt who
failed to account for the proceeds of the goods sold or to
return the goods, as the case may be, is guilty of estafa even
where the offense was committed before the promulgation
of Presidential Decree No. 115 on June 29, 1973. But unlike
the old rule, Presidential Decree No. 115 now expresses
a criminal liability on the part of responsible officers of
corporations and juridical entities.
5. NATURE OF ENTRUSTER’S TITLE
a)
The entruster-bank acquires "security interest"
in the goods as holder of a security title for the
advances it had made to the entrustee (Melvin
- Colinares v. CA, G.R. No. 90828, Sept. 5, 2000). By
fiction of law, the ownership of the merchan­
dise continues to be vested in the person who
had advanced payment until he has been paid in
CREDIT 1'RANS ACTIONS
REVIEWER ON COMMERCIAL LAW
386
such title is in substance taken or retained for security
full or if the merchandise has been already sold,
the proceeds of the sale should be turned over
to him by the importer or by his representative
or successor-in-interest. To secure that the bank
shall be paid, it takes full title to the goods at
the very beginning and continues to hold that
title as his indispensable security until the goods
are sold and the vendee is called upon to pay
for them; hence, the importer has never owned
the goods and is not able to deliver possession
only (Sec. 3[h], P.D. No. 115).
However, since the interest of the entruster is a
mere security interest:
The security interest of the entruster prevails as
against all creditors of the entrustee for the dura­
tion of the Trust Receipt Agreement (Sec. 12, P.D.
PROBLEMS:
the view that the entrustee is not the owner of
the property in question. Hence, the entrustee
cannot mortgage the property. However, it is
believed that the entrastee is still the owner and
the entruster acquires only security interest.
The entrustee cannot mortgage the property
not because he is not the owner but because he
does not have free disposal of the property to be
mortgaged.
A:
The entruster shall not, merely by virtue of
such interest, be responsible as principal or
as vendor under any sale or contract to sell
made by entrustee (Sec. 8, P.D. No. 115).
________________ 21
The entrustee bears the loss of the goods
after delivery to him (Sec. 11, P.D. No. 115).
Note, however, that in Development Bank of the
Philippines v. Prudential Bank (G.R. No. 143772,
Nov. 22, 2005), the Supreme Court sustained
5.01. Security Interest
-
b)
In 1973, LTM opened an irrevocable commercial letter
of credit with P Bank for US$498,000. This was in
connection with its importation of 5,000 spindles for
spinning machinery with drawing frame, simplex fly
frame, ring spinning frame and various accessories,
______spare parts andrtooLgauge. These were released to
LTM under covering 'Trust receipts" it executed in
favor of P Bank. LTM installed and used the items in
its textile mill. On Sept. 10, 1980, D Bank granted a
foreign currency loan in the amount of US$4,807,551
to LTM. To secure the loan, Litex executed real
estate and chattel mortgages on its plant site in
Montalban, Rizal, including the buildings and other
improvements, machineries, and equipment there.
Among the machineries and equipment mortgaged
in favor of D Bank were the articles covered by the
"trust receipts." Was the mortgage over the properties
covered by the trust receipt valid?
1)
c)
A purchaser in good faith and for value (from an
entrustee with a right to sell) acquires the goods,
documents or instrument free from the entruster's security interest (Sec. 11, P.D. No. 115).
No. 115).
(Ibid.).
b)
a)
Security interest means a property interest in
goods/■'documents or instruments:rto -secures per**
formance of some obligations of the entrustee or of
some third persons to the entruster and includes title,
whether or not expressed to be absolute, whenever
1.
NO. The mortgage was not valid with respect to the
machineries and equipment covered by the trust
receipts. LTM did not have free disposal nor the
authority to freely dispose of the articles. Hence, the
inclusion in the mortgage was void and had ho legal
effect (DBP v. Prudential Bank, G.R. No. 143772, Nov.
22,2005).
88
REVIEWER ON COMMERCIAL LAW
2.
A:
Sometime in 1989, RTMC was granted a credit line by
H Bank for a credit line of P8 million. RTMC availed
of the credit line by making numerous drawdowns
for the importation of raw materials, each drawdown
being covered by a separate promissory note and
trust receipt over the raw materials. When the
notes became due, RTMC offered to turnover the
imported materials arguing that the importation
of raw materials under the credit line was with a
grant of option to them to turnover to the bank the
imported raw materials should these fail to meet
their manufacturing requirements. However, the
bank refused to accept the same, until the materials
were destroyed by a fire which gutted down RTMC's
premises. RTMC claims that its obligation was
extinguished with the destruction of the materials. Is
RTMC still liable?
YES. RTMC is still liable despite the destruction of the
goods. The entruster bank did not become the owner
PARI V — CREDIT TEA NS A CTIC) NL
3A
nature and no criminal liability under the Trust Receipts
Law can be imposed.
E. BULK SALES LAW
(Act No. 3952)
1. WHEN IS A SALE CONSIDERED A SALE IN BULK?
A sale is a sale in bulk within the contemplation of the
Bulk Sales Law when: (a) there is a sale, transfer, mortgage
or disposition other than in the ordinary course of trade and
the regular prosecution of the business; (b) the sale is of all
or substantially all of the business or trade; or (c) when the
sale is of all or substantially all of the fixtures and equipment
used in business (Sec. 2, Bulk Sales Law or BSLfor short).
2. WHAT IS THE PURPOSE OF THE BULK SALES LAW?
It seeks to prevent the defrauding of creditors by the
secret sale or disposal in bulk of all or substantially all of a
merchant's stock of goods.34
orSFgoodFmd^TelrastreceiptwBsm'terely-^tgned’
as a security for the loan. Loss of the property that
served as a security did not extinguish the obligation.
The entrustee will then bear the loss of the goods
or property (Rosario Textile Mills Corporation v. Home
3. WHAT ARE THE FORMALITIES REQUIRED BY THE
BSL?
a)
Bankers Savings and Trust Co., supra).
6. NOVATION OF AGREEMENT
In Pilipinas Bank v. Alfredo T. Ong (G.R. No. 133176, Aug.
8, 2002), the Supreme Court ruled that a Memorandum of
Agreement entered into between the bank (entruster) and
the entrustee extinguished the obligation under the existing
trust receipt because the agreement did not only reschedule
the debts of the entrustee but it provided principal
conditions which are incompatible with the trust agreement.
For instance, the agreement provides for a term of 7 years;
it is secured by mortgage/ and it provides for different rates
of interests and charges. Hence, the liability for breach of
the Memorandum of Agreement would be purely civil in
The sale in bulk to be accompanied by sworn
statement of the vendor/mortgagor listing the
names and addresses of, and amounts owing to,
creditors;
.
b)
The sworn statement shall be furnished to the
buyer;
c)
The seller is required to prepare an inventory of
stock to be sold; and
d)
The seller is required to notify the creditors of
projected sale at least 10 days before such sale
(Secs. 3-4, BSL).
4. IN WHAT CASES ARE THE FQRMALITIES/REQUIREMENTS NEED NOT BE COMPLIED WITH?
a)
Sale is made in the ordinary course of business;
PART V — CREDIT TRANSACTIONS
REVIEWER ON COMMERCIAL LAW
390
There is,a waiver from all the creditors and must
be written;
c)
Sale is by virtue of a judicial order; and
d)
Those sold by assignee in insolvency or those
beyond the right of creditors.
c)
1
b)
the obligation of the debtor. It is not required that
d)
Violation of BSL makes the sale in bulk valid between
the parties, void as to affected creditors.
Sale in bulk is void as to creditors;
b)
Purchaser holds property in trust for seller; and
c)
Purchaser is liable to seller's creditors for prop­
erties forming part of bulk, and already disposed
by him.
e)
The mortgage must be constituted to secure the
fulfillment of a principal obligation.
b)
The mortgagor must be the absolute owner of
the thing mortgaged.
c)
1.01.
___ __
‘
2. REAL ESTATE MORTGAGE (NCC and ACT NO. 3135)
----- 2.01. SUBJECT------------------------------------------------------------Only immovable properties or real right over
such immovable may be the subject of a real estate
mortgage. Buildings are immovable properties, hence
they can be separately mortgaged.
2.02. REGISTRATION
A real estate mortgage must be registered with
the Register of Deeds where the subject property is
located in order to affect third persons. However, an
unregistered mortgage is valid between the parties.
The mortgagor must have free disposal of the
property.
FEATURES OF MORTGAGE
a)
The mortgage secures only the amount stated in
the mortgage deed which may be less than the
amount of the principal obligation (Landrito, Jr.
v. CA, 466 SCRA 107 [2005]).
REQUISITES COMMON TO REAL ESTATE MORTGAGEr
CHATTEL MORTGAGE AND PLEDGE (Art. 2085, New
Civil Code or NCC for short)
a)
The mortgage is indivisible. When several
things are given to secure the same debt in its
entirety, all of them are liable for the debt and
the creditor does not have to divide his action by
distributing the debt among the various things
mortgaged. Even if only part of the debt remains
unpaid, all the things are liable for such balance
(Vda. De Jayme v. CA, ibid.).
F. MORTGAGE
1.
A third person who is not a party to the principal
obligation may mortgage his property to secure
he benefited from, the principal contract (Via. De
Jayme v. CA, 390 SCRA 380 [2002]).
5. WHAT ARE THE EFFECTS OF THE VIOLATION OF BSL?
a)
391
2.03. MORTGAGEE IN GOOD FAITH
The mortgage cannot exist without a valid prin­
cipal obligation (Arts. 2086 and 2052, NCC).
: A mortgagee will be considered in good faith if
he relies on the face of the Torrens title. A mortgagee
without notice will not be affected by the claim of
third persons. - •— -
Jb.).. „The considerationJfor the principaL obligation
" •" is the consideration for the mortgage (Pilipinas
Exception: Banks cannot rely merely on the title.
By the nature of their 'functions, banks are required
Marble Corporation v. Intermediate Appellate Court,
142 SCRA 180 [1986]).
■
REVIEWER ON COMMERCIAL LAW
392
to go beyond the title because they are required to
exercise the highest degree of diligence. For example,
they are required to investigate the title and the
property (Ursal v. CA, 473 SCRA 58 [2005]).
2.04. NATURE
The mortgage constitutes an encumbrance on
the real property. The right of the mortgagee is a right
in rem. The registered mortgage follows the property
even if there is a change of ownership.
a)
PART V — CREDIT TRANSACTIONS
the absence of stipulation, the general rule is that the
mortgage must be limited to. the amount mentioned
in the mortgage (Quintanilla v. CA, 279 SCRA 397
[1997]).
2.07. FORECLOSURE OF MORTGAGE
The three (3) common types of forced sales
arising from a failure to pay a mortgage debt are:
Since only security interest is acquired, the right
to possession and jus disponendi is not included
unless otherwise stipulated (Ramirez v. CA, 409
SCRA 133 [2003]).
The first registered mortgagee has superior
right over junior mortgagees or attaching credi­
tors (Rizal Commercial Banking Corp. v. CA, 289
SCRA 292 [1998]). The Manual of Regulations
____________ for Banks (MORB) provides that banks may also
grant loans on the security of junior mortgages
on real estate. However, the sum total of the loan
to be granted and the outstanding loan on the
senior mortgage must not exceed the loan value
of the subject real estate based on the appraisal
to be made by the junior mortgagee (Sec. X311.1,
1)
An extrajudicial foreclosure sale, governed
by Act No. 3135;
2)
A judicial foreclosure sale, regulated by
Rule 68 of the Rules of Court; and
3)
An ordinary execution sale, covered by
Rule 39 of the Rules of Court (Concepcion v.
b)
MORB).
2.05. AFTER-ACQUIRED PROPERTY
The parties may stipulate that after-acquired
properties are automatically included in the mort­
gage. Thus, the parties may stipulate that all
buildings, machineries and equipment attached to the
mortgaged property shall be subject to the mortgage
CA, 274 SCRA 614 [1997]).
An ordinary execution sale covered by Rule 39
of the Rules of Court is the result of a personal action
for collection of debt or specific performance. This
remedy is alternative to foreclosure. If the mortgagee
opts to foreclose the real estate mortgage, either
judicially or extrajudicially, he thereby waives the
action for collection of the debt and vice versa (BPI
Savings Bank, Inc. v. Vda. de Coscolluela, 493 SCRA 472
[2006]).
2.08. EXTRAJUDICIAL FORECLOSURE (ACT NO. 3135
AND SUPREME COURT CIRCULAR A.M. NO. 9910-05-0)
a)
The Deed of Real Estate Mortgage may expressly
-
provide th atit may secure future advancements. In
Special Power Necessary. Extrajudicial foreclo­
sure under Act No. 3135 is available only if there
is an express authority in the real estate mort­
gage authorizing such extrajudicial sale (Sec.
1, Act No. 3135; Casano v. Magat, 374 SCRA 508
[2002]).
(Mendoza v. CA, G.R. No. 116710, June 25, 2001).
- 2.06. AFTER-INCURRED OR FUTURE OBLIGATIONS
393
b)
Petition. The extrajudicial foreclosure of the real
estate mortgage is initiated by filing a Petition
• with the Executive Judge through the Clerk of
r e v ie w e r o n c o m m e r c ia l l a w
PART V — CREDIT TRANSACTIONS
Court who is also Ez Officio Sheriff of the City or
Province where the property is located (AM. 99-
date, there must be another posting and
publication of the notice of sale for the new
date, otherwise the sale will be considered
invalid (Ouano v. CA, 398 SCRA 525 [2003]).
10-05-0).
Note: The same procedure is prescribed for the extra­
judicial foreclosure of chattel mortgage -and pledge.
c)
There is only one filing fee regardless of the num­
ber of properties to be foreclosed. However, the
venue of the extrajudicial foreclosure proceed­
ings is the place where each of the mortgaged
property is located (AM. 99-10-05; Benguet Man­
agement Corporation v. CA, 411 SCRA 347, 354
[20031).
d)
f)
Requirements of Notice and Publication
In extrajudicial foreclosure under Act No.
3135, what the Act requires are:
1)
The posting of notices of sale in three public
places; and
-------------—2)— The publication of the notice of sale in <T
newspaper of general circulation (Concep­
cion v. CA, supra).
e)
v. Wong, G.R. No. 120859, June 26, 2001).
2)
Posting must be in three (3) public places
but it is not necessary that notice is posted
_ in the mortgaged property.
: --------
3)
If the original date of the sale stated in
the notice of sale is transferred to another
5)
While posting is necessary, a Certificate of
Posting is not indispensable. The certificate
may be an evidence if the fact that there
was posting is an issue or in question.
Price. The fact that the mortgaged property is
sold at an amount less than its actual market
value is not a ground to invalidate the foreclo­
sure sale so long as the price is not shocking to
the conscience (Suico Rattan & Buri Interiors, Inc.
g)
Possession after Foreclosure. The mortgagor
shall remain in possession of the real property
even after foreclosure. However, the winning
bidder or purchaser may file a petition in court
for a writ of possession to obtain possession of
the property even before the expiration of the
redemption period (Sec. 7, Act No. 3135).
M)
Redemption. The debtor-mortgagor can redeem
the property within one (1) year from the date
the certificate of sale is registered with the Regis­
ter of Deeds (Sec. 6, Act No. 3135).
However, the mortgagor may be
that the required posting in three (3) public
places has not been complied with (MTBTC
Personal notice to the mortgagor-debtor is
NOT necessary.
a) The mortgagee-creditor can recover the de-----------------------ficiency if the price of the sale is not sufficient to pay for the entire debt or obligation.
Non-compliance with the posting and pub­
lication requirement will render the sale
null and void.
barred by estoppel or laches from claiming
4)
v. CA, 490 SCRA 560 [2006]).
Other Rules on Notice and Posting
1)
395
N ote: If the mortgagee is a bank, the same rule applies
but only.for natural persons. If the mortgagee is a juridical
person, the mortgagor can redeem the property within
three (3) months from foreclosure but not later than the
registration of the certificate of'sale.
- ■ .
,'w ^ w ;
PART V — CREDIT TRANSACTIONS
REVIEWER-QN COMMERCIAL LAW
1)
The:redemption price under Act No. 3135 is the
purchase price plus interest of one percent (1%)
..... ‘p e r month and taxes.
c)
E xception ; T h e redemption price is the
-whote,obligation secured by the mortgage if the
mortgagee-is*bank.
2)
- -
There must be tender of the whole redemption
price plus interest in order to validly exercise the
right of redemption. However, tender using a
check is sufficient.
3. CHATTEL-MORTGAGE' fAct Wo. 1508)
Thus, machinery installed by the lessee on
the leased premises may be the subject of a chat­
tel mortgage (Davao Sawmill v. Castillo, 61 Phil.
*
A chattel mortgage is an accessory contract by virtue
of which personal property is recorded in the Chattel
Mortgage Register as security for the performance of an
obligation (Art. 2140, NCC).
Not Conditional Sale. The original provisions
of the Chattel Mortgage Law consider chattel
______________ .mortgage as a conditional "saferThis old view~
has been expressly repudiated by Article 2140 of
the New Civil Code (Serra v. Rodriguez, 56 SCRA
709).
d)
Vessels — mortgage is recorded in the office of
the Philippine Coast Guard (now the Maritime
Industry Authority) to be effective as to third
persons; not necessary to be recorded in the Of­
fice of the Registry of Deeds.
e)
Motor Vehicles — mortgage registered in LTO (for
a)
538).
vehicles used for public services).
f)
There is no real analogy between a chat­
tel mortgage contract and a conditional sale, as
understood in Civil Law. Itis merely a security.
To regard it as a conditional sale is to rattle the
bones of an antiquated skeleton from which all
Wearever Textile Mills, 122 SCRA 296 [1983]).
Exception; The chattel mortgage over a
building is considered valid as between the par­
ties on the basis of estoppel but not against third
SUBJECT MATTER
a)
b)
It covers personal or movable properties con­
templated under Articles 416 and 417 of tike New
Civil Code including shares of stocks and inter­
est in business.
\
Shares o f stocks -—chattel mortgage thereon need
not be registered in the stock and-transfer book.
Buildings — they cannot, as a rule, be subject of
chattel mortgage. They are real properties under
Article 415(1) of the New Civil Code even if they
are houses of mixed materials (Tumalad v. Vicencio, 41 SCRA 143 [1971]) or if the building is on
rented land (Makati Leasing and Finance Corp. v.
semblance of animate life lias long since? depart­
ed (Bachrach Motor Co. v. Summers, 4 Phil. 3).
3.01.
Machinery — if any of the following is absent:
(1) installed by the owner; (2) intended by the
owner of the tenement for an Industry or work
being carried on in a building or piece of lands;
and (3) which tends directly to meet the needs of
the said industry or works (Art. 415[b], NCC). If
all of the requisites are present, the machinery is
real and is not, as a rule, proper subject of a chat­
tel mortgage. .
.............
:::
397
persons (Evangelista v. Alto Surety & Ins. Co., 103
Phil. 401 [1958]).
- 3J2.„ :AFTE1-ACQUIRED.PROPERTIES ; a)
Chattel mortgage shall be deemed to cover only
the property'described .-therein and not like or
398
b)
REVIEWER ON COMMERCIAL LAW
PART V —•CREDIT TRANSACTIONS
substituted property thereafter acquired (Sec,
7[4], Act No. 1508; Tsai v. CA, 366 SCRA 324
[2001]).
1)
The rule regarding after-acquired properties
does not apply to stores that are open to the
public. A stipulation in the chattel mortgage
which includes goods that are acquired in
renewal of or in substitution of goods on hand
when the mortgage was executed is valid and
binding (Northern Motors, Inc. v. Coquia, 66 SCRA
2)
b)
A chattel mortgage can cover only obligations
existing at the time the mortgage is constituted. It
cannot cover after-incurred obligations.
In a pledge, real estate mortgage, or antichresis,
after-incurred obligations may be secured so long as
______these future debts are accurately described. A chattel
mortgage can only cover obligations existing at the
time the mortgage is constituted. Promise expressed in
a chattel, mortgage to cover debts yet to be contracted
may be binding but security itself arises only after
amending the old contract conformably with the form
prescribed by the Chattel Mortgage Law. This rule is
the inference from the language of the Affidavit of
Good Faith (Acme Shoe Rubber and Plastic Cory. v. CA,
Affidavit of Good Faith. It is a subscribed state­
ment in a contract of chattel mortgage wherein
the parties severally swear that the mortgage is
made for the purpose of securing the obligation
specified in conditions thereof, and for no other
purpose, and that the same is a just and valid ob­
ligation and one not entered into for the purpose
of fraud (Sec. 5, Act No. 1508).
1)
The Affidavit of Good Faith gives the mort­
gage a preferred status, that is, it enjoys
(Cebu International Finance Corp. v. CA, 268
SCRA 178 [1997]).
2)
Even in the absence of the affidavit, the chatM mortgage is v a M a s between the parties.
However, it is not valid as to third persons
including other creditors or mortgagees or
pledgee (Phil Refining Co. v. Jarque, 61 Phil.
229 [1935]).
260 SCRA 714 [1996]).
Registration. It must be registered in the Chattel
Mortgage Register of the Register of Deeds
where the mortgagor resides or if he resides in
the Philippines in the place where the property
is situated (Sec. 4, Act No. 1508). If the place of
residence and the place where the property is
situated are different, they must be registered in
the registers of both province or city (Ibid.).
Unregistered mortgage is binding between
the parties but not on third persons (Pili­
pinas Marble Corp. v. I AC, 142 SCRA 180
[1986]).
3.03. AFTER-INCURRED OBLIGATIONS
a)
Registration creates a lien that follows the
property and serves as notice to third per­
sons (Northern Motors, Inc. v. Coquia, 68
SCRA 374 [1975]).
415 [1975]).
3.04. FORMALITIES
399
3.05. Right of Redemption
a)
The following may redeem if the condition of
the mortgage is broken: (1) the mortgagor; (2)
a person holding a subsequent mortgage; or (3)
a subsequent attaching creditor (Sec. 13, Act No.
■1508).
b) ' However, there is no right of redemption af­
ter the foreclosure sale (Cabral v. Evangelista, 28
SCRA 1000 [1969]).
400
PART V — CREDIT TRANSACTIONS
REVIEWER ON COMMERCIAL LAW
obligation (PCI Leasing v. Girajfe-X Creative
Imaging, Inc., G.R. No. 142618, July 12,2007).
8,06. Deficiency after Foreclosure
Since, a chattel mortgage is just a security, fore­
closure thereof will not prevent the mortgagee from
recovering any deficiency that may result after apply­
ing the proceeds of the foreclosure sale to the obliga­
b)
Alternative Remedies. The remedies are alter­
native, not cumulative — the exercise of one
bars exercise of another unless it was not
actually fully exercised. For instance, the filing
of the collection case bars foreclosure. However,
recovery of the property through a replevin case
preparatory to foreclosure will not bar the other
remedies if there was no actual foreclosure.
c)
Effect of foreclosure on deficiency. Foreclosure
of chattel mortgage on the things sold shall bar
recovery of any deficiency. Thus, seller cannot
recover from guarantor. However, if there is a
real estate mortgage over another property, the
foreclosure thereof will not bar recovery of any
deficiency because he is in effect availing of the
remedy of exacting fulfillment of the obligation
tion (Bicol Savings & Loan Association v. Guinhawa, 188
SCRA 642 [1990]).
Exception: When the transaction secured is a
sale of personal property on installment basis under
Article 1484 of the New Civil Code, otherwise known
as the "Recto Law."
G. RECTO LAW
(Art. 1484, NCC)
1. In a contract of sale of personal property on installment basis,
the vendor may exercise any of the following remedies: (a)
exact fulfillment of the obligation, should the vendee fail to
----- pay; (b) cancel the sale, should the vendee's failure to pay
cover two or more installments; and (c) foreclose the chattel
mortgage.
_____________ ____________________________________ _______
d)
When applicable. The law applies only to sale of
personal property in installments (hence, it does
not apply to a simple loan).
1)
However, the law applies to contracts that
are in substance,, sale of personal property
in installments. Thus, it applies to "finan­
cial lease" or "financial leasing," where a
financing company would, in effect, initial­
ly purchase a mobile equipment and turn
around to lease it to a client who gets, in
addition, an option to purchase the propL
'■ ~ erty at the expiry of the lease period. The
Recto Law applies where the supposed les­
see will retain the thing if he fully paid the
Waiver. If seller-mortgagee opts to exercise rem­
edy of exacting fulfillment of the obligation, he
shall be deemed to have waived his right as a
mortgagee but may still levy on the mortgaged
property.
2. Rules:
a)
401
H. FINANCIAL REHABILITATION AND INSOLVENCY
ACT OF 2010 (R.A. No. 10142) AND CONCURRENCE
AND PREFERENCE OF CREDITS
(Arts. 2241 ~ 2244, NCC)
I.
POLICIES
The Financial Rehabilitation and Insolvency Act (FRIA
for short) of 2010, which lapsed into law on July 18, 2010,
expressly repealed the Insolvency Law. * ' ■
~
a)
FRIA expresses the policy of the State to encour­
age debtors, both juridical and natural persons,
PART V — CREDIT TRANSACTIONS
REVIEWER ON COMMERCIAL LAW
402
and their creditors to collectively and realisti­
cally resolve and adjust competing claims and
property rights (Sec. 2, FRIA).
b)
c)
d)
b)
Insolvent shall refer to the financial condition of
a debtor that is generally unable to pay its or his
liabilities as they fall due in the ordinary course
of business or has liabilities that are greater than
its or his assets.
The State shall ensure a timely fair, transparent,
effective, and efficient rehabilitation or liquida­
tion of debtors (Sec. 2, FRIA).
The rehabilitation or liquidation shall be made
with the following factors in mind: (1) to ensure
or maintain certainty and predictability in com­
mercial affairs; (2) preserve and maximize the
value of the assets of these debtors; (3) recognize
creditor rights; (4) respect priority of claims; and
(5) ensure equitable treatment of creditors who
are similarly situated (Sec. 2, FRIA).
When rehabilitation is not feasible, it is in the
interest of the State to facilitate a speedy and
orderly liquidation of the debtors' assets and the
settlement of their obligations (Sec. 2, FRIA).
403
c)
1)
Liabilities shall refer to monetary claims
against the debtor, including stockholder's
advances that have been recorded in the
debtor's audited financial statements as
advances for future subscriptions.
2)
Ordinary course of business shall refer to
transactions in the pursuit of the individual
debtor's or debtors' business operations
prior to rehabilitation or insolvency pro­
ceedings and on ordinary business terms.
Creditor shall refer to a natural or juridical per­
son which has a claim against the debtor that
arose on or before the commencement date.
1.01. KEY DEFINITIONS (Sec, 3, FRIA)-------------------------
-------- 1)— G0mmeneemeni-Date-tefers-^& -^tgr-date-mr
Debtor shall refer to a sole proprietorship duly
which the court issues the Commencement
Order, which shall be retroactive to the date
of filing of the petition for voluntary or in­
voluntary proceedings (See Note 3.03 below).
a)
registered with the Department of Trade and In­
dustry (DTI), a partnership duly registered with
the Securities and Exchange Commission (SEC),
a corporation duly organized and existing under
Philippine laws, or an individual debtor who
has become insolvent.
1)
Individual debtor shall refer to a natural per­
son who is a resident and citizen of the Phil­
ippines that has become insolvent.
2)
_
^
d)
Group of debtors shall refer to and can
cover only: (1) corporations That are finan­
cially related to one another as parent
corporations, subsidiaries or affiliates; (2)
•. partneiRMps;that.are ovmed more than fifty
percent (50%) by the same person; and (3)
single proprietorships that are owned by
the same person.
e)
General unsecured creditor shall refer to a credi­
tor whose claim or a portion thereof is neither
secured, preferred nor subordinated under the
FRIA.
Secured creditor shall refer to a creditor with a se­
cured claim.
1)
Secured claim shall refer to a claim that is
secured by a lien.
2)
Lien shall refer to a statutory or contractual
: claim or judicial charge on
.pfflgonal
property that legally entitles a creditor to
resort to said property for payment of the
claim or debt secured by such lien.
REVIEWER ON COMMERCIAL LAW
404
PART V — CREDIT TRANSACTIONS
1.02. PROCEEDINGS COVERED BY FRIA AND
PERSONS WHO WILL FILE AND/OR APPROVE
Type of
Business
Type of
Who Will Approve
Proceeding
or File Petition
Pre-Negotiated
Rehabilitation
Plan)
P ro p rie to rs h ip
P a rtn e rs h ip
C o rp o r a tio n
Voluntary
Rehabilitation
Owner / P ro p rie to r
(Sec. 12, FRIA).
Voluntary
Rehabilitation
Majority of Partners
Voluntary
Rehabilitation
(1) Majority of th e
Director or
Trustees; and
N o n -S to c k C o r p r
(Sec. 12, FRIA).
Involuntary
Rehabilitation
ship, Partner­
ship, and Corpo­
ration
S o le P ro p rie to r-
Creditor or group
of creditors with
a claim of, or th e
aggregate of whose
claims is, at le a st
P I , 000,000.00 a ;
a t le a s t 25% of the
s u b s c r ib e d capital
stock or partners'
contributions,
whichgYer is higher
(Sec. 13, FRIA).
Sole Prop­
rietorship,- Partnership, and
C o r p o r a tio n
iO%.Qlthg total
securgdjckim and
unsecured creditors
holding more than
5P-%..Qf..Uhsecurgd.
claims (Sec, 76,
(Sec. 12, FRIA).
(2) Stockholders
representing 2 /3
of O u ts ta n d in g
Capital/ 2 / 3
of Members of
Pre-Negotiated The insolvent
Rehabilitation - debtor and the - Rehabilitation Plan
(Petition fo r
is endorsed
Approval of
or approved by
creditors holding
at least 223„o£fhe,
total liabilities of the
debtor including
secured creditors
holding more than
Organization
Sole
405
FRIA).
S o le
Proprietorship,
Partnership,
and
Corporation
Voluntary
Liquidation
Insolvent debtor
(Sec. 90, FRIA)
Sole
Proprietorship,
Partnership,
and
Corporation
In v o lu n ta ry
Individual
Debtor
S u s p e n s io n of
Liquidation
(Sec. 91, FRIA)
a) Three (3) or
more creditors, and
b) The aggregate
of whose claims
is at least either
P I,000,000.00 or
at least 25% of the
subscribed capital
stock or partner's
contributions of the
debtor, M lic liiY g r ,
ishjghgr,
Individual Debtor
Payment (Sec.
94, FRIA)
Individual
Debtor '
Voluntary
Liquidation
Individual Debtor
with at least
406
REVIEWER ON COMMERCIAL LAW
(Sec. 103,
FRIA)
Individual
Debtor
Involuntary
Liquidation
(Petition
for Acts of
In s o lv e n c y )
(Sec. 105, FRIA)
P500,000.00 debts
who does not have
sufficient assets to
cover his liabilities.
Any creditor or
g ro u p of creditors
with a claim o f,
or with claims
aggregating at least
P500,000.00.
G r o u p of D e b t o r s can file . A group of d e b to rs
may jo in tly file a petition for (voluntary) reha­
bilitation under the FRIA when one or more of
its m e m b e rs foresee the impossibility of meeting
debts w h e n they respectively fall due, and the
financial distress would likely adversely affect
the financial condition and/or operations of
______________ the other members of the group an d /or the___
participation of the other members of the group
is essentia] under the terms and conditions of
the proposed Rehabilitation Plan (Sec. 12, FRIA).
PART V — CREDIT TRANSACTIONS
value of payments projected in, the plan, more if the debtor
c o n tin u e s a s a going concern than if it is immediately
liquidated (Sec. 4[gg], FRIA).
3.01. REHABILITATION OF SOLE PROPRIETORSHIP,
PARTNERSHIP AND CORPORATION
The grounds for rehabilitation of any of the ihree
business organizations are:
a)
a)
VOLUNTARY REHABILITATION. The fol­
lowing must be alleged (in the verified Petition)
and established: (1) the insolvency of the debtor;
and (2) the viability of its rehabilitation (Sec. 12,
FRIA; Sec. 12 likewise enumerates the contents and
attachments to the Petition).
b)
INVOLUNTARY REHABILITATION. A credi­
tor or group of creditors may initiate involun­
tary proceedings against the debtor by filing a
petition for rehabilitation with the court if:
1)
There is no genuine issue of fact or law on"
the claim/'S of the petitioner/s, and that the
due and demandable payments thereon
have not been made for at least sixty (60)
days or that the debtor has failed generally
to meet its liabilities as they fall due; or
2)
A creditor, other than the petitioner/s, has
initiated foreclosure proceedings against
the debtor that will prevent the debtor from
-, paying its debts as they become due or will
render it insolvent (Sec. 13, FRIA).
2. EXCLU D ED D E B T O R S
:
Excluded from the operation of the FRIA are debtors
which a re (1) banks, (2) pre-need companies, (3) insurance
companies, and (4) national and local government agencies
or units. Rehabilitation of banks, pre-need companies, and
insurance companies is still governed by their respective
governing s p e c ia l laws (Sec. 5, FRIA; see Insurance Code, New
Central Bank Act and Pre-Need Code),
3. MEANING OF REHABILITATION
Rehabilitation shall refer to th e restoration of the debtor
to a condition of successful12*5operation add solvency, if it is ‘
shown that its continuance of operation is economically
feasible and its c re d ito rs can recover by way of the present
40?
3.02. REHABILITATION PLAN
Rehabilitation Plan shall refer to a plan by which
the financial well-being and viability of an insolvent
debtor can be restored using various means includ­
ing, but not limited to, debt forgiveness, debt re­
scheduling, reorganization or quasi-reorganization,
dacion en pago, debt-equity conversion and sale o f the
REVIEWER ON COMMERCIAL LAW
PART V — CREDIT TRANSACTIONS
b u s in e s s (or parts of it) as a going c o n c e rn , or setting
4)
up o f new business entity, or other similar arrange­
ments as may be a p p ro v e d by the c o u r t or creditors
(See Sec. 62, FRIAfor contents of the Rehabilitation Plan).
a)
A Rehabilitation Plan is attached to the Petition
for Rehabilitation.
b)
The Rehabilitation Plan: (1) may be approved by
the c re d ito rs (50% of the total claims) (Sec. 64,
FRIA); (2) c o n firm e d by the court after approval
of the creditors or even without such approval
or even over the objection of th e creditors (Sec.
68, FRIA).
c)
Cram D o w n Rule. The Rehabilitation Plan
(including pre-negotiated plans) confirmed by
the Court shall be binding upon the debtor and
all persons who may be affected by it, including
creditors, whether or not such persons have
participated in the proceedings, opposed the
Plan or whether or not their claims have been
scheduled (Secs. 69, 82, and 86, FRIA).
3.03. STAY ORDER
The court having jurisdiction over the rehabilita­
tion case shall is s u e a Commencement Order which
shall include a Stay Order (Sec. 16, FRIA). The Stay or
Suspension O r d e r shall:
1)
2)
_ _
Suspend all actions or proceedings, in court
or otherwise, for the enforcement of claims
against the debtor;
Suspend all actions to enforce any judg­
ment, attachment or other provisional rem­
edies against the debtor;
-3)_; Prohibit th e debtor from selling, encumber-.
■ "
‘ ing; transferring or disposing in any man­
ner any of its properties except in the ordi­
nary course of b u s in e s s ; and
409
Prohibit the debtor from making any pay­
ment of its liabilities outstanding as of the
commencement date except as may be pro­
vided herein (Sec. 16, FRIA).
The Commencement Order and conse­
quently the Stay Order shall be effective for the
entire duration of the rehabilitation proceedings
(Sec. 21, FRIA; PAL v. Spouses Kurongking, G.R.
No. 146698, Sept. 24, 2002). The order may be
lifted if th e re is no s u b s ta n tia l likelihood for the
debtor, to .he successfully rehabilitated.
3.04. SUSPENDED CLAIMS
Claim shall re fe r to all c la im s or demands of
whatever nature or character against the debtor or its
property, whether for money or othenAdse, liq u id a te d
or unliquidated, fixM-.o r,,contingent, matured. or
,unmatured., d is p u te d or undisputed, including,
-----------b u t-n o h 4 im ite d t o : (1 ) alh-etom is of the g o v e rn m e n t, whether national or local, including taxes, tariffs, and
customs duties; and (2) claims a g a in s t directors and
officers of the debtor arising from acts done in the
discharge of their functions falling within the scope
of their authority (Sec. 3, FRIA.).
The creditors or third : p a rtie s are not prohibited .
from filing cases against the directors and officers
acting in their personal capacities (Sec. 3, FRIA).
a)
Examples of Claims. Claims include money
claims or otherwise, w h ic h means even those
that are not purely monetary claims are includ­
ed.
1) The claim of passengers against a common
____ carrier (airline) for missing luggages is a
money claim or financial demand th a t the
la w requires to be suspended pending the
r e h a b ilita tio n ; p ro c e e d in g s :■(Philippine Air-
410
REVIEWER ON COMMERCIAL LAW
lines v. Spouses Sadie and Aisha Kurangking,
e t a l, ibid.).
2)
The suspension also covers employees'
claims (Rubberworld [Phils.], Inc. v. NLRC,
305 SCRA 721 [1999]).
3)
Cases for revocation of a contract of sale
and restitution of the price filed before the
HLURB. Under the Interim Rules (AM. No.
00-8-10-SC), the claim is suspended even if
the case involves claim that is not purely for
money (Sps. Sohrejuanite v. ASB Dev. Corp.,
PART V
To cases already pending appeal in the
Supreme Court as of commencement date.
Any final and executory judgment arising
from such appeal shall be referred to the
rehabilitation court for appropriate action;
2)
Subject to the discretion of the court, to
cases pending or filed at a specialized
court or quasi-judicial agency which, upon
determination by the court is capable of
resolving the claim more quickly, fairly,
and efficiently than the court. Any final and
executory judgment of such court or agency
shall be referred to the rehabilitation court
and shall be treated as a non-disputed
claim;
3)
To the enforcement of claims against sure­
ties and other persons solidarily liable with
the debtor, and third party or accommoda­
tion mortgagors as well as issuers of letters
Rationale of Suspension of Claims: (1) To
enable the rehabilitation receiver to effectively
exercise its/his powers free from or unburdened
by any judicial or extrajudicial interference that
might unduly hinder or prevent the "rescue" of
the debtor company (time, resources, and effort
will be used to litigate); and (2) lb enable the
management committee or the rehabilitation
receiver to substitute the defendant in any
pending action against it before any court,
tribunal, board, or body (Philippine Airlines v.
Spouses Sadie and Aisha Kurangking, el at, ibid.,
citing BP Homes, Inc. v. CA, 190 SCRA 262).
c)
d)
-------of-credif^unfofesAhe-prQpe-rty subject-ofAethird party or accommodation mortgage is
necessary for the rehabilitation of the debt­
or as determined by the court upon recom­
mendation by the rehabilitation receiver;
4)
To any form of action of customers or clients
of a securities market participant to recover
or otherwise claim moneys and securities
entrusted to the latter in the ordinary
course of the latter's business as well as any
action of such securities market participant
or the appropriate regulatory agency or
self-regulatory organization to pay or settle
such claims or liabilities;
5)
To the actions of a licensed broker or dealer
to sell pledged securities of a debtor pursu­
ant to a securities pledge or margin agree­
ment for the settlement of securities trans­
actions in accordance with the provisions.
Secured Credits. The Stay Order covers all
creditors, secured or unsecured (RCBC v. IAC,
213 SCRA 830 [1992]). The preferred status over
the unsecured creditors relative to the mortgage
liens is retained, but the enforcement of such
preference is suspended (See Note 7.03 below;
Metrobank v. ASB Holdings, Inc. et at, G.R. No.
166197, Feb. 27, 2007).
Exceptions to the Stay or Suspension Order
(Sec. 18, FRIA). The Stay or Suspension Order
shall not apply:
- --
411
1)
G.R. No. 165675, Sept 30, 2005).
b)
CREDIT TRANSACTIONS
412
REVIEWER ON COMMERCIAL LAW
of the Securities Regulation Code and its
implementing rules and regulations;
6)
The clearing and settlement of financial
transactions through the facilities of a clear­
ing agency or similar entities duly autho­
rized, registered and/or recognized by
the appropriate regulatory agency like the
Bangko Sentral ng Pilipinas (BSP) and the
SEC as well as any form of actions of such
agencies or entities to reimburse themselves
for any transactions settled for the debtor;
and
7)
Any criminal action against individual
debtor or owner, partner, director, or officer
of a debtor shall not be affected by any pro­
ceeding commenced under the FRIA.
3.05. WHO WILL MANAGE
The existing Board and/or Management of the
debtor shall continue.
Management can be replaced. Upon motion,
the court may appoint either the Rehabilitation
Receiver or a Management Committee to undertake
the management of the debtor in the following cases:
1)
Actual or eminent danger of dissipation,
loss, wastage, or destruction of the debtor's
■ assets or properties;
2)
Paralyzation of the business operations of
. the debtor; or
3)
Gross mismanagement of the debtor, or
fraud or 'other"wrongful conduct on the
part , of, or gross or willful violation of
the FRIA by existing management of the
debtor, owner, partner, director, officer, or
representative/s in the management of the
debtor (Sec. 36, FRIA).
PART V — CREDIT TRANSACTIONS
413
3.06, COURT ACTION ON PETITION FOR REHABILI­
TATION (Sec. 25, FRIA)
The Court may either: (1) give due course to
the petition; (2) dismiss the petition; or (3) convert the
proceedings to liquidation proceedings.
COURT ACTION
REQUIRED COURT
FINDINGS
a) Give DUE COURSE 1) The debtor is insolvent; and
to the petition.
2) There is a substantial
likelihood for the debtor
to be successfully
rehabilitated.
b) DISMISS the peti­
tion.
1) The debtor is NOT insol­
vent;
2) The petition is a sham filing
intended only to delay the
enforcement of the rights
of the creditor/s or of any
group of creditors;
3) The petition, the Rehabili­
tation Plan and the attach­
ments thereto contain any
materially false or mis­
leading statements; or
4) The debtor has committed
acts of misrepresentation
■ or in fraud of creditor/s or
a group of creditors.
c) CONVERT the pro­ 1) The debtor is insolvent; and
ceedings into Liqui2) There is no substantial like­
_ dation Proceedings
lihood for the debtor to be
successfully rehabilitated.
FART V — CREDIT TRANSACTIONS
REVIEWER ON COMMERCIAL LAW
414
c)
4. OUT-OF-COURT REHABILITATION
Rehabilitation is not necessarily court supervised.
An out-of-court or informal restructuring agreement or
rehabilitation plan that meets the minimum requirements is
recognized under the FRIA.
a)
Minimum Requirements of Out-of-Court or
Informal Restructuring Agreements and Reha­
bilitation Plans (Sec. 84, FRIA):
1)
The debtor must agree to the out-of-court
or informal restructuring / workout agree­
ment or rehabilitation plan;
2)
It must be approved by creditors represent­
ing at least sixty-seven percent (67%) of the
secured obligations of the debtor;
3)
4)
b)
..
• •■ •
It must be approved by creditors represent­
ing at least seventy-five percent (75%) of the
unsecured obligations of the debtor; and
It must be approved by creditors holding at
least eighty-five percent (85%) of the total
liabilities, secured and unsecured, of the
debtor.
Standstill Period (Sec. 85, FRIA). An agreement
on standstill period may be binding if the fol­
lowing requisites are present:
1)
Agreement is approved by creditors repre­
senting more than fifty percent (50%) of the
total liabilities of the debtor;
2)
Notice thereof is published in a newspa­
per of general circulation in the Philippines
once a week for two (2) consecutive weeks;
and
3)
The standstill period does not exceed one
hundred twenty (120) days from the date of
effectivity. -
5.
415
The Cram Down Rule applies upon publication
of the notice of the out-of-court approved reha­
bilitation plan (Sec. 86, FRIA).
SUSPENSION OF PAYMENTS
Only an INDIVIDUAL DEBTOR may file a petition for
suspension of payment.
a)
The debtor has sufficient properties to cover all
his debts but he foresees the impossibility of
meeting his debts when they respectively fall
due (Sec. 94, FRIA).
b)
The purpose is to suspend or delay the payment
of debts.
c)
The amount of indebtedness is not affected (not
reduced or discharged).
d)
The number of creditors is immaterial.
5.01. DISTINCTIONS
SUSPENSION OF
PAYMENTS
LIQUIDATION
1. Debtor is not insolvent
— The debtor has suffi­
cient assets to cover its
liabilities.
1. Debtor is insolvent —
His assets are insuffi­
cient to cover the debt­
or's liabilities.
2. Payment of obligations 2. The obligations are dis­
is stayed.
charged.
3. Applies
only
individual debtor.
to 3. Proceedings can cover
juridical persons and
individual debtors.
4. May be filed by the 4. May be initiated by the
debtor.
debtor (voluntary insol­
vency) or by the credi­
tors (involuntary insol­
vency).
REVIEWER ON COMMERCIAL LAW
416
5. There is no minimum
amount of liabilities
prescribed.
5. It is required that the
debt of the individual
debtor is not less than
P500,000.00.
6. The rules on concur­ 6. The rules on concur­
rence and preference of
credits under the New
Civil Code do not ap­
ply.
SUSPENSION O f
PAYMENTS
rence and preference of
credits under Articles
2236 and 2251 of the
: New Civil Code apply.
REHABILITATION
EAR! V — CREDIT TRANSACTIONS
5.02. SUSPENSION ORDER
Upon motion filed by the individual debtor, the
court may issue an order suspending any pending
execution against the individual debtor (Sec. 96,
FR1A).
a)
Properties held as security by secured creditors
shall not be the subject of such suspension order
(Sec. 96, FRIA).
b)
The suspension order shall lapse when three (3)
months shalbhave .passed without the proposed
agreement being accepted by the creditors or as
soon as such agreement is denied (Sec. 96, FRIA).
c)
No creditor shall sue or institute proceedings to
collect his claim from the debtor from the time of
1) Applies to Individual 1) Applies to Business Or­
Debtor.
ganizations — Single
Proprietorship, Partner­
ship, and Corporation.
the filing of the petition for suspension of pay­
ments and for as long as proceedings remain
pending (Sec. 96, FRIA).
d)
Exceptions (Sec. 96, FRIA). The following creditors are not affected by the Stay Order.
sufficient assets to cover
its liabilities.
1)
3) Secured debtors are not 3) Secured debtors are
affected.
affected by stay order.
4) Filed by the debtor.
417
4) May
be initiated by
the debtor (voluntary
rehabilitation) or by the
creditors
(involuntary
rehabilitation).
5) There is no minimum 5) The claim of, or the
requirement for the
aggregate
of
claims
amount of the claims.
against the debtor is at
least PI,000,000.00 or at
least twenty-five percent
(25%) of the subscribed
capital
stock
or
partners' contributions,
whichever is higher.
Those creditors having claims for personal
labor, maintenance, expense of last illness
and funeral of the wife or children of the
debtor incurred in the sixty (60) days im­
mediately prior to the filing of the petition;
and
2)
Secured creditors.
Note: These excepted creditors are not affected by the
proposed agreement with the debtor unless participated
and voted in the creditors meeting (Sec. 98, FRIA).
5.03. PROHIBITED ACTS
The Individual Debtor is prohibited (in the
Order to be issued by the court after the filing of the
Petition for Suspension of Payments) from: ’ ' ....... ...
a)
Selling, transferring, encumbering, or disposing
in any manner of his property, except those
REVIEWER ON COMMERCIAL LAW
418
PART V ~ CREDIT TRANSACTIONS
used in the ordinary operations of commerce or
o f in d u s tr y in which the petitioning individual
debtor is engaged, so long as the proceedings
relative to the suspension of payments are
p e n d in g (Sec. 95, FRIA); and
b)
419
6. LIQUIDATION OF INDIVIDUAL DEBTORS
Liquidation of Individual Debtors may be (1) voluntary
or (2) involuntary. Their similarities and distinctions are as
follows:
Making any payment outside of th e necessary or
legitimate expenses of his business or in d u stry ,
so long a s the proceedings relative to the suspen­
sion of payments are pending (Sec. 95, FRIA).
VOLUNTARY
LIQUIDATION OF
INDIVIDUAL DEBTOR
1. D e b t o r is insolvent.
INVOLUNTARY
LIQUIDATION OF
INDIVIDUAL DEBTOR
1. D e b to r is in so lv e n t.
5.04. CREDITORS' MEETING
The Individual Debtor shall attach to the Petition
for S u s p e n s io n of Payment a proposed agreement
with the creditors (Sec. 97, FRIA).
a)
The proposed agreement shall be approved o r
rejected in the Creditors' Meeting. The presence
of creditors holding claims amounting to at least
3 / 5 o f the liabilities of the debtor is necessary for*
1
------------- -the-m eeting,— — --------- -— _
--------------------
N ote: A creditor has no right to vote if he
incurred his credit within 90 days prior to the fil­
in g o f the petition for suspension (Sec. 97, FRIA).
b)
,
Acts of insolvency 2. Creditors must prove
acts of insolvency.
need not be alleged
and proved.
3.
The d e b ts must be at 3. The debts must be at
le a s t P500,000.00.
least P500,000.00.
4. The individual debtor 4. A creditor or group of
files the Petition.
creditors files the Peti­
tion.
5.
The d e b to r is n o t
absent as he files th e
Petition.
Double Majority is necessary for the approval
of proposed agreement with the creditors, to wit:
1)
Two-thirds (2 /3 ) of the creditors voting
unite upon the same proposition; and
2)
T h e c la im s r e p r e s e n te d by said majority
vote amount to at least three-fifths (3/5) of
the total liabilities of the debtor mentioned
in the petition (Sec. 97, FRIA).
c)
2.
108, FRIA.]).
6.
the creditors shall be at liberty to enforce their
rights which correspond to them (Sec. 90, FRIA).
Posting of Bond by
creditors not required.
6. Posting of Bond by
creditors is required (Sec.
105, FRIA).
7.
Liquidation O rd e r i s : 7. - L iq u id a tio n Order is
issued without trial
issued after trial (Sec.
(Sec. 104, FRIA).
Effect of Disapproval by Creditors. If there is no
approval of the double majority, the suspension
c " 0 | p a y m g fits p r o c e e d in g s w i l f b e te r m in a te d a n d
5. Applies even in the case
of A b s e n t Debtor (Debt­
or resides outside or has
departed from the Phil­
ippines, cannot be found
or conceals himself [Sec.
a.
107, FRIA).
Involuntary Liquidation of Individual D e b to rs
distinguished from Involuntary Liquidation of
B u s in e s s O r g a n iz a t io n s ..
PART V — CREDIT TRANSACTIONS
REVIEWER ON COMMERCIAL LAW
420
Involuntary Liquidation
of Individual Debtor
1. At le a s t 3 c re d ito rs
a re r e q u ir e d .
Involuntary Liquidation
of Business Organizations
— Sole Proprietorship,
Partnership, and
Corporation
1. There can be one or more
. creditors.
payments a n d / or transfer of property by the debtor;
and (5) directing all claims to be filed with the
liquidator (See Sec. 112, FRIA for other contents of the
Liquidation Order).
7.02. EFFECTS OF LIQUIDATION ORDER (Sec. 113,
FRIA)
2. The debts must be at 2. The debt or aggregate
o f d e b ts m u s t b e at least
le a s t P 5 0 0 ,0 0 0 .0 0 .
P I,000,000.00 or equiva­
lent to 25% of the sub­
scribed capital or part­
ners' contribution which­
ever is higher.
3. The individual can 3.
continue his business.
The business organization
will be dissolved.
4. There must be a n act 4. A c t o f in s o lv e n c y is not
------- re q u ire d ;
------ of insolvency.
1)
The juridical debtor shall be deemed dissolved
and its corporate or juridical existence terminat­
ed;
2)
Legal title to and control of all the assets of the
debtor, except those that may be exempt from
execution, shall be deemed vested in the liquida­
tor or, pending his election or appointment, with
- the court;
3)
All contracts of the debtor shall be deemed
terminated and/or breached, unless the liquid­
ator, within ninety (90) days from the date of his
---------------- assmnpfitin^f-©ffieer4edares-oAerwise-and-Aficontracting party agrees;
7. LIQUIDATION PROCESS
4)
No separate action for the collection of an unse­
cured claim shall be allowed. (Actions already
pending will be transferred to the Liquidator for
him to accept and settle or contest.)
5)
No foreclosure proceeding shall be allowed for a
period of one hundred eighty (180) days.
T h is is th e p r o c e e d in g w h e re c la im s are file d a n d th e
a s s e ts of the insolvent debtor are disposed and the proceeds
are divided among the creditors. These rules apply to
individual debtors, sole proprietorships, partnerships,
and corporation. The rules below apply to original
liquidation proceedings and proceedings that are originally
rehabilitation proceedings but converted into liquidation
proceedings.
7.03. Rights of Secured Creditors (Sec. 114, FRIA)
The Liquidation Order shall not affect the right
of a secured creditor to enforce his lien in accordance
with the applicable contract or law. A secured creditor
may:
7.01. LIQUIDATION ORDER
,
The Court that has jurisdiction over the
liquidation proceedings shall, in proper cases, issue
- a L iq u id a tio n ,O r d e r -w h ic h includes, among others:
(1) declaring that the debtor is insblvent; (2) ordering
the liquidation of the debtor; (3) in case of juridical
person, declaring it as dissolved; (4) prohibiting
421
1)
*'
Waive his right under the security or lien, prove
his claim in the liquidation proceedings and
share in the distribution of the assets of the debt­
or; or .
REVIEWER ON COMMERCIAL LAW
2)
PART V ~ CREDIT TRANSACTIONS
Maintain his rights under the security or lien,
a)
preference and the balance (after taxes are deducted)
of the proceeds of the specific movable or immovable
property, as the case may be shall be divided among
If the secured creditor maintains his rights
under the security or lien:
1)
the claimants or creditors in proportion to the value
of the claims or PRO RATA (Arts. 2246-2249, NCC).
The v a lu e of the p r o p e r ty m a y be fix e d
in a m a n n e r a g re e d u p o n by th e c re d i­
dation proceedings as a creditor for the
balance. If its v a lu e e x c e e d s the claim
The excess of the specific p ro p erty , if any, after the
payment of the credits which enjoy p re fe re n c e , sh a ll
be added to the free property which the debtor may
have, for the payment of the other credits, and shall be
disposed in a c c o rd a n c e with th e order o f preference
u n d e r Article 2244 of the NCC as m o d ifie d by Article
110 of the Labor Code and Section 113 of FRIA (Art.
s e cu re d , th e liq u id a to r m a y c o n v e y
2250, NCC).
to r a n d th e liq u id a to r. W h e n th e v a lu e
c)
of th e p ro p e rty is le s s th a n ,th e c la im it
se cu res, the liqui d a to r in ay c o n v e y th e
p ro p e rty to th e se c u re d c re d ito r a n d
th e la tte r w ill b e a d m itte d in th e liqui­
the property to the creditor and waive
th e d e b to r 's r ig h t of redemption upon
receiving the excess from the creditor;
2)
The liquidator may sell th e p ro p e rty
and satisfy th e secured creditor's*8
______________ entire claim fro m the p ro c e e d s o f the
sale; or
3)
d)
I f there is excess after satisfying the claims or liens
under Article 2244, all other c o m m o n credits sh a ll be
satisfied PRO RATA (Art. 2251, NCC; Jose Cordova v.
Reyes, Daway, et a l, G.R. No. 146555, July 3,2007).*1
8.01. PREFERENCE AS TO SPECIFIC PROPERTIES
lien o r fo re c lo s e o n the property p u r ­
I n the settlement of the assets of an insolvent
debtor, the claims with re s p e ct to specific properties
s h a ll be satisfied first in accordance with Articles 2241
su a n t to a p p lic a b le la w s .
and 2242.
T h e se cu re d c re d ito r m a y e n fo rc e th e
8, DISTRIBUTION OF ASSETS
T h e a s s e ts o f th e in s o lv e n t d e b to r s h a ll b e d iv id e d
a m o n g th e c re d ito rs in a c c o rd a n c e with L iq u id a tio n P la n
a)
Preference of claims or Hens as to specific
MOVABLE or P E R S O N A L property (A rt 2241,
NCC).
1)
Duties, taxes, and fees due thereon to the
State o r any subdivision thereof;
2)
Claims a ris in g from misappropriation,
breach of trust, or malfeasance by p u b lic
o fficia ls committed in the performance of
their duties, on the movables, money or
securities obtained by them;
3)
C la im s for the unpaid price o f m o v a b le s
s u b m itte d b y th e L iq u id a to r a n d a p p ro v e d b y th e C o u rt.
T h e ru le s on. c o n c u rr e n c e an d p re fe re n c e o f c re d its u n d e r th e
N e w C iv il C o d e a n d o th e r re le v a n t la w s sh a ll b e o b s e rv e d
in th e L iq u id a tio n P la n (Sec. 133, FR1A). T h u s , th e fo llo w in g
ru le s s h a ll b e o b s e rv e d :
a)
T h e r e is p re fe re n c e w ith re s p e c t to ta x e s O N L Y u n d e r
- - A r tic le s 2 2 4 1 a n d 2 2 4 2 o f the N e w C iv il Code (NCC).
b)
423
A s to all th e o th e r claims o r lie n s m e n tio n e d in A rtic le s
2 2 4 1 a n d 2242 of the NCC, there is NO ORDER of
so ld , on said movables, so long as they are
in the possession of the debtor, up to the
REVIEWER ON COMMERCIAL LAW
value of the same; and if the movable has
been resold by the debtor and the price is
still unpaid, the lien may be enforced on the
price; this right is not lost by the immobili­
zation of the thing by destination, provided
it has not lost its form, substance, and iden­
tity; neither is the right lost by the sale of
the thing together with other property for
a lump sum, when the price thereof can be
determined proportionally;
4)
Credits guaranteed with a pledge so long
as the things pledged are in the hands of
the creditor, or those guaranteed by a chat­
tel mortgage, upon the things pledged or
mortgaged, up to the value thereof;
5)
Credits for the making, repair, safekeeping,
or preservation of personal property on
the movable thus made, repaired, kept, or
possessed;
6)
Claims for laborers' wages, on the goods
manufactured or the work done;
7)
For expenses of salvage, upon the goods
salvaged;
8)
Credits between the landlord and the ten­
ant, arising from the contract of tenancy on
shares, on the share of each in the fruits or
harvest;
-
9)
Credits for transportation, upon the goods
carried, for the price of the contract and in­
cidental expenses, until their delivery and
for thirty days thereafter;
10) Credits for lodging and supplies usually
furnished to travellers by hotel keepers, on
the movables Belonging to the guest as long
as such movables are in the hotel, but not
for-money loaned to the guests;
PART V — CREDIT TRANSACTIONS
42S
11) Credits for seeds and expenses for cultiva­
tion and harvest advanced to the debtor,
upon the fruits harvested;
12) Credits for rent for one year, upon the per­
sonal property of the lessee existing on the
immovable leased and on the fruits of the
same, but n o t o n money or instruments of
credit;
13) Claims in favor of the depositor if the
depositary has wrongfully sold the thing
deposited, upon the price of the sale.
In the foregoing cases, if the movables
to which the lien or preference attaches
have been wrongfully taken, the creditor
may demand them from any possessor,
within thirty days from the unlawful sei­
zure.
A eierieiiceA m lJ^^
IMMXQv
ABLE OR REAL Property (Art. 2242, NCC).
1) Taxes due upon the land or building;
2) For the unpaid price of real property sold,
- u p o n the im m o v a b le sold;
3) Claims of laborers, masons, m e c h a n ic s , and
other workmen, as well as of architects,
engineers and contractors, engaged in the
- construction, reconstruction, or repair of
buildings, canals, or other works upon said
buildings, canals or other works;
4) Claims of furnishers of materials used in
th e construction, reconstruction, or repair
of buildings, canals, or other works upon
—- - said buildings, canals or other works; -
5) Mortgage credits recorded in the Registry
of Property, upon the real estate mortgaged;
PART V — CREDIT TRANSACTIONS
REVIEWER ON COMMERCIAL LAW
6) Expenses for the preservation or improve­
ment of real property when the law autho­
rizes reimbursement upon the immovable
preserved or im proved;
7)
Credits annotated in the Registry of Property,
in virtue of a judicial order, by attachments
or executions upon the property affected,
and only as to later credits;
8) Claims of co-heirs for warranty in the par­
tition of an immovable among them upon
the real property thus divided;
9) = C laim s of donors or real property for pecu­
niary charges or other conditions imposed
on the donee upon the immovable donated;
10) Credits of insurers, upon the property
insured, for the insurance premium for two
years.
OTHER PROPERTIES
With reference to other property, real and per­
sonal, of the debtor, the following claims or credits
shall be preferred IN THE ORDER NAMED (Art
have no property of their own, when approved
by the court;
3) Expenses during the last illness of the debtor or
of his or her spouse and children under his or
her parental authority, if they have no property
of their own;
4) Compensation due the laborers or their depen­
dents under laws providing for indemnity for
damages in cases of labor accident, or illness re­
sulting from the nature of the employment;
5) Credits and advancements made to the debtor
for support of himself or herself, and family,
during the last year preceding the insolvency;
6) Support during the insolvency proceedings, and
for three months thereafter;
7) Fines and civil indemnification arising from a
criminal offense;
8) Legal expenses, and expenses incurred m the
administration of the insolvent's estate for the
common interest of the creditors, when properly
authorized and approved by the court;
2244, NCC, as modified by Art. 110, Labor Code of the
Philippines):
9) Taxes and assessments due the national govern­
ment, other than those mentioned in Articles
2241(1), and 2242(1);
1) Credits for services rendered for the insolvent by
employees, laborers, or household helpers prior
to the proceedings in insolvency (As modified
10) Taxes and assessments due any province, other
than those referred to in Articles 2241(1), and
2242(1);
by Art. 110, Labor Code which removed the 1 year
limitation under Art. 2244 and elevated these credits
from 2nd to 1st; see also Sec. 133, FRIA which states
that labor claims enjoy preference under Art. 2244
of the NCC unless the claims constitute liens under
Arts. 2241 and 2242, NCC);
2) Proper funeral expenses for the debtor, or chil’ drerr und er his or her parental authority who
11) Taxes and assessments due any city or munici­
pality, other than those indicated in Articles
2241(1), and 2242(1);
12) Damages for death or personal injuries caused
by a quasi-delict; - - - - - -- - -
- -
13) Gifts due to public and private institutions of
charity or beneficence; -
REVIEWER ON COMMERCIAL LAW
428
14) Credits which, without special privilege, appear
in (a) a public instrument; or (b) in a final judg­
ment, if they have been the subject of litigation.
These credits shall have preference among them­
selves in the order of priority of the dates of the
instruments and of the judgments, respectively.
9. CROSS-BORDER INSOLVENCY
The FRIA adopted the Model Law on Cross-Border
Insolvency of the United Nations Center for International
Trade and Development as part thereof (Sec. 139, FRIA).
If there is a rehabilitation proceeding filed by a
foreign entity in another jurisdiction, a petition
may be filed by the latter's representative and
the court may issue orders:
a)
1)
Suspending any action to enforce claims
against the entity or otherwise seize or
foreclose the property of the foreign entity*1
located in the Philippines;
2)
Requiring the surrender property of the
foreign entity to the foreign representative;
or
3)
Providing other necessary relief (See Secs.
140 & 141, FRIA).
b)
-
In determining whether to grant relief to a
foreign entity, the court shall consider;
1)
The protection of creditors in the Philip­
pines and the inconvenience in pursuing
their claim in a foreign proceeding;
2)
The just treatment of all creditors through
resort to a unified insolvency or rehabilitation proceedings;
.
3)
Whether - other jurisdictions have given
recognition to the foreign proceeding;
PART V — CREDIT TRANSACTIONS
429
4)
The extent that the foreign proceeding
recognizes the rights of creditors and other
interested parties in a manner substantially
in accordance with the manner prescribed
in the FRIA; and
5)
The extent that the foreign proceeding
has recognized and shown deference to
proceedings under the FRIA and previous
legislation (Sec. 142, FRIA).
PART VI — LAWS ON TRANSPORTATION
AND PUBLIC UTILITIES
PART VI
LAWS ON TRANSPORTATION AND
PUBLIC UTILITIES
A. GENERAL CONCEPTS
1, CONCEPT OF COMMON CARRIERS
Article 1732 of the Civil Code provides that: "Common
carriers are persons, corporations, firms or associations
engaged in the business of carrying or transporting
passengers or goods or both, by land, water or air, for
compensation, offering their services to the public."
It has been defined as "one that holds itself out as ready
to engage in the transportation of goods for hire as a public
employment and not as a casual occupation." Article 1732
of the Civil Code avoids any distinction between a person
or an enterprise offering trans^rtation on regular and
scheduled basis and one offering transportation service on
occasional, episodic, and unscheduled basis. Neither does
the law distinguish between a carrier offering its services
for the general public, that is, the general community or
population and one who offers business only from a narrow
segment of the general population (De Guzman v. CA, G.R.
No. L-47822, Dec. 2 2 ,1 9 8 8 ).
1.01. TESTS
The tests for determining whether a party, is a
common carrier of goods are: 1) he must be engaged
in the business of carrying goods for others as a
....public employment^ and m:ust-hold-hirnself out as
ready to engage in the transportation of goods for
430
431
person generally as a business and not as a casual
occupation; 2) he must undertake to carry goods
of the kind to which has business is confined; 3) he
must undertake to carry by the method by which
his business is conducted and over his established
roads; and 4) the transportation must be for hire (First
Philippine Industrial Corp. v. CA, 300 SCRA 661).
In another case, the Supreme Court reiterated
the ruling that the true test of a common carrier is the
carriage of goods or passengers, provided it has space
fora fee (National Steel Corporation v. CA, 283 SCRA 45,
61 [1997]).
a) The Supreme Court ruled in First Philippine
Industrial Corp. v. Court of Appeals (300 SCRA 661), that
pipeline operators are common carriers. The Supreme
Court ruled that a corporation that is engaged in the
business of transporting oil and other petroleum
products through its pipes can be considered acommon carrier. The law does not distinguish as to the
means of transportation, as long as it is by land, water,
or air. It does not provide that the transportation of
the passengers or goods should be by motor vehicle.
b) A charter party may transform a common
carrier into a private carrier. However, it must be a
bareboat or demise charter where the charterer mans
the vessel with his own people and becomes, in effect,
the owner for the voyage or service stipulated (Caltex
[Phils.] v. Sulpicio Lines, 315 SCRA 709 [1999]).
The common carrier is not transformed into
a private carrier if the charter party is a contract of
affreightment like a voyage charter or a time charter
(IbidCoastwise Lighterage Corp. v. CA, 245 SCRA 797
c) The petitioner, a customs broker and ware­
houseman, was declared to be a common carrier in one
REVIEWER ON COMMERCIAL LAW
case although she does not indiscriminately hold her
services out to the public but offers the same to select
parties with whom she may contract in the conduct of
her business. In the said case, petitioner entered into a
contract ■■.with: SMC to transfer paper and kraft board
from the Port Area in Manila to SMCs warehouse in
Ermita, Manila. As a common carrier, she is bound
to exercise extraordinary diligence in transporting
the goods and is presumed to be negligent when she
failed to deliver the same (Virgines Calvo v. UCPB
General Insurance Co., G.R. No. 148496, March 19,2002).
d) In one case, respondent PKS Shipping
Corporation was declared a common carrier
although it had a limited clientele (Phil. American
Genera Insurance Company v. PKS Shipping Company,
G.R. No. 149038, April 9, 2003). In the said case, PKS
transported 75,000 bags of cement of petitioner
DUMC in a barge. The bags of cement sank together
with the barge when the latter was being towed by
a tug boat. The Supreme Court declared that PKS
was a common carrier because it was engaged in the
business of carrying goods for others for a fee. "The
regularity of its activities in the area indicates more
than just a casual activity on its part. Neither can the
concept of a common carrier change merely because
individual contracts are executed or entered into with
the patrons of the carrier."
e)
The same conclusion was reached in another
case involving a company that also transports goods
through barges (Asia Lighterage and Shipping, Inc. v. CA,
et a l, G.R. No. 147246, Aug. 19, 2003). The petitioner
argued that it is a private carrier allegedly because
it .has no fixed, and publicly known route, maintains
no terminals, and issues no tickets. It points out that
it.-is,.not obligated to carry, indiscriminately^for aiiy*,
person. The Supreme Court rejected the argument of
the petitioner pointing out that the principal business
of the petitioner is that of lighterage and drayage
PART VI — LAWS ON TRANSPORTATION
AND PUBLIC UTILITIES
433
and it offers its barges to the public for carrying or
transporting by water for compensation. Petitioner
was considered a common carrier whether its
carrying of goods is done on an irregular basis rather
than scheduled manner and with a limited clientele.
A common carrier need not have a fixed and publicly
known route nor does it have to maintain terminals
or issue tickets (Ibid.).
f)
The operator of a beach resort that accepts
clients by virtue of a tour-package contracts that
included transportation to and from the Resort and
the point of departure in Batangas is considered a
common carrier. Its ferry services are so intertwined
with its main business as to be properly considered
ancillary thereto. The constancy of respondent's ferry
services in its resort operations is underscored by its
having its own boats. And the tour packages it offers,
which include the ferry services, may be availed of
_____ by anyone who can afford to pay the same. These
services are thus available to the public (Spouses Cruz
v. Sun Holidays, Inc., G.R. No. 186312, June 29,2010).
1.02. Common
Carrier
Carriers
distinguished
from Private
The term " common or public carrier" is defined in
Article 1732 of the Civil Code. The definition extends
to carriers either by land, air or water which hold
themselves out as ready to engage in carrying goods
or transporting passengers or both for compensation
as public employment and not as Casual occupation.
The distinction between a "common or public
carrier" and a'"private or special carrier" lies in the
character of the business, such that if the undertaking
is a single transaction, not a part of a general business
or occupation, although involving the carriage of the
goods for a fee, the person or corporation offering
such service is a private carrier (Planters Product, Inc.
v. CA, G.R, No. MSOPOr-Sept. 15,1993).
REVIEWER ON COMMERC
434
,a w
PART VI — LAWS ON TRANSPORTATION
AND PUBLIC UTILITIES
a) The common carrier holds himself out in
common, that is, to alhpersonsr^ho choose to employ
: him>
carrying of persons or goods or both and one who
does such carrying drily as an ancillary activity.
Article 1732 does not make any distinction 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. Neither does Article 1732 distinguish between
a carrier offering its services to the general public, i.e.,
the general community or population, and one who
offers services or solicits business only from a narrow
segment of the general population (Fabre, jr: v. CA,
-to-£Mi^-iox.:hiE'e>whMe;.the;;priv;ate carrier
.or ^special ^carrier; :agpeS:sin\eosie:/special, case with
. some private individMayoeafry^for :hipe,:
b) A private carrier is not bound to carry for
any reason, unless it enters a special agreement to do
so. A common carrier is bound to carry for all who
offer such goods as it is accustomed to carry and
tender reasonable compensation for carrying them.
c) A common carrier is subject to regulation as
it is a public service. A private carrier is not.
25$ SCRA 426 [W96]),
2.
d) The common carrier is bound to exercise
extraordinary diligence while a private carrier owes
only diligence of a good father of a family.
e) A common carrier cannot stipulate that it is
exempt from liability for the negligence of its agents
or employees. Such stipulation is void as it is against*1
public policy. A private carrier may validly enter into
such stipulation (1980,1981,1984 Bar).
PROBLEMS:': '
1.
EF and his wife were owners of a minibus that was
being used principally in connection with a bus
service for school children which they operated in
Manila. On Nov. 2, 2002, WW Corp., a non-stock
and non-profit corporation, arranged with EF for
the transportation of 33 members from Manila to La
Union and back for a consideration. Are the spouses
operating as a common carrier?
A:
The spouses are operating as a common carrier. EF
and his spouse did not have to be engaged in the
business of public transportation for the provisions of
the Civil Code on common carriers to apply to them.
Article 1732 of the Civil Code makes no distinction
between one whose principal business activity is the
435
A:
EC, a junk dealer, was engaged in buying up used
bottles and scrap metal in Pahgasinan using two six­
wheeler trucks. Upon gathering sufficient quantities
of such scrap metal in Pangasinan, EC would bring
such material to Manila for resale. On the return
trip to Pangasinan, EC would load his vehicles with
cargo which various merchants wanted to deliver
to differing estabLishments in Pangasinan, For
that service, EC charged freight rates which were
commonly lower than regular commercial rates.
Can EC be characterized as a common carrier who is
bound to exercise extraordinary diligence?
YES. EC is a common carrier and he is Bound to exercise
extraordinary diligence in transporting goods. Article
1732 of the Civil Code makes no distinction 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. Article 1732
does not make any distinction 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.^Neither does Article 1732 distinguish between,,
a carrier offering its services to the general public,'
i.e., the general community or population, and one
who offers: Services of solicits business only from a
r ~
;w’::c;
A
436
PART VI — LAWS ON TRANSPORTATION
AND PUBLIC UTILITIES
REVIEWER ON COMMERCIAL LAW
4,
narrow segment of the general population. This is
also consistent with the definition of public service
under the Public Service Act (De Guzman v. CA, 168
SCRA 612 11988}).
3.
-fa
Tirso Molina charters a vessel owned and operated by
Star Shipping Cov a common carrier, for the purpose
of transporting two tractors to his logging concession.
The crane operator of the shipping company somehow
negligently puts the tractors in a place where they
would tilt each other. During the trip, a strong
wind hits the vessel, causing severe damage to the
tractors. Tirso Molina sues the shipping company for
damages. The latter cites a stipulation in the charter
agreement exempting the company from liability
for loss or damage arising from the negligence of its
agents. Tirso Molina countered by stating that the
aforementioned stipulation is against public policy
and therefore, null and void. Is the stipulation valid?
Would you hold the shipping company liable?
YES, if the charter is~a~demise or a bareboat charter.
However, the stipulation is invalid if the stipulation is
a contract of affreightment.
During the elections last May, AB, a congressional
candidate in Marinduque, chartered the helicopter
owned by Lobe Mining Corporation (LMC) for use
in the election campaign. AB paid LMC the same rate
normally charged by companies regularly engaged in
the plane chartering business. In the charter agreement
between LMC and AB, LMC expressly disclaimed any
responsibility for the acts or omissions of its pilot or
for the defective condition of the plane's engine. The
helicopter crashed killing AB. Investigations disclose
that the pilot's error was the cause of the accident.
LMC now consults you on its possible liability for
AB's death in the light of the above findings. How
would you reply to LMC's query?
A:
LMC is not liable for the death of AB. LMC is a private
carrier, hence the stipulation with private carrier
exempting it from liability for the simple negligence
of its employees is a valid stipulation.1
2. GOVERNING LAWS
Common carriers shall be governed by the following
laws:
Under a demise or bareboat charter, the charterer
mans the vessel and its own people and becomes, in
effect the owner for the voyage or service stipulated.
Hence, the carrier becomes a private carrier at least
insofar as the particular voyage concerning the
charter-party is concerned. Consequently under this
arrangement, the stipulation in the charter exempting
the owner from liability for the negligence of its agent
is valid and not against public policy.
However, the reverse is true if the charter is one
of affreightment whether a Voyage charter or a time
charter. In such a case, the carrier remains to be a
common carrier. H ence,the stipulation exempting
the carrier from liability for the negligence of its
employees is void for being against public policy and
the carrier is liable as a consequence.
437
a)
b)
—
Coastw ise Shipping
1)
New Civil Code (Arts. 1732-1766) — prima­
ry law;
2)
Code of Commerce — governs suppletorily
in absence of Civil Code provisions.
Carriage from Foreign Ports to Philippine Ports
1)
New Civil Code — primary law;
2)
Code of Commerce — all matters not regu­
lated by the Civil Code (National Develop-
- 3)
- ment Co? v. -CA, 164 SCR A 593);
Carriage of Goods by Sea Act — suppleto­
rily to the Civil Code (FbidA*
438
REVIEWER ON COMMERCIAL LAW
AND PUBLIC UTILITIES
c)
order at their destination (or failure to transport
the passenger safely) constitutes a prima facie
C arriage fro m P h ilip p in e P orts to Foreign P orts
1)
The laws of the country to which the goods
are to be transported (Art. 1753, Civil Code;
case of fault or negligence against the carrier.
If no adequate explanation is given as to how
the deterioration, the loss, or the destruction
of the goods, happened, the transporter shall
be held responsible (Belgian Overseas Chartering
and Shipping, N.V v. Phil. First Ins. Co., G.R. No.
143133, June 5, 2002).
National Development Co. v. CA, 164 SCRA
593).
d)
e)
__________
Overland Transportation
1)
Civil Code — primary law;
2)
Code of Commerce — suppletorily.
c)
Air Transportation
1)
Civil Code;
2)
Code of Commerce;
3)
For International Carriage — Convention
for the Unification of Certain Rules Relat­
ing to the International Carriage by Air or
" Warsaw Convention " with its amendments
(Alitalia v. Intermediate Appellate Court, 192
SCRA 9)._____ ,__________ __________________
122039, May 31,2000).
4. DEFENSES OF COMMON CARRIERS ,
----- Exetetse-el-extraordina^-dlMgeaee............-aad exemptingcauses (Art. 1734, NCC)
3. EXTRAORDINARY DILIGENCE AND PRESUMPTION OF
NEGLIGENCE UNDER THE CIVIL CODE
a)
b)
In case of loss of effects of passengers or death
or injuries to passengers, the common carrier is
presumed to be at fault or have acted negligently
unless it had observed extraordinary diligence
in the vigilance thereof. The court need not
make an express finding of fault or negligence
of common carriers, the law imposes to common
carriers strict liability, as long as it is shown that
there exists a contract between the passenger (or
the shipper of the goods to be carried) and the
common carrier and that the loss, deterioration,
injury or death took place during the existence
of the contract (Arts. 1735 and 1756, NCC).
Mere proof of delivery of the goods in good order
to a common carrier and their arrival in bad
The presumption also makes the doctrine of
proximate cause inapplicable to contract of
carriage. The injured passenger or owner of
goods need not prove causation to establish
his case. The presumption arises upon the hap­
pening of the accident (Calalas v. CA, G.R. No.
a)
Extraordinary diligence requires that the ship
which will transport the goods is seaworthy
(TranS'Asia Shipping Lines v. CA, 254 SCRA 260
[1996]). Ensuring the seaworthiness of the vessel
is the first step in exercising the required vigilance
(Cokaliong Shipping Lines v. WCPB, Gen. Insurance
Co., G.R. No. 146018, June 25, 2003). However,
presentation of certificates of seaworthiness is
not sufficient to overcome the presumption of
negligence (Delsan Transport Lines v. CA, G.R. No.
127897, Nov. 15,2001).
4.02.
■ :
Common carriers are responsible for the loss, des­
truction, or deterioration of the goods, unless it is due
^ to miy of the following causes only; --1)
Flood, storm, earthquake, lightning, or
other natural disaster or calamity;
440
REVIEWER ON COMMERCIAL LAW
:
2)
Acts of the public enemy in war, whether
international or civil;
3)
Act or omission of the shipper or owner of
the goods;
4)
The character of the goods or defects in the
packing or in the containers;
5)
Order or act of the competent public
authority (Art. 1734, NCC); or
6)
Exercise of extraordinary diligence (Arts.
PART VI — LAWS ON TRANSPORTATION
AND PUBLIC UTILITIES
2)
c)
1735 and 1755, NCC).
The above enumeration is exclusive or
a closed list. If not one of those enumerated is
present, the carrier is liable (Belgian Chartering
and Shipping, N.V. v. Phil. First Insurance Co., Inc.,
G.R. No. 143133, June 5, 2002; Delsan Transport
Lines v. CA, G.R. No. 127897, Nov. 15, 2001).
a)
b)
1)
In a case, the carrier was not held liable
where the goods were lost as a result of rob­
bery attended by grave irresistible threat,
• violence or force (De Guzman v. CA, supra).
In another case, the carrier was not made
liable for its failure to install window grills
on its buses to protect passengers from in­
juries caused by rocks hurled at the bus by
lawless elements (Pilapil v. CA).
However, it was ruled in one case that seizure of
passenger bus by armed men is not a fortuitous
event and does not excuse the carrier from liabil­
ity where there was already a report from police
agents that a certain group will attack the buses
and the carrier did not take steps to safeguard
the lives and properties of its passengers (For­
tune Express, Inc. v. CA, G.R. No. 119756, March
18,1999). This should be distinguished from Pi­
lapil v. CA, where the injury was not foreseeable.
d)
It should be pointed out that the requisite dili~
gence would not vary in case the contract is for
transport of passengers; the carrier is obliged to
carry the passenger safely as far as human care
and foresight can provide, using the utmost dili­
gence of very cautious persons with due regard
to all the circumstances (Art. 1755, NCC).
Hiiackmg of the carrier does not fall among the
five categories of exempting causes. It would
follow therefore that the hijacking of the car­
rier's vehicle must be dealt with under Article
1735 of the New Civil Code, in other words, the
common carrier ds presumed be at fault or to
have acted negligently unless there is a proof of
extraordinary diligence on the part of the com­
mon carrier.1
441
e)
Requisites of Fortuitous event:
1)
The cause of the unforeseen and unexpect­
ed occurrence, or of the failure of the debtor
to comply with his obligation, must be independent of the human will;
2)
It must be impossible to foresee the event
which constitutes the caso fortuito, or if it
can be foreseen, it must be impossible to
avoid;
3)
The occurrence must be such as to render it
impossible for the -debtor to fulfill his obli­
gation in a normal manner; and
4)
The obligor (debtor) must be free from any
participation in or the aggravation of the
injury resulting to the creditor.
The court ruled that the sinking of a barge that
was being towed by a tug boat was the result of
._ a iortuitous, event when it resulted because the
barge was suddenly tossed by waves of extra­
ordinary height and buffeted by strong winds
resulting in the entry of water into the barge's
REVIEWER ON COMMERCIAL LAW
f)
resulting therefrom (Southern Lines, Inc. v. CA, 4
Fortuitous event, to be a valid defense, must be
established to be the proximate cause of the loss
8. DURATION OF LIABILITY (Arts-. 1736, 1737 and 1738,
PROBLEM; - v
vh
M/V Tandag sank due to a fire which resulted from
a crack in the auxiliary engine fuel oil service tank.
Fuel spurted out of the crack and dripped to the
heating exhaust manifold, causing the ship to burst
into flames. The crack was located on the side of the
fuel oil tank, which had a mere two-inch gap from
the engine room walling, thus precluding constant
inspection and care by the crew. The vessel sank as
a consequence. Was the sinking of the vessel due to
_____ fortuitous e v e n t ? ____________________
A:
NO. Having originated from an unchecked crack in
the fuel oil service tank, the fire could not have been
caused by force majeure. Broadly speaking, force majeure
generally applies to a natural accident, such as that
caused by a lightning, an earthquake, a tempest or a
public enemy. Hence, fire is not considered a natural
disaster or calamity (Edgar Cokaliong Shipping Lines,
Inc. v. UCPB General Insurance Company, G.R. No.
146018, June 25, 2003).
g)
443
hatches (Phil American General Insurance Com­
pany v. PKS Shipping Company, G.R. No. 149038,
April 9, 2003).
(Asia Lighterage and Shipping, Inc. v. CA, et ah,
G.R. No. 147246, Aug. 19,2003).
1.
PART VI — LAWS ON TRANSPORTATION
AND PUBLIC UTILITIES
Contributory negligence on the part of the
passenger is not a defense that will excuse the
carrier from liability. It will only mitigate such
liability.
h) . The carrier,, knowing the fact of improper pack­
ing of the goodshipon ordinary observation, still
accepts the goods notwithstanding such condi­
tion, is not relieved of liability or loss or injury
SCRA258).
NOC)
5.01. GOODS
Th e duty to exercise extraordinary diligence starts
from the time the goods are unconditionally placed
in the possession of, and received by the carrier for
transportation until the same are delivered, actually
or constructively, by the carrier to the consignee or
to the person who has the right to receive them. It
remains in full force and effect even when they are
temporarily unloaded or stored in transit unless the
shipper or own er has m ade use of the right of stoppage
in transitu. It 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
ha3 been advised of the arrival of the goods and has
had reasonable opportunity thereafter to remove
them or otherwise dispose of them (Arts. 1736,1737
and 1738, NCQ. ;
5.02. ^PASSENGERS:
a)
Start. The carrier is bound to exercise utmost
diligence with respect to passengers the moment
the person who purchases the ticket (or a "token")
from the carrier presents himself at the proper
place and in a proper manner to be transported.
Such person must have a bona fide intention to
use the facilities of the carrier, possess sufficient
fare with which to pay for his passage, and
present himself to the carrier for transportation
in the place and manner provided. If he does
- — , not do so, he will not be considered a passenger..........
and the carrier does not owe him extraordinary
diligence (Jesusa Vda. de Nueca, et al. v. The Manila
Railroad Company, CA-No. 31731, Jan. 30,1968). It
444
REVIEWER ON COMMERCIAL LAW
is the duty of carriers of passengers to stop their
conveyances for 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 (Dangwa Transportation Co., Inc, v.
CA, 202 SCRA 575,580 [1991]).
1)
In Dangwa Transportation Co. v. Court of
Appeals (Ibid., at p. 580), the victim was
considered a passenger by stepping and
standing on the platform of the bus. The
duty which the carrier owes to its patrons
extends to persons boarding the carrier as
well as those alighting therefrom. While the
carrier (i.e., a bus) is not in motion there is
no necessity for a person who wants to ride
the same to signal his intention to board. A
public .utmty_bus,.pncg.j£ stops,, fc.jiD-fiffed;
making a ,continuous offer,to bus.r i f e r:
”
2)
The petitioner carrier was held liable for
breach of contract in Light Rail Transit
Authority (LRTA), et ah v. Marjorie Navidad,
et al. (G.R. No. 145804, Feb. 6, 2003) when
a certain Nicanor Navidad died after he
. fell on the LRT tracks and was struck by a
moving train which was coming in at the
exact moment that Mr.. Navidad fell from
the platform. Mr. Navidad was treated as
a passenger because he entered the LRT
station after having purchased a "token"
and he fell while he was on the platform
waiting for a train. Thus, he was where he
was supposed to be with the intention of
boarding a train.
b)
Termination. Once created, the relationship will
not ordinarily terminate until the passenger has,
after reaching his destination, safely alighted
f AR i
V|.— LAWS ON T k ANSiAj RTATICiN
AND PUBLIC UTILITIES
445
from the carrier's conveyance or has had a rea­
sonable opportunity to leave the carrier's prem­
ises. All persons who remain on the premises
within a reasonable time after leaving the con­
veyance are to be deemed passengers, and what
is a reasonable time or a reasonable delay within
this rule is to be determined from all the circum­
stances, and includes reasonable time to look af­
ter his baggage and prepare for his departure.
For instance, a person, who, after alighting from
a train, walks along the station platform is con­
sidered still a passenger (La Mallorca v. CA, 17
SCRA 739 [1966]; Aboitiz Shipping Corporation v.
CA, G.R. No. 84458, Nov. 6,1989).
In La Mallorca v. Court of Appeals (Ibid.), the
plaintiff spouses together with their three
daughters (ages 13, 4, and 2) were the first
to go down the bus that they were riding
when it reached their destination. The hus______ band led his wife and children to a shaded
spot on the left pedestrian side of the road
about 4 or 5 meters away from the vehicle.
The husband returned to the bus to get
his other baggage and he did not notice
that his 4-year old daughter followed him.
While he was on the running board of the
bus waiting for the conductor to hand him
his baggage, the bus moved although the
conductor had not yet signaled the driver
to start off. The bus hit the 4-year-old child
as a consequence. The Supreme Court ruled
that there was breach of duty to exercise ex­
traordinary diligence with respect to the
4-year old child and the carrier is liable as
a consequence. The presence of passengers
near the bus was not unreasonable and
they'werehtherefore, to be considered still
as passengers of the carrier, entitled to the
protection under their contract.
1)
446
REVIEWER ON COMMERCIAL LAW
2)
The Supreme Court cited in La Mallorca case
where a passenger alighted at his destina­
tion 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 returns to
relieve his brother. He is deemed reason­
ably and necessarily delayed and thus con­
tinues to be a passenger entitled as such to
the protection of the railroad company and
its agents.
3)
PART VI — LAWS ON TRANSPORTATION
AND PUBLIC UTILITIES
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 upon proof that they exercised
all the diligence of a good father of the family in the
selection and supervision of their employees (Art.
1759, NCC).
fjjl
ft
In Aboitiz Shipping Corporation v. Court
o f Appeals (179 SCRA 95 [1989]) a certain
6.02. The liability of the carrier for the personal violence of
its employees or agents upon its passengers extends
only to those acts which that the carrier could foresee
or avoid through the exercise of the degree of diligence
required.
6.03. The carrier is not liable for acts of the employee not
on duty or in the line of duty. However, the rule on
Anacleto Viana (AV) disembarked from
the vessel he was on board. About one (1)
hour after he disembarked, AV returned
to the vessel to retrieve a baggage that he
left. It was while he was pointing to the
crew of the said vessel to the place where
his cargoes were loaded that the crane
(operated by a stevedoring company to off
load cargoes) hit him, pinning him between
the side of the vessel and the crane. He died
as a consequence. The Supreme Court ruled
that extraordinary diligence was still owed
to AV at the time of the accident. It was
ruled that AV's presence in the premises
was not without cause. The victim had to
claim his baggage which was possible only
one (1) hour after the vessel arrived since
it was the standard procedure in the case
of petitioner's vessels that the unloading
operation shall start only after that time.
strangers apply to them.
6.04. 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 the family could have
prevented or stopped the act (Art. 1763, NCC).
7. STIPULATIONS REDUCING DILIGENCE OR LIMITING
LIABILITY
7.01. REDUCTION OF DILIGENCE
The parties cannot stipulate so as to totally
exempt the carrier from exercising any degree of
diligence whatsoever; and that the parties cannot
stipulate that the common carrier shall exercise
diligence less than the diligence of a good father of
a family. In other words, in carriage of goods, the
parties may stipulate that the diligence to be exercised
by the common carrier be less than the extraordinary
diligence provided that the following requisites are
complied with:
--•
- - - -
S. LIABILITY FOR ACTS OF EMPLOYEES AND PASSEN- GERS (Arts. 1759 and 1763, NCC)
- -6.01. Common carriers are liable for the death of or injuries
to passengers through the negligence or willful acts
447
a)
■
ail
gm m
mm
That the stipulation be in writing signed by both
parties; ^
REVIEWER ON COMMERCIAL LAW
448
b)
That the stipulation be supported by a valuable
consideration other than the service rendered by
the common carrier; and
c)
That the stipulation be reasonable, just and not
contrary to law (Art. 1744, NCC).
PART VI — LAWS ON TRANSPORTATION
AND PUBLIC UTILITIES
449
c)
The carrier need not observe any diligence in the
custody of the goods;
d)
The carrier shall exercise a degree of diligence
less than that of a good father of a family over
the movable transported;
Notes: (1) This should be distinguished from Article
1750 which involves a stipulation fixing the amount
that may be recovered which only requires that: (i) it is
reasonable and just under the circumstances; and (ii) it is
fairly and freely agreed upon. (2) No reduction is allowed
in carriage of passengers (Art. 1757, NCC).
e)
The carrier shall not be responsible for the acts
or omissions of his or its employees;
f)
The carrier's liability for acts committed by
thieves or robbers who do not act with grave or
irresistible threat, violence, or force is dispensed
with or diminished;
7.02. Valid stipulations relative to liability of common
g)
The carrier is not responsible for the loss,
destruction, or deterioration of the goods on
account of the defective condition of the car,
vehicle, ship, or other equipment used in the
contract of carriage (Art. 1745, NCC).
carriers
a)
An agreement limiting the common carrier's
liability for delay on account of strikes or riots.
b)
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 dedares a greater value ( E d g a r C o k a lio n g S h ip p in g
Lines v. UCPB Gen. Insurance Co., supra).
c)
d)
A contract fixing the sum that may be recovered
by the owner or shipper for the loss, destruction,
or deterioration of the goods, if it is reasonable
and just under the circumstances and has been
fairly and freely agreed upon (Art. 1748, NCC).
When a passenger is carried gratuitously, a
stipulation limiting the carrier's liability for
negligence is valid, but not for willful acts or
gross negligence. However, reduction of fare
does not justify any limitation of liability (Art.
7.04. Carriage of Goods by Sea Act (COGSA)
__________ If the goods are to be shipped from a foreign
port to the Philippines, the COGSA shall apply
suppletorily. Under the COGSA, that the liability of
the carrier is US$500 per package in the absence of a
shipper's declaration of a higher value in the bill of
lading (Sec. 4[5], COGSA).
The condition is part of the bill of lading even if
not expressly stated.
a)
If the goods are shipped in cartons, each carton
is considered a package even if they are stored
in container vans (Eastern Shipping v. IAC, 150
SCRA 464 [1987]). When what would ordinarily
be considered packages are shipped in a con­
tainer supplied by the carrier and the number
of such units is disclosed in the shipping docu­
ments, each of those units and not the container
- constitutes the "package" referred to in COGSA.
b)
In Belgian Overseas Chartering v. Phil. First Ins.
Co. (June 5, 2002), 242 coils of steel sheets were
1758, NCC).
7.03. Invalid Stipulations with Common Carriers
a)
"
The goods are transported at the risk of the owner or shipper;
~
■
b)
The carrier will not be liable for any loss,
destruction, or deterioration of the goods;
’ :T '
450
EA R ! VI ~ LAWS ON TRANSPORTATION'
AND PUBLIC UTILITIES
REVIEWER ON COMMERCIAL LAW
shipped on board a vessel in Germany for trans­
port to Manila. These coils were shipped inside
the containers provided by the carrier. The Let­
ter of Credit covering the shipment states the
per metric ton price of the coils. Later, it was dis­
covered that four (4) coils were damaged. The
Supreme Court applied the COGSA and ruled
that the liability should not be based on the price
declared in the Letter of Credit. The Court con­
sidered each coil as a package and awarded $500
per coil or a total of US$2,000.
subject to his right of recourse against the transferee
or the buyer (Gaudioso Erezo, et a lv . Aguedojepie , G.R.
No. L-9605, Sept. 30,1957; Equitable Leasing Corporation
v. Lucita Suyon, et at, G.R.:No. 143M0, Sept. 5 , 2002).
a)
(Edgar Cokaliong Shipping Lines, Inc. v. UCPB General
Insurance Company, supra).
b)
Stolen Vehicles. The registered owner is not
liable if the vehicle was taken from his garage
without his knowledge and consent. To hold the
registered owner liable would be absurd as it
would be holding liable the owner of a stolen ve­
hicle for an accident caused by the person who
stole such vehicle (Duavit v. CA, 173 SCRA 490,
496 [1989]).
8.02. K a b it System
The "registered owner" rule is applicable when—------- ever the persons involved are engaged in what is
known as the “kabit system." The “kabit system" is an
arrangement whereby a person who has been granted
a certificate of public convenience allows other per­
sons who own motor vehicles to operate them under
his license, sometimes for a fee or percentage of the
earnings. Although the parties to such an agreement
are not outrightly penalized by law, the kabit system
is invariably recognized as being contrary to public
policy and therefore void and inexistent under Article
1409 of the Civil Code (Aberlardo him, et al. v. CA, et at,
G.R. No. 125817, Jan. 16, 7.002; Baliwag Transit, Inc. v.
CA, 147 SCRA 82 [1987]),: .
8. REGISTERED OWNER RULE AND KABIT SYSTEM
8.01. Registered Owner Rule
The rule in this jurisdiction is that the person
who is the registered owner of a vehicle is liable for
any damages caused, by the negligent operation of
the veKTcle although the same was already sold or
con veyed to another person at the time of the accident.
The registered owner is liable to the injured party
'' ~
Leased Vehicles. The registered owner is also
liable even if the vehicle was leased to another
person (BA. Finance Corporation v. CA, 215 SCRA
715 [1992]).
7.05. Purpose of Stipulation Limiting Liability
The purpose of the limiting stipulation in the
Bill of Lading is to protect the common carrier. Such
stipulation obliges the shipper/consignee to notify
the common carrier of the amount that the latter
may be liable for in case of loss of the goods. The
common carrier can then take appropriate measures
________ — getting insurance, if needed, to cover or protect
itself. This precaution on the part of the carrier is
reasonable and prudent. Hence, a shipper / consignee
that undervalues the real worth of the goods it seeks
to transport does not only violate a valid contractual
stipulation, but commits a fraudulent act when it
seeks to make the common carrier liable for more
than the amount it declared in the bill of lading
451
^■
a)
May a jeephey under the “kabit system" be lev­
ied upon by the creditors of the registered opera­
tor?
YES. A levy is proper and in contemplation
of law as regards the public and third persons,
the vehicle should be considered the property of
4252
REVIEWER ON COMMERCIAL LAW
PART VI — LAWS ON TRANSPORTATION
AND PUBLIC UTILITIES
the registered owner under the registered owner
rule (Santos v, Sibug, 104 SCRA 520)j
9.' CONCURRENT CAUSES OF ACTION
9.01. DRIVER AND THIRD PERSONS
a)
What is the basis of a cause of action of a
passenger against the common carrier? Against
the driver?
The basis of a cause of action of a passenger
or shipper against the common carrier is culpa
contractual, while the basis of liability on the part
of the driver is either culpa delictual or culpa aquiliana. The driver of the carrier, not being an
agent but an employee, has himself no contrac­
tual relationship with the passenger. However,
the same act or omission may give rise to both
causes of action. Tort may be a mode of breach.
b)
Can a common carrier and the arrastre opera­
tor be held solidarity liable for damages in the
shipment of goods?
The legal relationship between the con­
signee and the arrastre operator is akin to that of
a depositor and a warehouseman. The relation­
ship between the consignee and the common
carrier is similar to that of a consignee and
the arrastre operator. Hence, the duty of the
arrastre operator to take care of the goods that
are in its custody and to deliver them in good
condition to the consignee also devolves upon
the common carrier. Thus, the arrastre operator
and the common carrier are liable in solidum io r
the proper delivery of the goods to the consignee
(Fireman's Fund Insurance Co. v. Metro Post Service,
Inc., 182 SCRA 455; Eastern Shipping Lines v. CA,
234SCRA78).
Concurrence of Third Person.
--------------------- :— If the negligence of third persons concurs
with the breach (as in the case where the passen­
ger was injured because the carrier collided with
another vehicle), the liability of the third person
who was driving the vehicle and / or his employ­
er may be based on quasi-delict. The driver (third
person) alone may be held criminally liable and
civil liability may be imposed on him. based on
delict. Ih the latter case, the employer is subsidi; arily liable.
9.02. JOINT AND SEVERAL LIABILITY
In case the negligence of the carrier's driver and
a third person concurs, the liability of the parties —
carrier and his driver, third person — is joint and
several (MMTC v. CA, 223 SCRA 521 (19931).
•9.03. A RR ASTRE OPERATOR* ~
a)
453
—
What is the nature of the legal relationship be­
tween the consignee anddh e:urrastre operator?
PASSENGER’&BAGQAGES__ ____________ __ _______
As to baggage of passengers, the law makes a distinction
between a baggage in possession of the passenger and one
that is with the carrier.
1Q.01. Baggage in the custody of the passengers or their
employee
Under this, the baggage in transit which is in the
personal custody of the passenger ,or his employee
will be considered as necessary deposits. The com­
mon carrier shall be responsible for the baggage as
depositaries, provided that notice was given to them
or its employees, and the passenger took the neces­
sary precaution, which the carrier has advised them
relative to the care and vigilance of their baggage.
In case of loss due to fault of the passenger the car.rier will not be liable. The act of the thief or robber,.
who has entered the coihmon carrier's vehicle is not
deem ed force majeure, unless it is done with the use of
arms or through an irresistible force (Art.1754, NCC).
454
REVIEWER ON COMMERCIAL LAW
10,02. Baggage in the custody of the carrier
Articles 1733 to 1753 of the NCC shall apply
in this case. The carrier who has in his custody the
baggage of a passenger to be carried like any other
goods is required to observe extraordinary diligence.
In case of loss or damage the carrier is presumed
negligent (Ibid.).
11. SUCCESSIVE CARRIERS
11.01. Successive carriers by agreement for combined
services-
~
PART VI — LAWS ON TRANSPORTATION
AND PUBLIC UTILITIES
455
conveyance of persons and property" (Francisco,
p. 254).
12.02. VESSEL
A ship or vessel is any kind, class or type of
craft or artificial contrivance capable of floating in
water, designed to be used or capable of being used
as a means of water transport for the carriage of
passengers or cargo or both, utilizing its own motive
power or that of another (Sec. 3[fl, R.A. No. 9295 and
Sec. 3[b], P.D. No. 474).
a)
Vessels, any interest thereto as well as conve­
yances, transfers or mortgages thereof are
registered with the Maritime Industry Authority
(MARINA for short) (Sec. 10, R.A. No. 9295; Sec.
In Maritime Law, the second carrier shall assume
the obligations of the first carrier but the second
carrier has a right of action against the first carrier,
if the latter is directly responsible for the fault giving
rise to the claim of the shipper or consignee (See Art.
373 of the Code o f Commerce, referring to a case where
b)
several carriers successively transport the goods, or by the
use of or through a bill of lading).
Any unregistered transfer shall not affect third
persons but is considered binding on the parties.
c)
A Philippine flag vessel or watercraft is one that
is registered under Philippine laws (Sec. 3[d],
P.D. No. 474). It entitles the vessel to protection
of the authorities and flag of the Philippines in
all ports and on the high seas (Sec. 810, Tariff and
11.02. Liability of successive air carriers
An airline ticket providing that carriage of
successive air carriers is to be regarded as a "single
operation" is to make the issuer-carrier liable for
the tortious conduct of the other carrier. A printed
provision in the ticket limiting liability only to its own
conduct is not enough to rebut that liability (KLM
Dutch Airlines v. CA).
B. MARITIME LAW
14, E.O. No. 125 and 125-A).
Customs Code).
13. LIMITED LIABILITY RULE
13.01. What is your understanding of the doctrine of
limited liability? When is it applicable under the
Code of Commerce? What are the exceptions?
The exclusively real and hypothecary nature
12. GENERAL CONCEPTS
12.01. DEFINITION OF M ARITIM E LAW
Maritime law is the system of laws which "par­
ticularly relates to the affairs and business of the sea,
to ships, their crews and navigation, and to marine
of maritime law operates to limit the liability of
the shipowner to the value of the vessel, earned
freightage, and proceeds of the insurance, if any. "NO
VESSEL, NO LIABILITY," expresses in a nutshell the
limited liability rule (Monarch Ins. Co. v. CA, G.R. No.
92735, June 8,2000) . The total destruction of the vessel
PART VI — LAWS ON TRANSPORTATION
AND PUBLIC UTILITIES
REVIEWER ON COMMERCIAL LAW
— when shipowner is negligent ~~~ applies
extinguishes maritime lien as there is no longer any
res to which it can attach.
The limited liability rule is embodied in Articles
587, 590, and 837 of the Code of Commerce (Aboitiz
(Monarch Ins. Co. v. CA, supra; Aboitiz Shipping v.
New India Ins. Co., Ltd., 488 SCRA 563 [2006]).
c)
Shipping Corp. v. Gen. Accident Fire and Life Assurance
Corp., 217 SCRA 359 [1993]).
a)
The Code of Commerce sanctions the appli­
cation of the doctrine in the following cases:
Civil liability for indemnities in favor of
third persons which arise from the conduct
of the captain in the care of the goods which
the vessel carried (Art. 587, Code o f Com­
merce or CC);
2)
Civil liability arising from collisions (Art.
837, CC);
_____ 3l)__I Jnpaid wages of the captain and the crew
if the vessel and its cargo are totally lost by
reason of capture or shipwreck (Art. 643,
CC).
b)
The exceptions are:
1)
When the injury to or death of a passenger
is due either to the fault of the shipowner,
or to the concurring negligence of the ship­
owner and the captain;
2)
When the vessel is insured (to the extent of
the insurance proceeds); and
3)
In Workmen's Compensation claims (Yangco
v. Laserna, 73 Phil 330 and Chua Yek Hong v.
I AC, 166 SCRA 183; Monarch Ins. Co., Inc. v.
CA, supra).
N ote: The limited liability rule does not
apply if the carrier failed to overcome the
presumption of negligence. The -first exception
Abandonment
Under Article 587 of the Code of Commerce,
the shipowner or ship agent may exempt
themselves from liability by abandoning the
vessel with all her equipment and the freight it
may have earned during the voyage. If there is
insurance over the vessel, abandonment covers
the insurance proceeds while the vessel itself
shall be abandoned in favor of the insurer.
When applicable
1)
457
d)
Who can invoke the Limited Liability Rule
It is the shipowner who can invoke the
limited liability rule. He is the person for whom
the rule has been conceived. The charterer cannot
invoke the limited liability rule as a defense
---------------- espednily-Hgainsl^the^ipowner (De la Torre v.
CA, 653 SCRA 714 [2011]).
13.02. How claims are satisfied under the Limited Liability
Rule
All claims should be collated before they can
be satisfied from what remains of the insurance
proceeds and freightage at the time of the loss. No
claimant should be given preference over the others
by the simple expedience of having filed or completed
its action earlier than the rest. Thus, execution of
judgment in earlier completed cases, even those
already final and executory, must be stayed pending
completion of all cases occasioned by the subject
sinking. Then and only then can all such claims be
simultaneously settled, either completely or pro rata
' should the insurance proceeds and freightage be not
enough to satisfy the claim (Aboitiz Shipping Co. v.
General Accident Fire and Life Ins. Corp. Ltd., suvra).
PART VI — LAWS ON TRANSPORTATION
AND PUBLIC UTILITIES
REVIEWER ON COMMERCIAL LAW
458
other member of the complement of the vessel.
The owner of the vessel at fault shall be liable for
losses or damages (Art. 826, CC).
44. PROTEST
Maritime protest is the written statement by the master
of a vessel or any authorized officer, attested by proper of­
ficer or a notary, to the effect that damages has been suffered
by the ship (Aquino & Hernando, Notes & Cases on the Law on
Transportation & Public Utilities, p. 448). Protest is required
under the Code of Commerce in the following cases:
1)
b)
c) . If it cannot be determined which vessel is at
fault, each vessel shall also suffer its own losses
and both shall be solidarily liable for losses or
damages on the cargoes (Art. 828, CC).
Where the vessel is shipwrecked (Arts. 612, 624,
843, CC).
3)
4)
Where the vessel has gone through a hurricane
or the captain believes that the cargo has suf­
fered damages or averages (Art. 624, CC).
d)
The vessels may collide with each other through
fortuitous event or force majeure. In this case,
each shall bear its own damage (Art. 830, CC).
e)
Two vessels may collide with each other without
their fault but by reason of a third vessel. The
third vessel will be liable for losses and damages
Maritime collisions (Art. 835, CC).
15. COLLISION
15.01. DOCTRINE OF INSCRUTABLE FAULT
In a collision, the vessel at fault shall indemnify
the damages sustained or losses incurred (Art. 826,
CC), and if both vessels were at fault, each shall suffer
its own damages, and both shall be solidarily liable to
others (Arts. 827-828, CC). This solidarity expressed
in Article 827 of the Code of Commerce has been held
to preclude a common carrier operating a vessel from
interposing a defense of due diligence in the selection
and supervision of its employees in an action
against it by a shipper of the other colliding vessel
as distinguished from the ordinary rule in liabilities
for tort or culpa aquiliana. Under the "doctrine of
inscrutable fault," where fault is established but it
cannot be determined which of the two vessels were
at fault, both shall be deemed to have been at fault.
15.02. Rules on Collision of Vessels (Arts. 826, 827, 828,
—
- -
$3 0 ,8 3 1 and 832, CC) -
: a)
'""1 ’ “ r
The collision may be due to the fault, negligence,
or lack of skill of the captain, sailing mate, or any
The collision may be due to the fault of both ves­
sels. Each vessel shall suffer its own losses, but
.as regards the owner of the cargoes, both ves­
sels shall be jointly and severally liable (Art. 827,
CC).
When the vessel makes an arrival under stress
(Art. 612, CC).
2}
459
(Art. 831, CC).
f)
A vessel which is properly anchored and moored
may collide with those nearby by reason of
storm or other cause of. force majeure. The vessel
run into shall suffer its own damage or expense
(Art. 832, CC).
15.03. DOCTRINE OF ERROR IN EXTREMIS
There are three (3) zones in collision: (a) first
zone — time up to the moment when risk of collision
begins; (b) second zone — time between moment
when risk of collision begins up to the moment it
becomes practical certainty; and (c) third zone — time
when collision is certain up to the time of impact.
.
If a vessel having a right of way suddenly changes
its course during the third zone, in an effort to avoid
an imminent ; collision due to the fault of another
vessel,- such act; jnay. be said To be done in extremis,
PART VI — LAWS ON TRANSPORTATION
AND PUBLIC UTILITIES
REVIEWER ON COMMERCIAL LAW
460
and even if wrong cannot create responsibility on the
part of said vessel with the right of way.
2)
The commander and technical director of
the vessel (considered the most important
because it has to do with the operation of
the vessel and the protection of the passen­
gers, crew and cargo);
3)
Government representative of the country
under whose flag he navigates (Inter-Orient
16. ARRIVAL UNDER STRESS
It is the arrival of the vessel at the nearest and most
convenient port, if during the voyage the vessel cannot
continue the trip to the port of destination due to:
a)
Lack of provisions;
b)
Well founded fear of seizure, privateers or
pirates;and . . . ..
c)
By reason of any accident of the sea disabling it
to navigate.
Maritime Enterprises, Inc. v. NLRC, 235 SCRA
268(1994]).
Note: The captain has management and fiduciary
functions and as such has a reasonable measure of
discretionary authority to decide what the safety of
the ship and of its crew and cargo specifically requires
on a stipulated ocean voyage (Ibid.).
17. PERSONS INVOLVED IN MARITIME COMMERCE
a)
Shipowners and ship agents;
b)
Captains and masters of the vessel;
— ;----------c)— -Officers And crew ufdrrvessel;---------------------------d)
The responsibility of the captain remains even
if the vessel is on a compulsory pilotage (Wildvattey
Shipping Co. v. CA, G.R. No. 119602, Oct. 6,2000).
b)
17.01. SHIP AGENTS
119881).
17.02. CAPTAINS AND MASTERS OF THE VESSEL
a)
What are the triple roles of the captain?
1)
The general agent of the shipowner (hejduiu*
' sign bills of lading, agree upon freight rates
and decide whether to take cargo; enter
into contracts with respect to the vessel);
What are the grounds for discharge of a cap-
faffi?-
Supercargoes.
The ship agent is entrusted with the provisioning
and representing the vessel in the port in which it
may be found. His liability to passengers and cargo
owners for loss or injury is the same as the shipowner.
He is solidarily liable with the owner for such loss or
damage subject to his right to claim reimbursement
from the shipowner (NDC v. CA, 164 SCRA 593
461
1)
Insubordination in serious matters;
2)
Robbery or theft;
3)
Habitual drunkenness; and
4)
Damage caused to the vessel or to its cargo
through malice or manifest or proven
negligence.
17.03. OFFICERS AND CREW OF THE VESSEL
a)
Sailing M ate/First Mate;
b)
Second Mate;
c)
Engineers; and
d)
Members of the crew.
17.04. SUPERCARGOES
-
- "
Supercargo is a person who discharges adminis­
trative duties assigned to him by ship agent or ship-
REVIEWER ON COMMERCIAL LAW
462
pers, keeping an account and record of transaction as
required in the accounting hook of the captain,
17,05. DESERTION
Desertion is an act by which a seaman deserts
and abandons a ship or vessel before the expiration
of his term of duty and without leave and without
intention to return (Singa Ship Management Phils, v.
NLRC, 276 SCRA 201 (19971).
18. GENERAL AVERAGE vs. PARTICULAR AVERAGE
18.01. General Average
This includes all damages and expenses which
are deliberately caused in order to save the vessel, its
cargo, or both at the same time from real and known
risk (Phil. Home Assurance Corp. v. CA, 257 SCRA 468
[1996]).
a)
Requisites of General Average
17 VI — LAWS ON TRANSPORTATION
463
AND PUBLIC UTILITIES
visions, 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 suf­
fered through said act by the goods which
are kept on board;
3) The cables or masts which are cut or ren­
dered 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 of roadstead, and the damage
resulting therefrom to the goods removed
or transferred;
1)
Common danger to ship and the cargo after
it has been loaded whether during voyage
or port of loading and unloading;
5) The damage suffered by the goods through
the opening made in the vessel in order to
drain her and prevent her sinking;
2)
That for the common safety, part of the
vessel or the cargo or both is sacrificed
deliberately;
6) The expenses caused through floating a
vessel intentionally stranded for the pur­
pose of saving her;
3)
That from the expenses or damages caused,
follows the successful saving of the vessel
and cargo; and
7) The damage caused to the vessel which had
to be opened, scuttled or broken in order to
That the expenses or damages should have
been incurred or inflicted after taking legal
steps and authority.
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;
4)
Article 811 of the Code of Commerce pro­
vides that general averages include:
1) The goods or cash invested in the redemp­
tion of the vessel or the cargo captured by
enemies, privateers, or pirates, and the pro-
save the cargo;
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,
REVIEWER ON COMMERCIAL LAW
until he is returned to the vessel or to Ms
domicile, should he prefer it;
10) The wages and victuals of the crew of a ves­
sel chartered by the month during the time
it should be embargoed or detained by force
majeure or by order of the government, or in
order to repair the damage caused for the
common good; -
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AND PUBLIC UTILITIES
18.02. Particular Average
Simple or particular averages are all the expenses
and damages caused to the vessel or to her cargo
which have not inured to the benefit and common
profit of all the persons interested in the vessel and
her cargo (Art. 809, CC). Article 809 of the Code of
Commerce provides that particular averages include:
1)
11) The loss suffered in the value of the goods
sold at arrivals under stress in order to re­
pair the vessel because of gross average;
and
12) The expenses of the liquidation of the aver­
age.
b)
Formalities (Arts. 813 and 814, CC)
The claim for contribution will not prosper
if the formalities prescribed under Articles 813
and 814 are not complied with (Phil Home Assurance v. CA, ibid.). The formalities are as follows:
1)
2)
There must be resolution of the captain,
adopted after a deliberation with the other
officers of the vessel and after hearing all
persons interested in the cargoes. If the
latter disagree, the decision of the captain
should prevail but they shall register their
objections.
The resolution must be entered in the log­
book, stating the reasons and motives for
the dissent, and the irresistible and urgent
causes if he acted in his own accord. It must
be signed, in the first case, by all persons
present in the hearing. In the second case,
by the captain and all the officers of the ves­
sel. The minutes must also contain a detail
of all the goods jettisoned and those injuries
caused to those on board.
465
The losses suffered by the cargo from the
time of its embarkation until it is unloaded
on account of inherent defects of the goods,
accident at sea or fortuitous event and any
expense incurred to avoid or repair the
same;
2)
The losses and expenses suffered by the
vessel in her hull, rigging, arms, and equip­
ment, for the same causes or reasons, from
the time she puts to sea from the point of
departure until she anchors in the port of
----------------------- destination; . ——-------— -------------------3)
Losses to merchandise loaded on deck,
except in coastwise navigation if the mari­
time ordinances allow it;
4)
Wages and victuals of the crew when the
vessel is detained or embargoed by a legit­
imate order or force majeure, if the charter
has been contracted for a fixed sum for the
voyage;
5)
The necessary expenses on arrival at a port
in order to make repairs or secure provi­
sions;
6)
The lowest value of the goods sold by the
captain in arrival under stress for the pay­
ment of provisions and in order to save the
"'Mrew, of to covesr'any other requirement of
the vessel against which the proper amount
shall be charged;
466
REVIEWER ON COMMERCIAL LAW
7)
The victuals and wages of the crew while
the vessel is in quarantine;
8)
The loss suffered by the vessel or cargo by
reason of an impact or collision with the
other, if it were accidental and unavoidable.
If the accident should occur through the
fault or negligence of the captain, the latter
shall be liable for all the losses caused; and
9)
Any loss suffered by the cargo through the
fault, negligence, or barratry of the captain
or of the crew, without prejudice to the right
of the owner to recover the corresponding
indemnity from the captain, the vessel, and
the freightage.
PROBLEM:
1.
A vessel owned and operated by AM, Inc. (AM) left
Manila on Oct. 6, 2003 bound for Basco, Batanes via
---------- Aparri
C agayan
w ith gpnpral rarg o belonging tn
different shippers, among them Mr. A. The vessel
reached Aparri on the 10th of the month, and after
a day's stopover in that port, weighed anchor to
proceed to Basco. While in the port, it ran aground
at the mouth of the Cagayan river, and, attempts to
refloat it under its own power having failed, plaintiff
had it refloated by LS Co. at an agreed compensation.
Once afloat,: the vessel returned to Manila to refuel
and then proceeded to Basco.-It was established that
the stranding, of the vessel was due to the sudden
shifting of the sandbars at the mouth of the river
which the port pilot did not anticipate. Mr. A claims
that he is not liable for general average contribution.
Are the expenses incurred in refloating the vessel
general averages?
A: .. -NO. The facts do not disclosC’thaCthetfxpertses
were incurred to save the vessel and cargoes from a
common danger. The vessel was refloated to enable
PART VI — LAWS ON TRANSPORTATION
AND PUBLIC UTILITIES
it to proceed to its port of destination. Hence, there
was no general average because if is the safety of the
property and not of the voyage, which constitutes the
true foundation of general average. It appears that
the cargoes could have been unloaded by the owners
if they have been required to do so without need of
expensive refloating operations (A.Magsaysay, Inc. v.
Anastacio Agcni, 96 Phil. 504).
i. CHARTER PARTY
19.01. What is a charter party? What are the kinds of charter
party?;:, ,
A charter party is a contract by which with the
entire ship or some principal part thereof is let by the
owner to another person for a specified period of time
or use.
There are two types of charter parties:
a) A Contract of Affreightment which involves the
---------- 1-------- use of shipping- space leased by the owner in----part or as a whole, to carry goods for others:
Time Charter — leased for a fixed period of time;
and Voyage ~~ for a single voyage.
b)
A Charter by Demise or Bareboat — by the terms
of which the whole vessel is let to the charterer
which transfers to him its entire command and
possession and consequent control over its
navigation, including the master and crew who
are his servants. The charterer is treated as owner
pro hac vice of the vessel. In such case, a common
carrier becomes a private carrier (Plantes
Products, Inc. v. CA, ei a l, 226 SCRA476).
. BILL OP LADING
_ _ It is a written acknowledgment of receipt of goods and
^agreement tJtran sp o rf th e m to a 'specific placelolfperson
named or to his order (Campania Maritirna v. Ins. Co. ofNorth
America, 12 SCRA 213),
, ...
........... .
....
............... ......
-
a)
469
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AND PUBLIC UTILITIES
REVIEWER ON COMMERCIAL LAW
with or without specifying the vessel on which
they are to be shipped (Magellan Manufacturing
The consignee and the shipper who accepts a
bill of lading even without signing are bound
by the terms and conditions thereof (Keng Hua
Corp. v. CA, 201 SCRA 102 [1991]).
Paper Products v. CA, 286 SCRA 257 [1998]).
Acceptance of the consignee is implied if he
claims reimbursement for missing goods and
files a case based on the bill of lading (Everett
21. LOANS ON BOTTOMRY AND RESPONDENTIA
21.01. DEFINITIONS
Steamship v. CA, 297 SCRA 496 [1998]; Belgian
Overseas Chartering v. Phil First Ins. Co., G.R. No.
143133, June 5, 2002).
b)
Delivery of Goods without Surrender of Bill
of Lading — The obligation of the carrier is also
terminated if the goods are delivered even if the
bill of lading was not surrendered. The surren­
der of the bill of lading is not necessary for the
discharge of the obligation of the carrier (Repub­
a)
Bottomry — loan secured by the shipowner or
ship agent guaranteed by the vessel itself and
payable only upon arrival of vessel at destina­
tion. This can also be secured by the captain
outside the residence of the shipowner or ship
agent.
b)
Respondentia — loan secured by the owner of
the cargo payable upon safe arrival of cargo
at destination. The shipowner, ship agent or
captain cannot secure this loan.
lic v. Lorenzo Shipping, 450 SCRA 551 [2005]; Art.
353, CC).
21.02, DISTINGUISHED FROM ORDINARY LOAN
20.01, Functions of a Bill of Lading .
---------a)— Evtdenee-ef^he^dstenee-ef-ihe--eefttmet-ef-eaf-riage of cargo (it provides its terms and condi­
tions including the consignee, the route, destina­
tion, freight, and other rights and obligations);
b)
Commercial document whereby, if negotiable,
ownership may be transferred by negotiation;
and,;
c)
Receipt of cargo (Telengtan Bros. v. CA, supra; see
also Keng Hua Paper Products v. CA, 286 SCRA
257 [1998] and Belgian Overseas Chartering v. Phil
First Ins. Co., supra, where the Court mentioned only
[a] and [c]).
OKDINS1YTOAN
Usury law if applicable (if Usury law is inapplicable.
there is usury).
Right to recover from debt­ Right to recover is extin­
or is not extinguished if guished if the thing put up as
thing put up as security is security is lost or destroyed.
lost or destroyed.
22.
b)
, "On Board" Bill of Lading — it states that the
goods have been received on board the specified
vessel that will carry them.
"Received Shipment" Bill of Lading — it states
that the goods have been received for shipment
PROCEDURE
CLAIMS
AND
PRESCRIPTIVE
PERIOD
FOR
22.01. Coastwise or within the Philippines (Example:
Manila to Cebu)
20.02. Types of Bills of Lading
a)
LOAN ON BOTTOM RY
AND RESPONDENTIA
a)
_
_
_
When to file a claim with carrier
p re ce d e n t.___ _ _
.
condition
______
Under Article 366 of the Code of Com­
merce, if goods arrived in damaged condition
470
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claim mugt be filed bycthe^hip i^ r withm the fol­
lowing period, otherwise recovery is barred:
1)
2)
a)
The prescriptive period of one (I) year starts after
the delivery of the goods or the date the goods
should have been delivered (Sea 3, COGSA).
The period does not apply to conversions or
misdeliveries. It starts from delivery to the
arrasire operator, not consignee. A stipulation
reducing the one (1) year period is null and void,
but a written agreement to suspend it is valid.
(Note: The arrastre operator cannot invoke the
one [1] year prescriptive period.)
b)
YES. The rule applies in cases of collision, but it
starts not from the date of the collision but when
the goods should have been delivered, had the
cargoes been saved (Maritime Company of the
Immediately if damage is apparent; or
Within 24 hours from delivery if damage is
not apparent.
b)
When to file a case in court — prescriptive pe­
riod
1)
Within 6 years, if no bill of lading has been
issued; or
2)
Within 10 years, if a bill of lading has been
issued.
22.02. International carriage from foreign port to the
Philippines (GOGSA) ^
a)
Philippines v. CA, 164 SCRA 593).
When to file a claim with carrier — NOT a con­
dition precedent
1)
2)
Upon discharge of goods, if the damage is
apparent, claim should be filed immediatelyTor
c)
______d)
If damage is not apparent, claim should be
filed within 3 days from delivery.
e)
Within a period of one (1) year from dis. charge.
•
22.03, Under the Carriage of Goods by Sea Act, a prescrip­
tive period of one (1) year is expressed, a) when does
the period start? b) Does the rule apply to collision
cases? c) Is the period suspended by a letter-demand
made by the shipper's lawyer to the carrier? d) Is the
prescriptive period applicable to an insurer who is
enforcing his right of subrogation? e) Is it applica­
ble to the claim against the insurer for the insurance
proceeds? f) Is the period applicable in case of dam­
age caused by delay or late delivery of.the goods?
The insurer 'who is exercising its right of subrogation is also bound by the one (1) year prescriptive period (Fil. Merchants v. Alejandro, 145 SCRA
42 [1986]).
When to file court case — prescriptive period
1)
NO. The period is not suspended by an extraju­
dicial demand (Dole Philippines v. Maritime Co.,
148 SCRA 118 [1987]).
N ote: The filing of claim is not condi­
tion precedent.
b)
471
It does not apply to claim against the insurer
for the insurance proceeds. The claim against
the insurer which is based on a written contract
expires in ten (10) years (Mayer Steel Pipe Corp. v.
CA, 274 SCRA 432 [1997]).
f)
Damages arising from delay or late delivery is
not the damage or loss contemplated under the
COGSA. The goods are not actually lost or dam­
aged. The applicable period is ten (10) years
(Mitsui v. CA, 287 SCRA 366 [1998]).
23.
THE SHIP MORTGAGE DECREE (SMD) OF 1978
(P.D. No. 1521)
..
.
The provisions of Presidential Deceree No. 1521
with respect to preferred mortgage prevail over the
REVIEWER ON COMMERCIAL LAW
PART VI — LAWS ON TRANSPORTATION
AND PUBLIC UTILITIES
Civil Code provisions on mortgage as well as the
■provisions of the Code of Commerce. General legisla­
tion must give w-ay to special legislation on the same
subject, and generally be so interpreted as to embrace
only cases in which the special provisions are hot
applicable (Poliand Industrial Ltd. v. NDC, 467 SCRA
3)
b)
500).
23.01. WHO MAY CONSTITUTE A SHIP MORTGAGE
Any citizen of the Philippines, or any association
or corporation organized under the laws of the
Philippines, at least sixty percent (60%) of the capital
of which is owned by citizens of the Philippines
may, for the purpose of financing the construction,
acquisition, purchase of vessels or initial operation
of vessels may freely constitute a mortgage or any
other lien or encumbrance on his or its vessels and
its equipment with any bank or other financial
institutions, domestic or foreign (Sec. 2, SMD).
23.02. FORMAL REQUIREMENTS----------------------- — ----
7""
The ship mortgage must be recorded or registered
(now with MARINA), otherwise die same is void
except as to the parties or their heir and assigns or
persons with actual notice (Sec. 3, SMD).
a)
The ship mortgage shall be considered a "pre­
ferred mortgage" or shall have a preferred status
only if the following requirements under Section
4 of the SMD are complied with. In other words,
it is required that:
1)
The mortgage is recorded;
2)
An affidavit is filed with the record of such
mortgage to the effect that the mortgage is
made in good faith and without any design
to hinder/delay, or "defraud any existing or
future creditor of the mortgagor or any lien
or of the mortgaged vessel; and
473
The mortgage does not stipulate that the
mortgagee waives the preferred status
thereof:(Sec. 4, SMD; Poliand Industrial Ltd,
v. 'NDC, supra).
When preferred mortgage covers two or more
vessels
1)
The mortgage rnay provide for separate
discharge of each vessel by the payment of
a portion of mortgage indebtedness. The
amount of such portion of such payment
shall be endorsed upon the documents of
the vessel (Sec. 4[b], SMD)i
2)
In case such mortgage does not provide
for the separate discharge of a vessel and
the vessel is to be sold upon the order of a
court of competent jurisdiction in a suit in
rent in admiralty, the court shall determine
the portion of the mortgage indebtedness
increased by 20 per centum (20%) (1) which,
in the opinion of the court, the approximate
value of all the vessels covered by the mort­
gage, and (2) upon the payment of which
the vessel shall be discharged from the
mortgage.
23.03. ARREST AND FORECLOSURE
,
Upon default; o f the obligor; the preferred ship
mortgage may be foreclosed in a suit in admiralty (Sec.
10, SMD). Upon filing of a petition for foreclosure,
the Court may order the arrest of the vessel upon ex
paiie application duly supported by an affidavit of a
person who knows the facts and upon filing of a bond
(Sec. 11, SMD).
Note: The mortgagee may likewise avail of the alterna­
tive remedy of specific performance in a suit in personam in
admiralty (Sec. 18, SMD).
a *
474
REVIEWER ON COMMERCIAL LAW
23.04. CONCURRENCE AND PREFERENCE OF CRE­
DITS
Upon the sale of any mortgaged vessel in any
extrajudicial sale or by order of a Court of competent
jurisdiction, all pre-existing claims in the vessel shall
be held terminated and shall thereafter attach in like
amount and in accordance with the following order
of preference (Sec. 17, SMB):
a)
The preferred mortgage lien shall have priority
over all claims against the vessels.
M K T VI — LAWS ON TRANSPORTATION
AND PUBLIC UTILITIES
The maritime lien is inseparable from the vessel
and until discharged, it follows the vessel. Hence,
the enforcement of a maritime lien is in the nature
and character of a proceeding quasi in rent (Poliand
Industrial Ltd. v. NDC, supra).
a)
The maritime liens that are superior to the
preferred mortgage includes maritime lien for
necessaries (Sec. 21, SMD).
1)
Exception: The preferred mortgage is inferior to
the following claims IN THE ORDER STATED:
1)
2)
3)
Expenses and fees allowed and costs taxed
by the court and taxes due to the Govern­
ment;
Crew's wages;
General average;
__________ 4)
Galvage; including contract salvage;_______
5)
Maritime liens arising prior in time to the
recording of the preferred mortgage;
6)
Damages arising out of tort; and
7)
Preferred mortgage registered prior in time.
b)
When proceeds not sufficient. If the proceeds
of the,sale, should not be sufficient to pay all
creditors included in one number or grade, the
residue shall be divided among them pro rata
(Sec. 17, SMD).
c)
Ordinary credits. All credits not paid, whether
fully or partially, shall subsist as ordinary credits
enforceable by personal action against the debt­
or (Sec. 17, SMD).
23.05. MARITIME LIEN
A mantime lien is No. 5 in the order of prefer­
ence. It is akin to a mortgage lien in that in spite of the
transfer of ownership, the lien is not extinguished.
475
Necessaries — repairs, supplies, towage,
use of dry dock or marine railway, or other
necessaries to any vessel, whether foreign
or domestic, upon the order of the owner
of such vessel, or of a person authorized by
the owner.
2)
For example, expenses for the payment
of bunker oil/fuel, unused stores and oil,
bonded stores, provisions, and repair and
docking of the vessel are preferred claims
------------------------------because they are necessaries (Poliand Indus*
trial Ltd. v. NDC, supra).
3)
The cost of modification are also necessaries
under Section 21 of the SMD. Such cost
is a necessary expense for the vessel's
navigation. As long as an expense on the
vessel is indispensable to the maintenance
and navigation of the vessel, it may properly
be treated as a maritime lien for necessaries
under Section 21, Presidential Decree No.
1521 (Ibid.).
24. SALVAGE LAW (SL)
The applicable law is Act No. 2616, otherwise known
as the Salvage Law.
24.01. DEFINITION
"
There is salvage where a person (or persons)
picks *up and conveys to a safe place a vessel or its
REVIEWER ON COMMERCIAL LAW
476
PART VI ~~ LAWS ON TRANSPORTATION
AND PUBLIC UTILITIES
cargo which are beyond the control of the crew or
shall have been abandoned by them (Sec. 1, SL).
6}
Note: However, there can also be a contract of
salvage that may be voluntarily agreed upon by the
parties.
The salvor is entitled to reward or compensation.
The reward for salvage or for assistance shall be
divided between the owner, the captain, and the
remainder of the crew of the latter vessel, so as to
give the owner a half, the captain a fourth, and all
the remainder of the crew the other fourth of the
reward, in proportion to their respective salaries, in
the absence of an agreement to the contrary (Sec. 13,
A salvage claim or compensation may be award­
ed to the salvor if the following requirements are
present:
There must be a marine peril;
2)
The vessel is shipwrecked beyond the control of
the crew or shall have been abandoned;
3)
The service of picking up and conveying the
vessel of cargo to a safe place is voluntarily
rendered; and
4) The service must have been successful in whole*1
--------or in part, or that the service rendered contribufed to such success (Sec. 1, SL; Barrios v. Go Thong,
7 SCRA 535).
SL).
I f two or more persons — divide between them in
proportion to the services which each one may
have rendered, and, in case of doubt, in equal
parts (Those who, in order to save persons, shall
have been exposed to the same dangers shall
also have a right to participation in the reward.)
----------------------- (Sec. 12, SL).--------------------------------------------------a)
C. THE WARSAW CONVENTION AND CIVIL AVIATION LAWS
(R.A. No. 9497 and R.A. No. 6235)
24.03. AMOUNT OF REWARD OR COMPENSATION
The amount of compensation shall be fixed by
the Court taking into account the following:
1)
The expenditures made to recover or save the
vessel or the cargo or both;
2)
The zeal demonstrated;
3)
The time employed;
4)
The services rendered;
4)
The excessive express occasioned the number of
persons .who aided;
5)
The danger to which they and their vessels were
exposed as well as that which menaced the
things recovered or salvaged; and .
The value of such things after deducting the
expenses (Sec. 10, SL).
24.04. WHO IS ENTITLED TO REWARD
24.02. REQUIREMENTS FOR COMPENSATION
1)
477
25. WARSAW CONVENTION (WC)
This Convention applies to international transportation
by air. There is international transportation when:
a)
.
-
The place of departure and the place of destina­
tion are within the territories of two contracting
countries regardless of whether or not there was
a break in the transportation or transshipment;
or
b) The place of departure and the place of destina. . . . tion are within the territory of a single contract­
ing country if there is an agreed stopping place
within a territory subject to the sovereignty,
mandate or authority of another power, even
REVIEWER ON COMMERCIAL LAW
478
PART VI — LAWS ON TRANSPORTATION
AND PUBLIC UTILITIES
though the power is not a party to the Conven­
tion (Mapa v. CA, 275 SCR A [1997]).
Exception: If the passenger or consignor has
made, at the time when the package was handed
over to the carrier, a special declaration of inter­
est in delivery at destination and has paid a sup­
plementary sum if the case so requires. In that
case; the carrier will he liable to pay a sum not
exceeding the declared sum, unless he proves
that sum is greater than the actual value to the
consignor at delivery.
25.01. TRANSPORTATION BY AIR
The period during which the baggage or goods
are in charge of the carrier, whether in an airport or on
board an aircraft, or, in the case of a landing outside
an airport, in any place whatsoever (Sec. 18[b] WC).
a)
b)
It does not cover any transportation by land, by
sea, or by river performed outside an airport.
a)
Passenger — injury took place: (1) on board the
aircraft; (2) in the course of any of the operations
of embarking; (3) in the course of disembarking;
or (4) when there was or because of delay (Secs.
17 and 19, WC).
b)
Checked baggage or goods — damage occurred
during air transportation or when there is delay
(Secs. 18[1] and 19, WC).
25.03. LIMIT OF LIABILITY OF CARRIER
a)
Carriage of passengers — 250,000 francs.
Exception: By special contract, the carrier
and the passenger may agree to a higher limit
of liability (Alitalia v. IAC, G.R. No. 71929, Dec. 4,
1990).
■ - -*
b)
Note: (1) In determining the amount of
the carrier's liability, only the total weight of
the package or packages concerned- :sh$U be
considered, except when the value of other
packages covered by the same baggage check or
the same airway bill are affected, the total weight
of such other package or packages shall also be
taken into consideration in determining the limit
of liability.
If transportation takes place in the performance
of a contract for transportation by air, for the
purpose of loading, delivery, or transshipment,
any damage is presumed, subject to proof to
the contrary, to have been the result of an event
which took place during the transportation by
air (Sec. 18 fc], WC):
25.02. DAMAGE OR INJURY FOR WHICH THE CAR-------- RIER IS LIABLE--------------------------------— — ------- -
Carriage of registered baggage and of cargo —
250 francs per kilogramme.
479
c)
Objects of which the passenger takes charge
himself — 5,000 francs per passenger.
N otes: The Guatemala Protocol of 1971 in­
creased the limit for passengers to US$100,000
and US$1,000 for baggage. However, the Su­
preme Court noted in Santos III v. Northwest Ori­
ent Airlines, et al. (G.R. No. 101538, June 23,1992)
that the Guatemala Protocol isM ll ineffective.
25 04. TORT LIABILITY
The Warsaw Convention does not provide for an
exclusive enumeration of instances when the carrier
is liable. It does not provide for an absolute limit of
liability and it does not preclude the application of
ihe Civil Code and other pertinent local laws. Hence,
a complaint for quasi-delict can still be filed even if
Jh e filing is beyond the prescriptive period provided
for under the Convention so long as it is; within the
prescriptive period of four (4) years under the Civil
-Code.
REVIEWER ON COMMERCIAL LAW
480
a)
The Warsaw Convention, however, denies to
the carrier "availment 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, in accordance with the
law of the court seized of the case, is considered
to be equivalent to willful misconduct," or "if
the damage is (similarly) caused . . . by any
agent of the carrier acting within the scope of
his employment" (WC, as amended by the Hague
Protocol and Montreal Agreement).
PART VI — LAWS ON TRANSPORTATION
AND PUBLIC UTILITIES
01. DEFINITIONS
"Aeronautics or Aviation " refers to the science and
art of flight (Sec. 3, CAAA). Other important terms
may be defined as follows (Ibid.):
1) "Air carrier or operator" refers to a person who
undertakes, whether directly or indirectly, or by
a lease or any other arrangements, to engage in
air transportation services or air commerce.
2)
25.05. JPUWSDICnON/VENUE
The court where the carrier is domiciled;
2)
The court where the carrier has its principal
-----------------------------place of business;________________________
a)
b)
3)
The court where the carrier has an estab­
lishment by which the contract has been
made; or
4)
The court of the place of destination.
Article 28(1) of the Warsaw Convention is juris­
dictional in character.
3)
"Aircraft" refers to any machine that can derive
support in the atmosphere from the reactions of
the air other than the reactions of the air against
the earth's surface. The term "aircraft," when
used in the CAAA or in regulations issued there­
under shall refer to civil aircraft only, and will
not include State or public aircraft.
4)
"Airworthiness" means that an aircraft, its en­
gines, propellers, and other components and ac­
cessories, are of proper design and construction,
and are safe for air navigation purposes, such
design and construction being consistent with
accepted engineering practice and in accordance
with aerodynamic laws and aircraft science.
5)
"Civil aviation" refers to the operation of any
civil aircraft for the purpose of general aviation -;.,
?opeMionsraerial work orcommercial air tra h s-" 1*’■’ ' ^
port operations.
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, Inc., G.R.
No. 171092, March 15, 2010).
26. CIVIL AVIATION
The governing law is now Republic Act No. 9497 or
the Civil Aviation Authority Act o f2008 which was passed on
March 4,200.8 (hereinafter called CAAA).
"- » ;
"Air commerce or commercial air transport opera­
tion" refers to and includes scheduled or nonscheduled air transport services for pay or hire,
the navigation of aircraft in furtherance of a
business, the navigation of aircraft from one
place to another for operation in the conduct of
a business, or an aircraft operation involving the
transport of passengers, cargo or mail for remu­
neration or hire.
Under Article 28(1) of the Warsaw Convention,
the plaintiff may bring the action for damages before
1)
481
6) "Domestic air commerce" means and includes air
PART VI — LAWS ON TRANSPORTATION
AND PUBLIC UTILITIES
REVIEWER ON COMMERCIAL LAW
482
commerce within thelimits of the PMIippifte ter­
ritory.
b)
Every ticket issued to a passenger by the
airline or air carrier concerned shall contain
among others the following condition printed
thereon: "Holder hereof and his hand-carried
luggage(s) are subject to search for, and seizure
of, prohibited materials or substances. Holder
refusing to be searched shall not be allowed to
board the aircraft," which shall constitute a part
of the contract between the passenger and the air
carrier (Sec. 9, R.A. No. 6235).
c)
The CAAA likewise authorizes the Director
General of the Civil Aviation Authority of the
Philippines (or CAAP) to have access to all civil
aircraft for their inspection (Sec. 38, CAAA).
The Director General is also authorized to
detain civil aircraft if: (1) the aircraft may not be
airworthy; (2) the airman may not be qualified or
physically or mentally capable for the flight; or
(3) the operation would cause imminent danger*1
to persons o r property on. the ground (Sec. 39,
7) "Domestic air transport" means air transportation
within the limits of the Philippine territory.
8) "Foreign air carrier or foreign air operator" means
any operator, not being a Philippine air operator^
which undertakes, whether directly or indirectly
or by lease or any other arrangement, to engage
in commercial air transport operations within
borders or airspace of the Philippines, whether
oh a scheduled or chartered basis.
9)
"Foreign air transport" refers to air transportation
between the Philippines and any place outside it
or wholly outside the Philippines.
"International commercial air transport" refers to
the carriage by aircraft of persons or property
for remuneration or hire or the carriage of mail*•
__________ between any two (2) or more countries.
10)
11)
—
"Philippine air carrier" means an air carrier who
483
CAAA):
is a citizen of the Philippines.
26.02. INSPECTION OF AIRCRAFT.
The duty to inspect aircraft is mandated under
Republic Act No. 62§5 which prohibits acts inimical
to civil aviation,
• a)
—
Aircraft companies which operate as public
utilities or operators of aircraft which are for
hire are authorized to open and investigate
suspicious packages and cargoes in the presence
of the owner or shipper, or his authorized
representatives if present; in order to help the
authorities in the enforcement of the provisions
of Republic Act No. 6235. If the owner, shipper
or-hi\: representative refuses to have the same
o'peneS'and inspected,' the airline or air carrier is
authorized to refuse the loading thereof (Sec. 8,
RA .N o.6235). '
PROBLEM:".
1.
A, as paying passenger, boarded a plane of X & Co.,
a duly authorized air carrier bound from Manila to
Cebu. Qn the way, the plane exploded in mid-air, and
crashed, causing the death of all persons on board. It
was determined that the mid-air explosion was due
to the explosive device contained in a suitcase by
another passenger in the ill-fated aircraft. If you are
the judge, how will you rule?
A:
I will make the carrier liable. The carrier is bound
to exercise extraordinary diligence in carrying its
passengers. It is presumed to be negligent when
., „its„. passengers,.,jdiedvwheA^the_ aircraft exploded., _
Moreover, the negligence of the carrier is apparent
because an explosive device was brought into the
carrier without being detected by the employees.
PART VI — LAWS ON TRANSPORTATION
AND PUBLIC UTILITIES
REVIEWER ON COMMERCIAL LAW
484
Under Republic Act No. 6235, the carrier is bound
to inspect and investigate suspicious packages that
are being brought into the aircraft. This duty was not
complied with because the explosive device was not
detected by the carrier' s personnel,
"Philippine aircraft" means an aircraft registered
in the Philippines in accordance with the requirements
of the CAAA (Sec. 3. CAAA).
a)
b)
The registry of aircraft and any transfer, lien,
mortgage or other interests in aircraft or aircraft
engines is maintained by the CAAP. The CAAP
is given the sole authority to register aircraft and
liens, mortgages or other interests in aircraft or
aircraft engines (Sec. 43, CAAA).
The certificate of registration is conclusive
evidence of ownership, except in a proceeding
where such ownership is, or may be, at issue
(Sec. 44, CAAA).
c)
No aircraft shall be eligible for registration unless
it is owned by or leased to a citizen or citizens of
the Philippines or corporations or associations
organized under the laws of the Philippines at
least sixty per centum (60%) of whose capital is
owned by Filipino citizens.
Exception: Foreign-owned or registered air­
craft may be registered if utilized by members of
aero clubs organized for recreation, sport or the
development of flying skills as a prerequisite to
any aeronautical activities of such clubs within
the Philippine airspace (Sec. 44, CAAA).
-**
d-)w~All conveyances*** madei-or executed, which
. ’ affects the title to, or interest in, any aircraft of
Philippine registry, or any portion thereof shall
be registered with the CAAP.
1)
EFFECT IF NOT REGISTERED. Valid only
with respect to the parties and their heirs,
assignees, executors, administrators, devi­
sees, or successors in interest, and any per­
son having actual notice thereof (Secs. 49
and 53, CAAA).
2)
EFFECT IF REGISTERED. Valid as against
all persons and any instrument, recording
of which is required, shall take effect from
the date of-its record in the books of the
Authority and not? from the date of its
execution (Sec. 49, CAAA).
-
26.03, NATIONALITY AND OWNERSHIP OF AIRCRAFT
e)
48S
The requirements are similar to the requirements
in land registration (Sec. 50, CAAA).
p. public Service act
27. PUBLIC SERVICE ACT " ^
27.01. What are the government agencies that replaced the
Public Service Commission?
a)
Land Transportation Franchising Regulatory Board
(LTFRB) — land transportation. (The Land
Transportation Office registers motor vehicles.)
b)
Maritime Industry Authority (MARINA) — water
transportation.
c)
National Telecommunications’ Commission —
communication utilities and services, radio
communications systems, wire or wireless tele­
phone and telegraph systems, radio and tele­
vision broadcasting systems and other similar
public utilities.
’’
d) Energy Regulatory Commission — electric or
~~yj?pwer companies (EPIRA Law, RArNo. 9136).
—* — - -
National Water Resources Council — water
i.-rresourcesc-^
e)
REVIEWER ON COMMERCIAL LAW
£)
g)
Civil Aviation. Authority — air transportation.
(The CAAP undertakes the maintenance and
operation of airports and other similar facilities.
The CAA P also registers aircrafts.)
Department o f Transportation and Communication
— trains or railroad companies.
h)
Toll Regulatory Board — toll facilities (Example:
SLEX).
27.02. What conditions must concur in the grant of certifi­
cate of public convenience (and necessity)?
a)
The grantee must be a citizen of the Philippines
or a corporation or entity sixty percent (60%) of
which is owned by such citizens;
b)
The grantee must have sufficient financial capa­
bility to undertake the service; and
c)___The service will promote public interest and
convenience in a proper and suitable manner.
Note.' The overriding principle, still, is public
interest, necessity and convenience.
27.03. Is a certificate of public convenience property in the
hands of the holder thereof?
A certificate of public convenience is a mere
license or a privilege and being neither a franchise nor
a contract/ it confers no vested or property right or
interest on the holder. However, in its purely private
aspect, it has value and may be considered property
that can be levied upon.
27.04. Certificate : of Public" Convenience (CPC) and
Certificate of Public Convenience and Necessity
(CPCN)
of Public Convenience is distinct from
Certificate of Public Convenience and Necessity. The
former is any authorization to operate public service
PART VI — LAWS ON TRANSPORTATION
AND PUBLIC UTILITIES
487
issued by the Public Service Commission for which no
franchise, either municipal or legislative, is required
by law. The latter requires a franchise issued by the
legislative department.
27.05. Prior or old operator rule
To carry out the purpose and intent for which
the Public Service Commission was created, the law
c o n te m p la te s that the first licensee will be protected
in his investment and will not be subjected to ruinous
competition. It is not therefore, the policy of the law
fo r the Public Service Commission to issue a certificate
of public convenience to a second operator when
a prior operator is rendering sufficient, adequate
and satisfactory service, and who in all things and
respects is complying with the rules and regulations
of the CoiruhBsion.
27.06. Grounds for Revocation of Certificate
------—a)— The holder violates or contumaciously refuses to
comply with any order, rule or regulation of the
commission.
b)
The holder is a mere dummy.
c)
The holder ceases operations or abandons the
service.
27.07. Notice and Hearing
a)
Required with respect to th e following:
1)
Issuance of certificate of public convenience
and certificate of public convenience and
necessity;
2)
Fixing of standards and qualifications;
3)
Fixing of standards for measuring quantity;
4)
Establishment of rules to secure accuracy of
all meters and all measuring appliances;
PART VI — LAWS ON TRANSB@KEA.TION
AND PUBLIC UTILITIES
REVIEWER ON COMMERCIAL LAW
b)
5)
Order to compel operators to furnish prop­
er service; and
6)
Allowing extension of facilities,
b)
Investigation of public utility companies;
2)
Valuation of properties of public utilities;
3)
Examination and test of measuring appli­
ances;
4)
Grant of special permits to make extra or
special trips in territories specified in the
certificate;
5)
Investigation of accidents; and
6)
Compel compliance with the laws and
regulations.
27.08. FRANCHISE
The term "franchise" includes not only authori­
zations issuing directly from Congress in the form
of a statute, but also those granted by administrative
agencies to which the power to grant franchises has
been delegated by Congress (Metropolitan Cebu Water
Services-United Broadcasting Networks v. National
Telecommunications Commission, supra; Albano v.
Reyes, 175 SCRA 264 [1989]; Philippine Airlines v.
Civil Aeronautics Board, 270 SCRA 538 [1997]).
District v. Adala, G.R. No. 168194, July 4,2007).
a)
Legislative franchise distinguished from a cer­
tificate of public convenience (CPC for short).
A legislative franchise is distinguished
from a CPC in that the former is a grant or privi­
lege from the sovereign power, while the latter is
a form of regulation through an administrative
agency (Associated Communications & Wireless
Services-United Broadcasting Networks v. National
Telecommunications Commission, G.R. No. 144109,
Feb. 17, 2003, citing Radio Communications Philip­
pines v. NTC, 150 SCRA 450 [1987]).
Is a legislative franchise necessary before a
public utility can be allowed to secure a certifi­
cate of public convenience?
There is a need to qualify the answer.
NO, if there is no statute requiring the same,
but YES, if the pertinent law requires such
legislative franchise. Although the trend is to
delegate the legislative power to authorize the
operation of legislative authorities, there are
laws that still require legislative franchises.
For example, the governing law (P.D. No. 576A) requires a franchise for the operation of
radio and television stations, hencer such law
must be followed and a franchise must be so
acquired. However, there are instances when a
franchise is not required by law as in the case
of Executive Order No. 30 which does not
require the Philippine Ports Authority to secure
a franchise to take over, manage and operate the
port complex. Similarly, no legislative franchise
is necessary for the operation of a domestic air
transport (Associated Communications & Wireless
NOT required with respect to the following:
1)
489
27.09. PUBLIC UTILITY
A "public utility" is a business or service en­
gaged in regularly supplying the public with some
commodity or service of public consequence such as
electricity, gas, water, transportation, telephone or
telegraph service (Metropolitan Cebu Water District v,
Adala, G.R. No. 168194, July 4,2007). For example, the
Water District is a public utility (Ibid.).
a)
What are the bases/reasons for regulation of
public utilities?
The regulation of public utilities is founded
upon the police powers of the State and statutes
490
REVIEWER ON COMMERCIAL LAW
prescribing rules for the control and regulation
of public utilities are considered valid exercise
thereof. When private property is used for a pub­
lic purpose and is affected with public interest, it
ceases to b e juris privati only and becomes subject
to regulation. The regulation is to promote the
common good. Submission to regulation may be
withdrawn by the owner by discontinuing use;
but as long as use of the property is continued,
the same is subject to public regulation (Republic
PART VI — LAWS ON TRANSPORTATION
AND PUBLIC UTILITIES
of discretion, good sense, and a fair, enlightened
arid independent judgment. The requirement
of reasonableness comprehends such rates
which must not be so low as to be confiscatory,
or too high as to be oppressive. In determining
whether a rate is confiscatory, it is essential also
to consider the given situation, requirements
and opportunities of the utility (Ibid.).
b)
o f the Philippines v. Manila Electric Company, G.R.
■No. 141314, Nov. 15, 2002).
In regulating rates charged by public utilities,
the State protects the public against arbitrary and
excessive rates while maintaining the efficiency and
quality of services rendered. However, the power
to regulate rates does not give the State the right to
prescribe rates which are so low as to deprive the
public Trtittty~uf a reasonable- return orHrtvestment.
Thus, the rates prescribed by the State must be one
that yields a fair return on the public utility upon
the value of the property performing the service and
one that is reasonable to the public for the services
rendered. The fixing of just and reasonable rates
involves a balancing of the investor and the consumer
interests (Ibid.).
What is the standard that should be used when
an administrative body fixes the rates of public
: ' Utilities?::-1
In the fixing of rates, the only standard
which the legislature is required to prescribe
for the guidance of the administrative authority
is that the-rate:be. reasonable and just. It has
been held that even in the absence of an express
requirement as to~reasonableness, this standard
may be implied. What is a just and reasonable
■rate.-is a question of-fact calling for the exercise
..................->
What are the factors that should be considered
in determining the just and reasonable rates?
In determining the just and reasonable
rates to be charged by a public utility, three
major factors are considered by the regulating
agency: a) rate of return; b) rate base; and c)
the return itself or the computed revenue to be
earned by the public utility based on the rate
of return and rate base. The rate of return is a
judgment percentage which, if multiplied with
the rate base, provides a fair return on the public
utility for the use of its property for service to the
public. The rate of return of a public utility is not
prescribed by statute but by administrative and
judicial pronouncements. The Supreme Court
has consistently adopted a 12% rate of return
for public utilities. The rate base, on the other
hand, is an evaluation of the property devoted
by the utility to the public service or the value of
invested capital or property which the utility is
entitled to a return (Ibid.).
27.10. Regulation of Rates
a)
491
c)
Should operating expenses be considered in
the determination of a just and reasonable rate?
YES. The principle behind the inclusion of
operating expenses in the determination of a just
and reasonable rate is to allow the public utility
to recoup ihe?reasonable amount of expenses it
has incurred in connection with the services it
provides. It does not give the public utility the
REVIEWER ON COMMERCIAL LAW
492
license to indiscriminately charge any and all
types of expenses incurred without regard to the
nature thereof, i.e.r whether or not the expense is
attributable to the production of services by the
public utility. To charge consumers for expenses
incurred by a public utility which are not related
to the service or benefit derived by the custom­
ers from the public utility is unjustified and in­
equitable (Ibid.).
d)
PART VI — LAWS ON TRANSPORTATION
AND PUBLIC UTILITIES
customers and LGU concerned in its action on
the application or motion for provisional rate
adjustment (Ibid.).
27.11. Foreign Equity in Public Utilities
a)
Section 11 of Article XII of the Constitution
provides that "No franchise, certificate or any
other form of authorization for the operation
of a public utility shall be granted except to
citizens of the Philippines or to corporations
or associations organized under the laws of
the Philippines at least sixty per centum (60%)
of whose capital is owned by such citizens, nor
shall such franchise, certificate or authorization
be exclusive in character for a longer period
than fifty (50) years." It likewise provides that
"the participation of foreign investors in the
governing body of any public utility enterprise
shall be limited to their proportionate share in
its capital, and all the executive and managing
officers of such corporation or association must
be citizens of the Philippines."
b)
However, the Supreme Court clarified in Tatad
v. Garcia, Jr. (243 SCRA 436 [1995]) that the limit
imposed by the Constitution on foreign equity
applies only to the operation of a public utility
and not to ownership of the facilities. The right to
operate a public utility may exist independently
and separately from the ownership of the
facilities thereof. For example, a corporation may
own the rail tracks, rolling stocks like coaches,
rail stations terminals and power plant without
being a public utility. In the same manner, a
common carrier may lease its vehicle like an
airplane from another corporation which does
not have a franchise. Ownership of the assets
w0Hly do nbttfequire 60% FiliplnO'eqUity;"
Can an administrative body that regulates a
public utility grant a provisional rate increase
^without prior1evidentiary hearing?
YES. The Supreme Court ruled in a num­
ber of cases that an administrative agency may
be empowered by law to approve provisionally,
when demanded by urgent public need, rates of
public utilities without a hearing. The reason is
easily discerned from the fact that provisional
rates are by their nature temporary and subject
to adjustment in conformity with the definitive
rates approved after final hearing. Thus, the Su­
preme Court sustained the provisional approval
of increased rates by the Land Franchising and
Regulatory Board and Toll Regulatory Board
(Ceferino Padua, et al. v. Hon. Santiago Ranada,
G.R. No. 141949, Oct. 14,2002).
e)
The authority over petitions for authority
to increase a generation charge of electricity
or motions for provisional rate adjustments
now falls within the jurisdiction of the ERC
(NASECORE v. ERC, G.R. No. 163935, Feb. 2,
2006). To be valid, the approval of an application
to increase the charge requires: (1) the publication
of the application itself, not merely the notice
of hearing issued, by the ERQ jn ju iew sp ap er
of general circulation in the locality where the
applicant operates; and (2) the need for the ERC
to consider the comments or pleadings of the
493
‘~
c)
Voting Control Test and Beneficial Ownership Test
applies. Full beneficial ownership of 60% of the -
494
REVIEWER ON COMMERCIAL L a W
outstanding capital stock and 60% of the vot­
ing shares are both required. Hence, preferred
non-voting shares shall not be included in the
computation of compliance with the 60% Fili­
pino equity requirement under the Constitution
(Gamboa v. Teves, G.R. No. 176579, June 28, 2011
and Oct. 9, 2012).
P A R T V II
INTELLECTUAL PROPERTY CODE
(R.A. No. 8293)
27.12, Non-exclusivity
Section 11 of Article XII of the Constitution like­
wise prohibits the issuance of a franchise, certificate,
or authorization that is exclusive in character or for a
longer period than fifty (50) years.
1. STATE POLICIES
a)
The State recognizes that an effective intellectual
and industrial property system is: (1) vital to the
development of domestic and creative activity;
(2) facilitates transfers of technology; (3) attracts
foreign investments; and (4) insures market ac­
cess for our products (Sec. 2, Intellectual Property
27.13. Acts Requiring Approval (Sec. 20, Public Service
Act) by Successor Agencies of the PSC include:
(1)
Fixing of rates;
(2)
Establishment, maintenance and operation
of new units and extension of facilities or
service;
;--------------------------------------- -
b)__ The State likewise recognizes that the use of intellectual property bears social function (Ibid.).
(3)
Abandonment of station;
c)
(4)
Issuance of stocks, bonds and other evi­
It is also a State policy to streamline administra­
tions of administrative procedures concerning
intellectual property, liberalize registration of
transfer of technology, and enhance the enforce­
ment of intellectual property rights.
d)
Protection of intellectual property is likewise
mandated by the Constitution. Section 13 of
Article XIV of the Constitution provides that
the: "State shall protect and secure the exclusive
rights of scientists, inventors, artists, and other
gifted citizens to their intellectual property and
creations, particularly when beneficial to the
people, for such period as may be provided by
Code, IPC for short).
dence of indebtedness;
(5)
(6)
Sale, alienation, mortgage, encumbrance,
lease, merger or consolidation of proper­
ties, franchises, certificates, privileges, or
rights or any part thereof; and
Sale of shares that will make the transferee
the owner of 40% of the subscribed capital.
.
law."- •-
e)
^-
Treaties are part of our laws, hence various
provisions of treaties are incorporated in the IPC.
496
REVIEWER ON COMMERCIAL LAW
PART VII — INTELLECTUAL PROPERTY CODE
497
(R.A. No. 8293)
For instance, the enactment of the IPC is partly
rhe result of the mandate of the Agreement
Establishing the World Trade Organization and
the WTO's Agreement on Trade Related Aspects
of Intellectual Property Rights or TRIPS (Mirpuri
of its components, generally known among
or readily accessible to persons within the
circles that normally deal with the kind of
information in question;
v. CA, 318 SCRA 516 [1999]).
2. THE TERM “INTELLECTUAL PROPERTY9’ CONSISTS
OF fSec. 4.1, IPC):
a)
Copyright and related rights;
b)
Trademarks and Service Marks;
c)
Patents;
„
c)
d)
Geographic indications;
Layout Designs (Topographies) of Integrated
Circuits;
f)
Protection of Undisclosed Information; and
g)
Industrial Designs.
.....— ■
— —
^
' —
a)
Geographic indications —- indications which
identify a good as originating in the territory
or a region or locality in that territory, where a
given quality, reputation or other characteris­
tics of the good is essentially attributable to its
geographical origin (Sec. 3, Art. 22[1], TRIPS for
short). Example: Indications which identify wine
as coming from a specific region in France.
b)
' Protection of Undisclosed Information — natu­
ral and legal persons shall have the possibility
of preventing information lawfully within their
controkfrom being disclosed to, acquired by, or
used; by others; without their consent in a man­
ner contrary to honest commercial practices (i.e.,
breach of contract, breach of confidence, fraudulehf inducement, etc.) so long as the information:
1)
Has commercial value because it is secret;
and
,,..
3)
Has been subject to reasonable steps under
the circumstances, by the person lawfully in
control of the information, to keep it secret
(Sec. 7, Art 39[2], TRIPS).
e)
2.0L C oncepts;p-’
2)
Is secret in the sense that it is not, as a body
or in the precise configuration and assembly
Trademark, copyright and patents are different
intellectual property rights that cannot be inter­
changed with one another. A trademark is any
visible sign capable of distinguishing the goods
(trademark) or services (service mark) of an en­
terprise 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 intellectual
creations in the literary and artistic domain pro­
tected from the moment of creation. Patentable
inventions, on the other hand, refer to any tech­
nical solution of a problem in any field of human
activity which is new, involves an inventive step
and is industrially applicable (Kho v. CA, G.R.
No, 115758,March 11,2002),
d)
Utility model — models of implement or tools
of any industrial product even if not possessed
of the quality of invention but which is of "prac­
tical utility."
e)
Industrial design — any composition of lines or
colors or any three-dimensional form, whether
or not associated with lines or colors (Sec. 112,
ICP). i
REVIEWER ON COMMERCIAL LAW
498
PART VII ■— INTELLECTUAL PROPERTY CODE
499
(R.A. No. 8293)
f)
"Drugs and medicines" — refer to any chemical
compound or biological substance, other than
food, intended for use in the treatment, preven­
tion or diagnosis of disease in humans or ani­
mals (Sec. 41c], R.A. No. 9502, otherwise known as
Universally Accessible Cheaper and Quality M edi­
cine Act o f 2008).
3. INTERNATIONAL LAW RELATED PROVISIONS
4. THE INTELLECTUAL PROPERTY OFFICE (IPO) — THE
BODY THAT ADMINISTERS THE POLICIES SOUGHT TO
BE IMPLEMENTED UNDER THE iPC
4.01. FUNCTIONS OF THE IPO (Sec. 5, IPC)
a)
b)
Examine applications for the registration of
marks, geographic indications, integrated cir­
cuits;
c)
Register technology transfer arrangements and
settle disputes involving technology transfer
payments;
d)
Promote the use of patent information as a tool
for technology development;
e)
Publish regularly in its own publication the
patents, marks, utility models and industrial
3.01. RECIPROCITY (Sec. 3, IPC)
Any person who is a national or who is domiciled
or has a real and effective industrial establishment in a
country which is: (1) 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 (2) extends reciprocal
rights to nationals of the Philippines by law, shall
be entitled to benefits to the extent necessary to give
-----------------gtforl- i-n an y p ro v is io n nf gnrfi m n v p n tin n f tre a t y n r
reciprocal law, in addition to the rights to which any
owner of an intellectual property right is otherwise
entitled by this act.
desi^s;Asstted-mrd--appm¥edr-&^AkeAedm0^~
logy transfer arrangements registered;
f)
Administratively adjudicate contested proceed­
ings affecting intellectual property rights; and
g)
Coordinate with other government agencies and
the private sector to strengthen the protection of
intellectual property rights in the country.
3.02. NATIONAL TREATMENT
E ach m e m b e r
o f t h e W T O 's Agreement on
Trade-Related Aspects of Intellectual P ro p e rty Rights
(T R IP S ) s h a ll a c c o r d to n a tio n a ls o f th e o th e r m e m b e r s
n o le s s fa v o r a b le t h a n th a t it a c c o rd s it o w n n a tio n a ls
w ith re g a rd to th e p ro te c tio n o f in te lle c tu a l p r o p e r ty
(A rt 3, TRIPS).
3.03. MOST-FAVOURED-NATION TREATMENT
W ith r e g a r d t o th e . p r o te c tio n o f in te lle c tu a l
...
property, any advantage, favour, p riv ile g e or
immunity granted by: a Member to the nationals of
a n y o th e r c o u n tr y .sh a ll be accorded im m e d ia te ly a n d
unconditionally to the nationals of all other m e m b e r s
of WTO's TRIPS (Art 4, TRIPS).
Examine applications for grant of letters patent
for inventions and register utility models and in­
dustrial designs;
Custody of all records, books, drawings,
specifications, documents, and other papers and
things relating to the intellectual property rights
applications filed with the Office.
Note: While registration of other intellectual proper­
ties are with the IPO, copyrighted works are still deposited
with the National Library and the Supreme Court. However,
the IPO exercise original jurisdiction over disputes relating
to the terms of a license involving the author's rights (Secs.
7,l[c] and 191, IPC).
REVIEWER ON COMMERCIAL LAW
500
PARTVII — INTELLECTUAL PROPERTY CODE
(R.A, No. 8293)
5, COPYRIGHT
matic, historical, legal, philosophical, scien­
tific or other work;
5.01. DEFINITIONS (Sec. 17% IPC)
"Copyright" — right over literary and artistic
2)
works which are original intellectual creations in
the literary and artistic domain protected from
the moment of creation (Kho v. CA, supra).
The composer, as to his musical composi. tion;
3)
The painter, sculptor, or other artist, with re­
spect to the product of his art;
b)
"Author" — is the natural person who has
created the work.
4)
The scientist or technologist or any other person
with regard to his discovery or invention
c)
"Collective Work" — is a work which has been
created by two (2) or more natural persons at
the initiative and under the direction of another
with the understanding that it will be disclosed
by the latter under his own name and that con­
tributing natural persons will not be identified.
a)
"Joint Work" — is a work prepared by two or
more authors with the intention that their con­
tributions be merged into inseparable or inter--------------------- dependent parts of a unitary whole/ i.e., medical textbook that is jointly authorized by two or
three experts.
d)
e)
"Work of Applied Art" — is an artistic creation
with utilitarian functions or incorporated in a
useful article, whether made by hand or pro­
duced on an industrial scale.
f)
"Performers" — are actors, singers, musicians,
(Art. 721, NCC).
b)
Rights over copyrights are conferred from the
______ moment of creation (Sec. 172.1, IPC). The work is
deemed created if something original is expressed in
a fixed manner.
5.04. Who owns the copyright?
a)
One creator — creator, his heirs or assigns owns
copyright.
b)
Joint creation — co-authors shall be the original
owners of the copyright and in the absence of
agreement, their rights shall be governed by the
rules on co-ownership.
Exception: Work of joint authorship con­
sists of parts that can be used separately and the
author of each part can be identified, the author
of each part shall be the original owner of the
copyright in the part that he has created.
5.02. CIVIL CODE PROVISIONS
Intellectual creation is one of the modes of
acquiring ownership under the Civil Code.
a) ..The following persons acquire ownership by
intellectual creation:
1)
The author with regard to -his:literary, dra­
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 (Art. 723, NCC).
5.03. When rights over copyrights are conferred
dancers, and other persons who act, sing,
declaim, play in, interpret, or otherwise perform
literary and artistic work.
" '
501
c)
Commissioned work — the person commission­
ing owns the work; ownership of copyright re­
502
REVIEWER ON COMMERCIAL LAW
mains with the creator, unless there is a written
stipulation to the contrary.
d)
e)
Audiovisual work — producer for purposes of
exhibition; for all other purposes, the producer,
the author of the scenario, the composer, the
film director, the photographic director and the
author of the work are the owners.
Pseudonymous and anonymoul works— unless
the author is undisputably known, the publisher
shall be presumed to be the representative of the
author (Secs, 178 and 179, IPC).
f)
Employee's work during course of employment
— employer, if the result of regular functions or
duties but the employee owns it if it is not part
of his duties.
5.05. Duration of Copyright (Secs. 213 and 214, ICP)
a)---- Literary artistic works and derivative works —
during the lifetime of the crcat e L~and for fifty
(50) years after his death.
b)
c)
Joint creation — the economic rights shall be
protected during the life of the last surviving
author and for fifty (50) years after the death of
the last surviving author.
Anonymous or,a pseu dQnymousjvQrk — till the
end of fifty (50) years following the date of their
first publication. The fifty (50) year duration
commences from January 1 following the date of
publication.
d)
Work of applied art — twenty-five (25) years
from the date of making.
e)
Photographic works — fifty (50) years from
the publication jof thejwork, orjfrom making if
unpublished (the iam e te rm lF given to audio­
visual works produced by photography or
analogous processes).
PART VII — INTELLECTUAL PROPERTY CODE
(R.A. No. 8293)
f)
503
Broadcast — twenty (20) years from the date of
broadcast.
5,06. COPYRIGHTABLE OBJECTS
a)
Literary and Artistic Works:
1) Books, pamphlets, articles and other writ­
ings;
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;
5) Dramatic on dramaticctemusical composi­
tions; choreographic works or entertain­
ment in dumb shows;
6) Musical compositions, with or without
words;
7) Works of drawing, painting, architecture,
sculpture, engraving, lithography or other
works of art; models or designs for works
of art;
:
8) Original ornamental designs: or models
for articles of manufacture, whether or not
registrable as an industrial design, and
other works of applied art;
9) Illustrations, maps, plans, sketches, charts
and three (3) dimensional works relative
■ to geography, topography, architecture or
science;
■ ■ ..; 10) Drawings or plastic works of a scientific or
technical character;
11) Photographic works including works pro­
duced by a process analogous to photogra­
phy; lantern slides;
504
REVIEWER ON COMMERCIAL LAW
PART VII — INTELLECTUAL PROPERTY CODE
(R.A. No. 8293)
12) Audiovisual works and cinematographic
works and works produced by a process
analogous to cinematography or any pro­
cess for making audiovisual recordings;
character of mere items op p ress informa­
tion" (Sec. 175, JPC). Example; The writings
of a columnist in a newspaper is subject to
copyright but if he mentions a news item
like bomb explosion in a certain place, he
cannot claim protection regarding this
news item.
13) Pictorial illustrations and advertisements;
14) Computer programs; and
b)
15) Other literary scholarly scientific and artis­
tic works (Sec. 172, IPC).
c)
N ote; The author of speeches, lectures,
sermons, addresses, and dissertations shall have
the exclusive right of making a collection of his
works (Sec. 176.2, IPC).
d)
Derivative works:
1)
Dramatizations, translations, adaptations,
abridgments, arrangements, and other al­
terations of literary or artistic works; and
----------------2)— Collections of literary, scholarly or artistic
works, and compilations of data and other
materials which are original by reason of
the selection or coordination arrangement
of their contents (Sec. 173, IPC).
Any idea, procedure, system, method or opera­
tion, concept, principle, discovery or mere data
as such, even if they are expressed, explained,
illustrated or embodied in a work (Sec. 175, IPC;
Art. 10[1], TRIPS). Thus, the format of a televi­
sion game show is not subject to a copyright (Joa­
(Sec. 175, IPC).
e)
News of the day and other miscellaneous facts
havinguthe character of mere items of press
information (Sec. i75, IPC).
~~~~~
1)
No protection is given to "news of the day
and other miscellaneous facts having the
The trade name and container of a medicated
cream is the proper subject of trademark. Hence,
copyright and patent registration of the name
and container would not guarantee the regis­
trant the right to the exclusive use of the same,
not being the proper subjects thereof (Kho v. CA,
supra).
quin v. Drilon, G.R. No. 108946, Jan. 28,1999).
b)
Any official text of a legislative, administrative
or legal nature, as well as any official translation
thereof (Sec. 175, IPC).
Any work of the Government of ^ P h ilip p in es
However prior approval of the government
agency or office wherein the work is created
shall be necessary for exploitation of such work
for profit. Such agency or office may, among
other things, impose as a condition the payment
of royalties. No prior approval or conditions
shall be required for the use of any purpose of
------ -statutes/ -rules and regulations, and speeches,
lectures, sermons, addresses, and dissertations,
pronounced, read or rendered in courts of justice,
before administrative agencies, in deliberative
assemblies and in meetings of public character
5.07. UNPROTECTED WORKS
a)
505
f)
In the same manner, copyright registration of a
drawing or pictorial illustration which depicts
. ... light.boxes^orjbox-type electrical devices pro­
tects the drawing but not the light box depicted
therein (Pearl & Dean [Phil] v. Shoemart, Inc., et
al., G.R. No. 148222, Aug. 15,2003).
FART VII — INTELLECTUAL PROPERTY CODE
REVIEWER ON COMMERCIAL LAW
506
507
(R.A. No, 8293)
5.09. PUBLISHER'S RIGHTS
5.08, RIGHTS OF AUTHORS
b)
Economic Rights
a)
Economic rights shall consist of the exclu­
sive right to: (a) carry out, (b) authorize, or (c)
prevent the following acts:
The right to publish granted by the author, his
heirs, or assigns;
b)
The publisher shall have a copyright consisting
merely of the right of reproduction of the typo­
graphical arrangement of the published edition
of the work (Sec. 174, ICP);
c)
If submitted to newspaper, magazine and the
like, the right to publish once materials sent by
a writer, a photographer, an artist to a periodical
or newspaper publisher, but such writer or artist
retains his copyright on the piece (Sec. 180.3,
1)
Reproduction of the work or substantial
portion of the work;
2)
Dramatization, translation, adaptation,
abridgment, arrangement or other transfor­
mation of the work;
3)
First public distribution of the original and
each copy of the work;
4)
Rental of the original or a copy of an audio­
visual or cinematographic work;
5)
Public display of the original or a copy of
the work;
6)
Public performance ot the work; and
7)
Other communication to the public of the
work (Sec. 177, IPC).
IPC).
5.10. ACTS THAT DO NOT INFRINGE COPYRIGHT
a)
Recitation or performance of a work: (i) made
accessible to the public, (ii) privately done, (iii)
free of charge, (i.v) strictly for a charitable or reli­
gious institution;
b)
Making of quotations from a published work: (i)
compatible with fair use, (ii) extent is justified by
the purpose, (iii) source and name of the author,
appearing on work, must be mentioned;
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: (i) for information purposes, (ii) not
expressly reserved, and (iii) source is already
indicated;
d)
Reproduction and communication to the pub­
lic of literary, scientific or artistic works as part
of reports of current events by means of photo­
graphy, cinematography or broadcasting to the
extent necessary for die purpose;
- -
e)
Inclusion of a work in a publication, broadcast,
or other communication to the public, sound
Moral Rights
1)
Require that the authorship of the works be
attributed to him, in a prominent way on
the copies, and with the public use of the
work;
2)
Make any alterations of his work prior to,
or to withhold it from publication;
3)
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; and
4)
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, IPC),
fill!
a)
REVIEWER ON COMMERCIAL LAW
f)
l)
Single copy reproduction of a published work
by natural person exclusively for research and
private study (even without authorization of
owner);
Recording made in schools, universities, or
educational institutions of a work included in
a broadcast for the use of such schools, univer­
sities 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 for
brief excerpts of the work;
m)
Reproduction by libraries of: (i) fragile works,
(ii) isolated articles in composite works, (iii)
brief portions of published work, (iv) to preserve
or replace copy;
n)
One back-up copy of computer program.
Making of ephemeral recordings: (i) by a broad­
casting organization, (ii) by means of its own
facilities, (iii) for use in its own broadcast;
h)
Use made of a work by or under the direction
or control of the Government (Government, National Library, Educational, Scientific, or protessional institutions) for public interest compatible
with fair use;
j)
k)
509
recording o r film if made b y way c f illustration
for te a c h in g purposes c o m p a tib le w ith fair u s e
and the source and name of th e au th or, appearing
on work, must be mentioned;
g)
i)
PART VII — INTELLECTUAL PROPERTY CODE
(R.A. No. 8293)
. 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 chari­
table or educational purpose only and the aim is
not profit-making;
Public display of the original or a copy of the
work not made by means of a film, slide, televi­
sion 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 successors
in title;
Any use made of a work for the purpose of any
judicial proceedings; or for the giving of profes­
sional advice by a legal practitioner;
5.11. FAIR USE
Fair use of a copyrighted work for criticism,
comment, news reporting, teaching including mul­
tiple copies for classroom ussy scholarship, research
and similar purposes is not an infringement of copy­
right (Sec. 185,1PC).
a)
Factors to consider to determine whether use is
fair or not:
1)
Purpose and the character of the use;
2)
Nature of the copyrighted work;
3)
Amount and substantiality of the portions
used; and
4)
Effect of the use upon the potential market
of the copyrighted work.
5.12. IMPORTATION FOR PERSONAL PURPOSES
The importation of a copy of a work by an indi­
vidual for his personal purposes shall be permitted
without the authorization of the author of, or other
owner of copyright in, the work under the following
circumstances:
a)
Copies of the work are not available in the Phil;ippines/aaiid: ~ ^
-- -1) ' One (1) copy at one time is imported, for
strict individual;
b)
2)
By Authority of and for the use of the Phil­
ippine Government; or
3)
Religious, Charitable or Educational Soci­
ety or institution imported not more than
three (3) copies per title (or kind) provided
they are not for sale;
Copies form parts of libraries and personal bag­
gage belonging to persons or families arriving
from foreign countries and are not intended for
sale: Provided, That such copies do not exceed
three (3) (Sec, 190, IPC).
BAR PROBLEMS:
1.
Solid Investment House (SOLID) commissioned Mon
Blanco and his son Steve, both noted artists, to paint
a mural for the Main Lobby of the new building of
SOLID for a contract price of P52 Million, a) Who
owns the mural? Explain, b) Who owns the copyright
of the mural? Explain.
A;
a)
;
How made ■
— when there is piracy or substantial
reproduction. If so much is taken that the value
of the original work is substantially diminished
or the labors of the original author are substan­
tially and to an injurious extent appropriated by
another (Habana v. Robles, G.R. No. 131522, July
19,1999).
b)
Remedies
1)
Mon Blanco and his son Steve own the copyright.
While Section 17&4 of the IPG provides that the
work belongs to the person who commissioned
---------------- it, it is also provided that the copyright thereto
shall remain with the creator unless there is a
written stipulation to the contrary.
2.
Injunction to prevent infringement (Sec.
3)
^ **
"" . *
,r, ,,
Action for damages which should be filed
within four (4) years. Damages are assessed
on the basis of the proof alleged by the
plaintiff of sales made by the defendant of
the infringing work minus whatever costs
the defendant may be able to prove and
appreciated by the court.
Criminal case. The infringer also exposes
himself to criminal liability wherein the law
prescribes penalties of imprisonment and
fines, including subsidiary imprisonment
in case of insolvency (Sec. 218).
,i
.. ,
..
Since SOLID commissioned Mon Blanco
and his son m do the work and paid for the
work in the sum of P52Million, SOLID owns the
mural.
b)
216).
2)
SOLID owns the m ural In case of commissioned
work, the person who so commissioned the
work shall have ownership of the work (Sec.
178.4, IPC).
5.13. INFRINGEMENT
a)
511
PART VII — INTELLECTUAL PROPERTY CODE
(R.A. No. 8293}
REVIEWER ON COMMERCIAL LAW
510
In an action for damages on account of an infringement
of a copyright, the defendant (the alleged pirate)
raised the defense that he was unaware that what
he had copied was a copyright material. Would this
defense be valid?
A:
NO, the defense would not be valid. The rights
conferred by Republic Act No. 8293, otherwise
known as the "Intellectual Property Code/' insofar
as copyright is concerned, subsists from the moment
of creation (Sec. 172.1). There would be infringement
of this right the moment the defendant copies the
copyrighted material. It is immaterial whether the
defendant was unaware that what he had copied was
..........-a copyrighted material -——
—
.......
3.
Diana and Piolo are famous personalities in showbusiness who kept their love affair secret. They use a
Kmc.
512
REVIEWER ON COMMERCIAL LAW
special instant messaging service which allows them
to see one another's typing on their own screen as
each letter key is pressed. When Greg, the controller
of the service facility, found out their identities, he
kept a copy of all the messages Diana and Pidlo sent
each other and published them. Is Greg liable for
copyright infringement? Reason briefly.
A:
PART VII — INTELLECTUAL PROPERTY CODE
(R.A. -No. 8293)
6. TRADEMARKS
a)
YES. Greg is liable for copyright infringement
Letters are protected works under Section 172 of the
Intellectual Property Code. Hence, the publication of
the letters is an infringement on the right of Diana
and Piolo. The law does not distinguish if the letters
are handwritten or; in electronic form. Hence, the
messages are protected works under the Intellectual
Property Code.
BR and CT are noted artists whose paintings are
highly prized by collectors. Dr. DL commissioned
them to paint a mural at the main lobby of his new
hospital for children. Both agreed to collaborate on
--------- the-pre|eg4-for a totaLfee-oLiw o million pesos to be
equally divided between them. It was also agreed
that Dr. DL had to provide all the materials for the
painting and pay for the wages of technicians and
laborers needed for the work on the project. Assume
that the project is completed and both BR and CT are
fully paid the amount of P2M as artists' fee by DL.
Under the law on intellectual property, who will own
the mural? Who will own the copyright in the mural?
Why? Explain. -
4.
A:
DL owns the mural while BR and CT own the copyright
over the mural. Section 178.4 of the Intellectual
. Property Code provides that in case of commissioned
work, the creator owns the copyright, but the work
itself belongs to the person who commissioned its
creation. The person who commissioned the work
^ -^ -.w ilL o w n the copyright, onlw iC there is a written
stipulation to that effect. Tn the present case, BR and
CT own the copyright, since there is no stipulation to
the contrary.
513
TRADEMARK — 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 (Kho v. CA, supra). Thus, the basic
requirements are:
1)
There must be a visible sign. Example: A
sound of a musical instrument cannot
be a scent of a perfume. It can be words,
acronyms, logos, slogans, designs, figures,
pictographs, or portraits.
2)
It must be capable of distinguishing the
goods of an enterprise. (Distinctiveness)
h)
COLLECTIVE MARK — any visible sign desig­
nated as such in the application for registration
and capable of distinguishing the origin or any
-------------------- ether-common characteristic, includingihe quality of goods or services of different enterprises
which use the sign under the control of the reg­
istered owner of the collective mark.
Note: There is no need to register trade
names in order to secure protection for them
(Sec. 165.21a], IPC).
6.01. FUNCTIONS
a)
To indicate the origin of the goods to which they
are attached;
b)
To guarantee the standard of quality of the
goods; and
c)
To advertise the goods (Mirpuri v. CA, supra).
6.02. HOW MARKS ARE ACQUIRED
a)
The rights*in a mark shall be acquired through
registration with the Intellectual Property Office
or IPO (Sec. 122>IPC),
■REVIEWER-ON
COMMERCIAL LAW
1)
Registration is necessary before one can file
an action for infringement.
2)
A£t]Muse_,
(i)
PART VII — INTELLECTUAL PROPERTY CODE
(R.A. No. 8293)
competition or false designation of or­
igin (Secs. 168.2 and 169, IPC). Unfair
competition is present when: (1) there
is passing off of a product format of
another; (2) giving goods (or service)
the appearance of goods of another.
Prior use in the Philippines is not
required before registration.
(ii) However, there must be actual use
after registration. The registrant shall
file a declaration of actual use of the
mark with evidence to that effect with­
in three (3) years from the filing date
of application otherwise it may be can­
celled (Secs. 142.2 and 1511c], IPC). The
registrant is required to file a declara­
tion of actual use and evidence to that
effect, or shall show valid reasons for
non-use within one (1) year from the
fifth anniversary date of registration
b)
When the law states the right is acquired from
the time of registration, it is actually referring to
the filing date of application.
1)
(Sec. 145, IPC).
i f —rp o r(v)
Registration of a mark is not necessary
for purposes of filing a case for unfair
The filing date of an application shall be the
date on which the IPO received the follow­
ing indications and elements: (i) express or
implicit indication that the registration of
the mark is sought; (ii) identity of the ap­
plicant; (iii) indications sufficient to contact
the application or his representative; (iv)
reproduction of the mark; (v) list of goods
or services for which registration is sought
(Sec. 127, IPC).
that a .certificate-of registration of a mark shall be
prima facie evidence of the validity
of the registration, the registrant's
ownership of the mark, and of the
registrant's exclusive right to use the
same (Sec. 138, IPC). This means that
registrant's right may be questioned
by a person who has a better right,
including a prior actual user. This also
includes persons with internationally
known marks.
(iv) Registration is also not important to
protect the goodwill that identifies in
the mind of the public the goods he
manufactures or deals in (Sec.: 168.1,
515
2)
However, the right may also be protected
from the priority date. Subject to the rules
on reciprocity, where the application is filed
in the Philippines and the same applicant
previously filed an application in the coun­
tries covered by the reciproeity rule under
Section 3 of the IPC, the application is
deemed filed as of the day the application
was fi rst fi led in the foreign country (Sec. 131,
IPC). However, there will be no registration
in the Philippines until registered in a such
foreign country (See. 131.2, IPC).
6.03. MARKS THAT CANNOT BE REGISTERED
a)
Immoral, deceptive, or scandalous matter, or
matter which may disparage nr falsely suggest a
connection with persons, living or dead, institu­
tions, beliefs, or national symbols, or bring them
into contempt or disrepute;
PART VII — INTELLECTUAL PROPERTY CODE
REVIEWER ON COMMERCIAL LAW
c)
Consists of a name, portrait or signature iden­
tifying a particular living individual except by
his written consent, or the name, signature, or
portrait of a deceased President of the Philip­
pines, during the life of his widow, if any, except
by written consent of the widow;
d)
Identical with a registered mark belonging to
a different proprietor or a mark with an earlier
filing or priority date, in respect of: (i) the same
goods or services, or (ii) closely related goods or
services, or (iii) if it nearly resembles such a mark
as to be likely to deceive or cause confusion;
e)
Generic terms for goods or services;
Color by itself; and
i)
Shapes.
6.04. LIMITATIONS
a)
Doctrine of Secondary Meaning. A generic
or descriptive mark may later acquire the
characteristic of distinctiveness and can later
be registered if it acquires a meaning which is
different from its ordinary connotation. For
this to happen, there must be exclusive and
continuous use for a period of at least five (5)
years (Sec. 123.2, IPL). Examples: (1) "Selecta" for
bakery products; (27 "Ang TIbay'r for shoes (Arce
& Sons v. Selecta Biscuit Co., Inc., 110 Phil 858
[1961]; Ang v. Teodoro, 74 Phil 50 [1942]).
c)
Contractions and Coined Marks. Similarly,
marks may be registered even if they are contrac­
tions of or coined from generic and descriptive
terms (Example: "Salompas" [Marvez Commercial
d) •Arbitrary Use. Generic and descriptive terms
may also be registered as trademarks if they are
used in an arbitrary or fanciful manner. Example:
"Ivory? is generic for elephant tusk but arbitrary
and can be registered for soap.
a) The persons who may question the mark (that is,
__________ oppose registration, petition for the cancellation
thereof, sue for unfair competition) include per­
sons whose int^rnmioiiaJJy^jvelh t o
whether or not registered, is identical with or
confusingly similar to or constitutes a transla­
tion of a mark that is sought to be registered or is
actually registered (Secs. 123[3] and 131.3, IPC).
b)
.
h)
..... ..............
Customary sign in everyday language;
Composite marks. Although they cannot be
registered by themselves, generic and descriptive
marks, colors and shapes may he part of a
composite mark but there should be a disclaimer
and the person who registers them as part of a
mark will not acquire ownership thereto.
6.05. INTERNATIONALLY WELL-KNOWN MARKS
---------f)---- Jnrli iHin^jchararteristics of
goods like quality or quantity;
g)
b)
Co. v. Petra Hawpia & Co., 18 SCRA 1178,1966]).
...
Consists of the flag or coat of arms or other in­
signia of the Philippines or any of its political
subdivisions, or of any foreign nation, or any
simulation thereof;
- - -■
b)
517
(R.A. No. 8293)
■-
516
There is also protection for internationally
known marks registered in the Philippines for
goods thaLare not sim ilar with respect to which
registration is applied for (Rule 1011fl. Rules and
Regulatmts on Trademarks, etc,).
6.06. RIGHTS CONFERRED
a)
The right to the exclusive use of the mark for
one's own goods or services.
b)
The right to prevent others from the use of ml"
same mark for identical goods or services in the
-b ou rse of trade.-
51.8
REVIEWER ON COMMERCIAL LAW
PART VII — INTELLECTUAL PROPERTY CODE
519
(R.A. No, 8293)
c)
The right to the exclusive use of one's already
registered mark even for goods or services into
which one's venture expands, it used by others
for dissimilar products is likely to damage the
business interests of the first venturer (Sec, 147,
IPC).
of (Prosource International, Inc. v. Horphag
Research Management, GM. No. 180073, Nov,
25, 2009 citing Agpalo; Secs, 155.1 and 155.2,
IPC).
b)
*6*07, DURATION
Types of Confusion.
1)
The elements of trademark infringement under
Republic Act No. 8293 are as follows:
"Confusion of goods" — when an other­
wise prudent purchaser is induced to pur­
chase one product in the belief that he is
purchasing another, in which case defen­
dant's goods are then bought as the plain­
tiff's and its poor quality reflects badly on
the plaintiff's reputation (Mighty Corpora­
1)
tion v.'E&] Gallo, 434 SCRA 473 [2004]).
The duration is ten (10) years subject to indefinite
renewal for periods of ten (10) years each.
6.08. INFRINGEMENT
a)
The trademark being infringed is registered
in the Intellectual Property Office; how­
ever, in infringement of trade name, the
same need not be registered;
2)
2)----The trademark or trade name is repro--------------------- . dnrprf rmmtprfpjted. copied, or colorably
imitated by the infringer;
3)
The infringing mark or trade name is used
in connection with the sale, offering for sale,
or advertising of any goods, business or ser­
vices; or the infringing mark or trade name
is applied to labels, signs, prints, packages,
wrappers, receptacles or advertisements
intended to be used upon or in connection
with such goods, business or services;
4)
'
The use or application of the infringing
mark or trade name is likely to cause con­
fusion or mistake or to deceive purchasers
or others as to the goods or services them­
selves or as to the source or origin of such
goods or services or the identity of such
^ ^ business; and
5)
It is without the consent of the trademark
or trade name owner or the assignee there-
c)
"Confusion of business" •
— wherein the
goods of the parties are different but the
defendant's product can reasonably (though
mistakenly) be assumed to originate from
the plaintiff, thus deceiving the public into
believing that there is some connection
between the plaintiff and defendant which,
in fact, does not exist (Ibid).
Test. Jurisprudence has developed two tests in
determining similarity and likelihood of confu­
sion in trademark resemblance:
1)
The Dommaney Test focuses on the simi­
larity of the prevalent features of the com­
peting trademarks which might cause con­
fusion or deception, and thus infringement.
If the competing trademark contains the
main, essential or dominant features of an­
other, and confusion or deception is likely
to result, infringement takes place. Dupli. catiorypr imitation is not necessary; nor is
— it necessary tKafthe infringing label should
suggest an effort to imitate. The question is
whether the use of the marks involved is
520
REVIEWER ON COMMERCIAL LAW
PART VII — INTELLECTUAL PROPERTY CODE
(R.A. No. 8293)
In addition, the aural effects of the words and
letters contained in the marks should be consid­
ered in determining the issue of confusing simi­
larity. Examples of confusingly similar marks:
likely to cause confusion or mistake in the
mind of the public or deceive purchasers
(Ibid). The Dominancy test is now embod­
ied in Section 155 of the IPL and is there­
fore the controlling test (McDonald's Corp.
"(l)
v. L.C. Big Mak Burger, Inc., 437 SCRA 10,
37 [2004]). Examples: (i) "Mcjoy" and "Big
Mack" infringe the trademark of McDon­
ald's and the latter's dominant feature is
"Me" or "Mac" (Ibid.; Me Donald's Corp. v.
Mcjoy, 514 SCRA 95 [2007]); (ii) "Master
Flavor" is an infringement of the registered
marks "Master Roast" and "Master Blend"
The Holistic Test requires that the entirety
of the marks in question be considered in
resolving confusing similarity. Comparison
of winds is not the oi tly-^et^mkang-factor.
The trademarks in their entirety as they
appear in their respective labels or hang
tags must also be considered in relation
to the goods to which they are attached.
The discerning eye of the observer must
focus not only on the predominant words
but also on the other features appearing
in both labels in order that he may draw
his conclusion whether one is confusingly
similar to the other (Mighty Corp. v.EJ Gallo,
supra; Great White Shark Ent. v. Cavalde, Jr.,
G.R. No. 192294, Nov. 21, 2012).
d)
Aural Effects/Idem Sonans Rule. In dominancy
test, what are taken into account are signs, color,
design, peculiar shape or name, or some special,
easily remembered earmarks !of the brand that
readily attracts and catches the attention of the
ordinary consumer (Dermaline, Inc. v. Myra Phar­
maceuticals, Inc., G.R. No. 190065, Aug. 16, 2010).
PYCNOGENOL is confusingly similar to
PCO-GENOL, (2) "DERMALINE DER­
MALINE, INC." is confusingly similar to
"DERMALIN," (3) "NANNY" is confus­
ingly similar to "NAN"; "NAN" is the
prevalent feature (Prosource International
Inc. v. Horphag Research Management, G.R.
No. 180073, Nov. 25, 2009; Dermaline, Inc. v.
Myra Pharmaceuticals, Inc., G.R. No. 190065,
Aug. 16, 201Q; Societe Des Produits Nestle,
S.A. v. Martin Dy, Jr. G.R. No. 172276, Aug.
8, 2010).
(Societe Des Produit Nestle S.A. v. CA, 356
SCRA 207,217).
2)
521
e)
Expansion of Business Rule. The protection to
which the owner of a trademark is entitled is
-------not limited to guarding his -goods or business
from actual market competition with identical or
similar products of the parties, but extends to all
cases in which the use by a junior appropriator
of a trademark or 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 busi­
ness into the field or is in any way connected
with the activities of the infringer; or when it
forestalls the normal potential expansion of
his business (Dermaline, Inc. v. Myra Pharmaceu­
ticals, Inc., G.R. No. 190065, Aug. 16,2010; Societe
Des Produits Nestle, S.A. v. Martin Dy, Jr., G.R. No.
172276, Aug. 8, 2010).
f)
J J s e o f IdenticaLM ^ks Not NecessajfilyJProhib^
*• Tied. The use of identical Mark does not, by itself,
lead to a legal conclusion that there is trademark
infringement if they are NOT used for identical,
similar or related goods. Examples:
522
REVIEWER ON COMMERCIAL LAW
1)
FART VII — INTELLECTUAL PROPERTY CODE
(R.A. No. 8293)
Registration of the trademark "SHELL" for
that it can reasonably be assumed that they
originate from one manufacturer, in which
case, confusion of business can arise out of
the use of similar marks.
cigarettes was allowed although there is
prior registrant for gasoline and petroleum
products (Shell Company of the Philippines v.
CA, G.R. No, 1-4914:5, May 21,1979);
2)
2)
The trademark ESSO was allowed for ciga­
rettes although the same was registered
by another for petroleum products (Esso
Standard Eastern, Inc. v, CA, 116 SCRA 336
The registration of the trademark CAN­
NON was allowed for sandals despite the
(iii) The product's quality, quantity, or
size, including the nature of the pack­
age, wrapper or container;
(iv) The nature and cost of the articles;
4)
The mark which contains the word GALLO
can be used for cigarettes without infring----------------- ing__the rights of the owner of another mark
which also contains the same word but
which was registered for wine. It was noted
that the dominant feature of the GALLO
(v)
Related Goods. Non-competing goods may
be those which, though they are not in actu­
al competition, are so related to each other
The descriptive properties, physical
attributes or essentia] characteristics
with reference to their form, composition, texture or quality;
(vi.) The purpose of the goods;
cigarette trademark is the device of a roost­
er and the name of the manufacturer are
clearly stated. The labels for the GALLO
wine are diverse (Mighty Corporation v . E &
J Gallo, supra).
- 1)
The business (and its location) to
which the goods belong;
(ii) Tire class of product to which the
goods belong;
prior registration of the same for paints,
chemical products, toner and dyestuff
(Canon Kabushiki Kaisha v. CA and NSR Rub­
ber Corporation, 336 SCRA 266 [2000]); and
g ) .. Related. Goods and. Non-Related. Confusion of
goods is evident where the litigants are actually
in competition. However, confusion of business
may arise between non-competing interests and
goods that are related or would tend to indicate
a connection between the goods and the owner
of the mark (See Sec. 147.1, IPL).
Related Goods How Determined. In re­
solving whether goods are related, several
factors come into play. No single factor is
preeminent on:
(i)
[19821);
3)
523
(vii) Whether the article is bought for im­
mediate consumption, that is, day-today household items;
(viii) The fields of manufacture;
(ix) The conditions under which the article
is usually purchased; and
(x) The channels of trade through which
the goods flow, how they are distrib­
uted, marketed, displayed and sold.
3)
Variables to Consider. It has been held that
a . where the: products are different, the piidfT
owner's chance of success is a function of
many variables, such as the: (a) strength of
524
REVIEWER ON COMMERCIAL LAW
PART VII — INTELLECTUAL PROPERTY CODE
525
(R.A. No. 8293)
his mark, (b) degree of similarity between
the two marks, (c) reciprocal of defendant's
good faith in adopting its own mark>.(d)
quality of defendant's product, (e) proxim­
ity of the products, (f) likelihood that the
prior owner will bridge the gap, (g) actu­
al confusion, and (h) sophistication of the
buyers (Mighty Corp, v. E&J Gallo, supra).
4)
in the case of internationally "well-known"
marks, it is expressly provided under the
IPC that other persons or entities cannot
use the internationally "well-known" mark
even for unrelated goods (Sec. 123.1[f], 246
a)
b)
Corp. v. Daway, 416 SCRA 315 [2003]).
h)
Importation of Medicine. There is no infringe­
ment of trademarks or trade names of imported
or sold drugs and medicines as well as imported
or sold off-patent drugs and medicines which
bears marks that have not been tampered, unlawfully moainea or infringed upon (Sec. 159.4,
IPL as amended by R.A. No. 9502).
The .essential, elements of unfair competition
with respect to goods, are:
1)
Confusing similarity in the general appear­
ance of the goods; and
2)
Fraud or intent to deceive the public and
defraud a competitor.
TEST of unfair competition: whether the acts of
the defendant have the intent of deceiving or are
: calculated to deceive the ordinary buyer making
his purchases under the ordinary conditions of
the particular trade to which the controversy
relates (Superior Commercial Enterprises, Inc. v.
Kunnan Enterprises Ltd., G.R. No, 169974, April 20,
2010).
c)
Distinguish infringement of trademark from
utifaif competition.
The distinctions between infringement and
unfair competition are as follows:
________
1)
In infringement of trademark, there is un­
authorized use of a trademark, while unfair
competition under the IPC involves pass­
ing off of one's goods as those of another
and giving one's goods the appearance of
that of another.
2)
It is not necessary to establish fraudulent
intent in a case for infringement of trade­
mark while it is necessary to establish
fraudulent intent in an unfair competition
case.,
3)
Registration of the trademark is necessary
for the filing of an action for infringement
of trademark while prior registration of a
trademark is not necessaryj n unfair com* petition.
*
'
. ■
— - *
6.09. PROTECTION OF TRADE NAME
A trade name (including a corporate name) need
not be registered with the IPO before an infringement
suit may be filed by its owner against the owner of
an infringing trademark (Sec. 165.2, IPL). Example, the
trademark "San Francisco Coffee" is an infringement
of the trade name "San Francisco Coffee & Roastery,
Inc." even if the said trade name is not registered with
the IPO (Coffee Partners, Inc. v. San Francisco Coffee and
Roastery, Inc., G.R. No. 169504, March 3 , 2010).
' 6.10. UNFAIR COMPETITION
This involves employing deception or any other
_ means contrary to good faith by which a person
passes off his:goods or business or services for those
of one who has already established goodwill thereto
(Sec. 168.2, IPL).
4)
Unfair competition is broader as it includes
L;: baseS. that:.are,covered not only, by the IPC
526
PART VII — INTELLECTUAL PROPERTY CODE
(R.A. No. 8293)
REVIEWER ON COMMERCIAL LAW
but also by Article 27 of the New Civil Code
distinctive
marks that
became generic
or descriptive;
(See Del Monte Corp., ei a l v. CA, 181 SCRA
410),
6.11. INTER PARTES CASES. These are contested cases
filed before the Intellectual Property Office. Inter
partes trademark cases include: (a) opposition against
the registration of a mark published for opposition;
and (b) petition to cancel the registration of a mark.
(2) Abandon­
ment — failure
to use it for an
uninterrupted
period of three
(3) years;
Note; In the case of patents, inter partes cases
include: (a) petition to cancel an invention patent,
utility model registration, industrial design registra­
tion or any claim or parts of a claim; and (b) petition
for compulsory licensing.
Inter Partes ■ Period to Cases
Grownd/s
File
Within 30
Opposition to
application “for "daysafter
publication.
registration
(3) Mark is
beihg used to
misrepresent
the source
of goods or
services.
Venue
Registration
IPO
ill damage— the oppositor.
t v
Note: An administrative complaint for viola­
tions of laws involving intellectual property rights
can be filed with the IPO where the total damages
claimed are not less than P200 000.00 (Subsec. 10.2,
(Sec. 134, IPL).
Cancellation
(Sec. 151, [a]).
Cancellation
Within5
years from
date of
registration.
Mark is
confusingly
similar.
At any time.
(1) Mark
becomes
generic
("Genericide
Policy") or
descriptive.
(Sec. 151, fb]
an ile]).
IPO
IPL).
BARPROBLEMS:
Examples:
Aw.’A-
527
-Aspirin, _ ^
thermos, and
escalator are
originally
IPO
1.
Company X sold its wine under the brand "Rose"
Brandy; it became very popular So, X registered
trademark "Rose" for its brandy. Subsequently,
Company Y manufactured bicycles and sold it under
the name "Rose." Company X now sues Company Y
for violation of IPC. Rule on the dispute.
A:
The ruling should be in favor of Company Y. No
violation of -the iPCjvasxom m itfed by Company Y, *
' - The goods of Coftipany Y, bicycles, are so dissimilar
from the goods of Company X that there would be no
confusion as to the origin of the goods.
528
REVIEWER ON COMMERCIAL LAW
N ote: Section 123.1(f) of the IPC now adopts
whafc is.known as the Theory of Dilution. Section
123.1(f) of the Intellectual Property Code provides
that "a mark cannot be registered if it: x x x (f) Is
identical with, or confusingly similar to, or constitutes
a translation of a mark considered well-known x x x
which is registered in the Philippines with respect to
goods or services which are not similar to those with
respect to which registration's applied foi, Provided,
That use of the mark in relation to those goods or
services would indicate a connection between those
goods or services, and the owner of the registered
mark, Provided, further, That the interests of the owner
of registered mark are likely to be damaged by such
use." However, it is necessary for the application of
the doctrine that the public may have been, or had
actually been deceived or misled as to the source of
the good. This is not the case in the given problem.
2.
A:
N Corporation manufactures rubber shoes under the
trademark "JOEDANN" which hit the Philippine
market in 1985, and registered its trademark with
the Bureau of Patents, Trademarks and Technology
Transfer (BPTTT) in 1990. PK Company also
manufactures rubber shoes with the trademark
"JAVORSKI" which it registered with the BPTTT in
1978. In 2002, PK Company adopted and copied the
design of N Corporation's "JORDANN" rubber shoes,
both as to shape and color, but retained the trademark
"J^VORSKI" on its products. May PK Company be
held liable to N Corporation? Explain.
YES. PK Company may be held liable by N
Corporation for unfair competition. Under Section
168.3(a) of the IPC, a person is committing unfair
competition if he sells his goods and "gives them the
general appearance of goods of another manufacturer
_____ .or dealer,_either., as J p , the goods, themselves or in
the wrapping of the packages in which they are
contained, or the devices or words thereon, or in
PART VII — INTELLECTUAL PROPERTY CODE
(R.A. No. 8293)
529
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." The
circumstances contemplated by Section 168.3(a) are
present in this case because PK Company gave its
shoes the appearance of the shoes of N Corporation
and the same will tend to mislead the public as to the
origin of the goods.
7. PATENTS
7.01. Patentable inventions refer to any technical solution
of a problem in any field of human activity which is
new, involves an inventive step and is industrially
applicable (Kho v. CA, supra).
a)
b)
Requisites:
1)
A technical solution of a problem in any
field of human activity;
2)
It must be a novel invention;
3)
Industrially applicable.
___________
Definitions.
1)
Novel — that which does not form part of
the prior art (Sec. 23, ICP),
2)
"Prior art" — (i) that which has been made
available to the public anywhere in the
world before the filing date or the priority
date of application; (ii) that which forms
part of an application whether for patent,
utility model or industrial designed, effec­
tive in the Philippines: Provided, That the
inventor or applicants are not the same
■and the contents of the application are pub­
lished in accordance with the requirements
of patent application rules and the filing
date of prior art is earlier (Sec. 24, IPC).
530
REVIEWER ON COMMERCIAL LAW
3)
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 inven­
tion (Sec. 2 6 ,1PC).
PART VII — INTELLECTUAL PROPERTY CODE
(R.A. No. 8293)
c)
(ii)
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;
et a l, supra).
The law attempts to strike an ideal balance
betw^m the twb inteifests: The patent system
thus embodies a carefully drafted bargain for
encouraging the creation and disclosure of new
useful and npri-obvious advances in technology
and design, in return fpr the exclusive right to
practice the invention for a number of years.
The inventor may keep his invention secret and
reap its fruits indefinitely. In consideration of
its disclosure and the consequent benefit to the
community, the patent is granted. An exclusive
enjoyment is guaranteed him for twenty (20)
years, but upon the expiration of that period, the
knowledge of the invention inures to the people,
who are thus enabled to practice it and profit by
its use (Pearl & Dean ['Phit.lv. Shoemart, Inc., et ah,
Mere discovery of any new property
or new use for a known substance; or
(iii) Mere use of a known process unless
such known process results in a new
------ :--------- ------ product that empleys-aUeast one new
reactant (Sec. 22, IPC as amended by
R.A. No. 9502).
4)
5)
Person skilled in the Art
presumed to
be an ordinary practitioner aware of what
was common general knowledge in the
art at the relevant date. He is presumed to
have knowledge of all references that are
sufficiently related to one another and to the
pertinent art and to have knowledge of all
arts reasonably pertinent to the particular
problems with which the inventor was
involved. He is presumed also to have had at
his disposal the normal means and capacity
to routine work and experimentation (Rule
Industrial applicability — an invention that
can be produced and used in any industry
(Sec. 27, IPC).
What are the purposes of patent law?
The patent law has a three-fold purpose;/irsL
patent law seeks to foster and reward invention;
second, it promotes disclosures of inventions to
stimulate further innovation and to permit the
public to practice the invention once the patent
expires; third, 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 & Dean [Phil.] v. Shoemart, Inc.,
Note: In the case of drugs and medi­
cines, there is no inventive step if the inven­
tion results from:
0)
531
ibid.).
7.02. Classes of Patentable Inventions
a)
Useful machine;
b)
A product;
c)
Process;
d)
Improvement of (1), (2), or (3);
e)
Microorganism; and
f)
Non-biological
and
microbiological
process
(Rule 201, Rules 'and Regulations on Inventions).
REVIEWER ON COMMERCIAL LAW
7.93, Non-Patent&Me Indentions
a)
Discoveries, scientific theories, and mathemati­
cal method;
b)
Schemes, rules, arid methods of performing
mental acts, playing games, or doing business,
and programs for computer;
c)
Methods for treatment of the human body or
animal body by surgery or therapy and diagnos­
tic methods practiced on the human or animal
body;
d)
Plant varieties or animal breeds of essentially
biological process for the production of plants or
animals;
e)
Aesthetic creations;
f)
Anything which is contrary to public order or
morality (Sec. 22, IPC);
---------gL—in Jh e rase of drugs and medicines, there is no
patentable invention in the following instances:
1)
Mere discovery of a new form or new prop­
erty of a known substance which does not
result in the enhancement of the known ef­
ficacy of that substance;
2)
Mere discovery of any new property or new
use for a known substance;
3)
Mere use of a known process unless such
known process results in a new product
that employs at least one new reactant (Sec.
PART VII ~ INTELLECTUAL PROPERTY CODE
(R.A. No. 8293}
c)
a)
The right to a patent belongs to the inventor, his
heirs or assigns, w
_
b)
When two or more persons have jointly made an
invention, the right to a patent shall belong to
themjointly.
First to File Rule —•if two or more persons have
made the invention separately and indepen­
dently of each other, the right to the patent shall
belong to the person who first filed an applica­
tion for such invention (Sec. 29, IPC).
7.05. LIMITATIONS OF PATENT RIGHTS
The following acts are NOT PROHIBITED:
a)
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 (Sec. 72.1, IPL).
b)
Parallel Importation. Importation of drugs and
medicines by a government agency or by any
private third party (Secs. 72.1 and 72.5, IPL, as
amended by R.A. No. 9502). Private parties must
secure a license to import from BFAD.
--------c)---- Wrtfi Hnnn privntnly and nn a nnn-mmmprnal
scale or for a non-commercial purpose. Condi­
tion: The act does not significantly prejudice the
economic interests of the owner of the patent
(Sec. 72.2, IPL).
d)
The act consists of making or using exclusively
for experimental use of the invention for scien­
tific purposes or educational purposes and such
other activities directly related to such scientific
or educational experimental use ( Sec. 72.3, IPL as
amended by R.A. No. 9502).
22, IPC as amended by R.A. No. 9502).
7.04. PERSON ENTITLED TO RIGHT ‘
533
e)
Testing, using, making or selling the invention
including any data related thereto of drugs and
medicine, solely for purposes reasonably related
to the development and submission of informa­
tion and issuariceof approvals by government
regulatory agencies required under any law of
the Philippines or of another country that regu-
REVIEWER ON COMMERCIAL LAW
534
Jates the manufacture, construction, use or sale
of any product (Sec. 72.4, IPL as amended by R.A.
No. 9502).
f)
Preparation for individual cases, in a pharma­
cy or by a medical professional, of a medicine
in accordance with a medical prescription after
a drug or medicine has been introduced in the
Philippines or anywhere else in tire world by the
patent owner, or by any party authorized to use
the invention (Sec. 72.5, IPL as amended by R.A.
No. 9502).
7.06. PREJUDICIAL DISCLOSURE
Whatever right one has to the invention covered
by the patent arises alone from the application date.
Thus, if the inventor voluntarily discloses it, such as
by offering it for sale, the world is free to copy and use
it with impunity. Ideas, once disclosed to the public
______without the protection of a valid patent, are subject
to appropriation without significant restraint (Pearl &
Dean [Phil] v. Shoemart, Inc., et al, ibid., citing Creser
Precision Systems, Inc. v. CA, 286 SCRA13 [1998]).
For example, there would be prejudicial disclo­
sure if the inventor secured a copyright certificate for
drawings that depicted light boxes. On the assump­
tion that the light boxes are patentable inventions,
there would be prejudicial disclosure to the public
by submitting the engineering drawing thereof to the
National Library for purposes of registering his copy­
right (Ibid.).
7.07. NON-PREJUDICIAL DISCLOSURE
Any disclosure of the invention made within
twelve (12) months before the filing date does not
prejudice the application if the disclosure is made by:
1) inventor himself (or by anyone who has the right to
patent); 2) patent office — a) when the information of
the latter office was contained in another application
PART VII — INTELLECTUAL PROPERTY CODE
(R.A. No. 8293)
535
filed by the inventor that should not have been
disclosed by the office, b) it is contained in a third
person's application filed without the knowledge or
consent of the inventor and the third person obtained
the information directly from the inventor; and 3) a
t h ir d p a r t y — such party obtained the information
directly or indirectly from the inventor (Sec. 25.1,
IPC).
7.08. TERM OF A PATENT
The term of a patent is twenty (20) years from
the filing date of application (Sec. 54, IPC).
7.09. INFRINGEMENT v
Infringement is the making, using, offering for
sale, selling or importing a patented product or a
product obtained directly Or indirectly from a patent­
ed process, or The use of a patented process without
the authorization of the patentee{Sec. 76.1, IPC).
_____ a)__Steps in determining the presence of infringement.
(1) Determine if there is literal infringe­
ment. If there is literal infringement, the defen­
dant is liable.
(2) If there is no literal infringement, then
the doctrine of equivalents should be applied.
b)
Literal Infringement. There is infringement
of patent under this test if one makes, uses or
sells an item that contains all the elements of the
patent claim. This test is satisfied in either of the
following:
(1) Exactness rule: The item that is being
sold, made or used conforms exactly to the pat­
ent claim of another;
(2) Addition rule: One makes, uses, or
sells an item that has all the elements of Me
patent claim of another plus other elements.
REVIEWER ON COMMERCIAL LAW'
536
cl
Doctrine of Equivalents.
PART VII — INTELLECTUAL PROPERTY CODE
(R.A. No, 8293)
a)
The doctrine of equivalents provides that
an infringement also takes place when a device
appropriates a prior invention by incorporating
537
Grounds:
1)
National emergency or other circumstances
of extreme urgency;
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;
3)
Where a judicial or administrative body has
determined that the manner of exploitation
by the owner of the patent or his licensee is
anti-competitive;
Kline Beckman Corp. v. The Honorable CA, G.R. No.
126627, Aug. 14,2003).
4)
1) The doctrine of equivalents cannot be
applied when the infringing invention is dearly
beyond what is written in the claim.
In case of public non-commercial use of the
patent by the patentee, without satisfactory
reason;
5)
its innovative concept and, although with some
modification and change, performs substantially
the same function in substantially the same way
to achieve substantially the same result. In other
words,
be the same or substantially the same. The doc­
trine of equivalents thus requires satisfaction of
the function-means-and-result test, the patentee
having the burden to show that all three com­
ponents of such equivalency test are met (Smith
-----------------------2)— When the language of the patentee's
claims is clear and distinct. The patentee is bound
thereby and may not claim anything beyond
them. And so are the courts bound which may
not add to or detract from the claims matters
not expressed or necessarily implied, nor may
they enlarge the patent beyond the scope of that
which the inventor claimed and the patent office
allowed, even if the patentee may have been
entitled to something more than the words it
had chosen would include (Smith Kline Beckman
Corp. v. The Honorable CA, ibid.).
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; and
6)
R.A. No. 9502).
b)
In whose favor. Compulsory license should be
granted to any person who has shown his capa­
bility to exploit the invention.
c)
Time when application for compulsory license
cannot be applied: before the expiration of a
period of |oim (^ years from the date of filing of
the application orTtmee (3) years from the date of
the patent whichever period expires last.
7.10. COMPULSORY LICENSING
"Compulsory License" is a license issued by
the Director General of the Intellectual Property
Office to exploit a patented invention without the
permission of the patent holder, either by manufacture
or through parallel importation (Sec. 4, R.A. No. 9502),
Where the demand for patented drugs and
medicines is not being met to an adequate
extent and on reasonable terms, as deter­
mined by the Secretary of the Department
of Health (Secs. 93-93.6, IPL as amended by
REVIEWER O N COMMERCIAL LAW
538
d)
Requirement to obtain a license on reasonable
commercial terms. The Compulsory license will
only be granted after the petitioner has made
efforts to obtain authorization from the patent
owner on reasonable commercial terms and con­
ditions but such efforts have not been success­
ful within a reasonable period of time (Sec. 95.2,
IPL as amended by R.A. No. 9502). Effort to obtain
authorization is not required in the following in­
stances:
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; and
----------------4)-— In racgc JiArW p t'hp Hpmand fnr 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, IPL as amended by R.A. No. 9502).
7.11. Voluntary License and Technology Transfer Agree­
ments.-..
.
..
.
. .
a)
"- ~
"r
"Technology Transfer Arrangements " refers to con­
tracts or agreements involving the transfer of
systematic knowledge for the manufacture of a
product, the application of a process, or render­
ing of a service including management contracts;
and the transfer, assignment or licensing of all
forrris of intellectual property rights, including
licensing of computersoftware except computer
soltwarc'developed^foF mass market (Sec. 4.2,
IPC). It is in the nature : of ;a Voluntary License
Contract.
‘-<•’5=— -
f ---------- , i- -
-
PART VII — .INTELLECTUAL PROPERTY CODE
(R.A. No. 8293)
b)
539
Jurisdiction. The IPO through the Director of the
Documentation, Information and Technology
Transfer Bureau shall exercise quasi-judicial
jurisdiction in the settlement of disputes between
parties to a technology transfer arrangement
arising from technpl^ ^ r ^ g f e ^ y m i f e
including the fixing of appropriate amount or
rate of royalty (Sec. 86, IPC).
c)
Prohibited Provisions. Provisions that are
adverse to competition and trade are prohibited
(Sec. 87, IPC). These prohibited provisions which
are deemed prima facie to have an adverse effect
on competition and trade are enumerated in
Sections 87.1 to 87.13 of the IPC. Examples of
prohibited provisions: (1) licensor reserves the
right to fix the sale or resale prices of the products
manufactured on the basis of the license; (2)
restrictions regarding the volume and structure
of production; and (3) restrictions regarding the
—^ ----volume and structure of production.--------------- --d)
Mandatory Provisions. The following provi­
sions shall be included in voluntary license con­
tracts:
(1) Applicable laws are Philippines laws and
in the event of litigation, the venue shall be
the proper court in the place where the li­
censee has its principal office;
(2)
Continued access to improvements in tech­
niques and processes related to the tech­
nology shall be made available during the
period of the technology transfer arrange­
ment;
(3)
If Arbitration is provided for in the technoltransfer arrangements the»*applicable
procedure is (a) the Arbitration Law of the
Philippines; (b) the Arbitration Rules of the
United Nations Commission on Interna-
PART VII — INTELLECTUAL PROPERTY CODE
(R.A. No. 8293)
REVIEWER ON COMMERCIAL LAW
540
an improvement of any of the foregoing." The process
of improving the tenderness of meat appears to be a
new technical solution.
tional Trade Law (UNCITRAL); or (c) the
Rules of Conciliation and Arbitration of the
International -Chamber of Commerce (ICC)
2.
Philippines or any neutral country; and
(4)
e)
The Philippine taxes on all payments relat­
ing to the technology transfer arrangement
shall be borne by the licensor.
A:
7.12. What is the concept of divisional applications?
Che-che invented a device that can convert rainwater
to automobile fuel. She asked Macon, a lawyer, to assist
---------in getting her invention patented. Macon suggested-------that they form a corporation with other friends and
have the corporation apply for the patent, 80% of the
shares of stock thereof to be subscribed by Che-che
and 5% by Macon. The corporation was formed and
the patent application was filed. However, Che-che
dies three months later of a heart attack.
Franco, the estranged husband of Che-che,
contested the application of the corporation and filed
his own patent application as the sole surviving heir
of Ghe-che. Decide the issue with reasons.
BAR PROBLEMS:
X invented a method of improving the tenderness of
meat by injecting an enzyme solution into the liver of
the animal shortly before a slaughter. Is the invention
patentable?
A:
The invention is patentable. Section 21 of IPC provides
'" " t h a t "any technical solution of a problem m any field
of human activity which is new, involves an inventive
step and is industrially applicable shall be patentable.
It may be, or maj^ relate to, a product, or process, or
X may not apply for the patent. Section 22.6 provides
that anything that is contrary to public order or
morality shall be excluded from patent protection.
The machine involved in this case appears to be
a gambling device or a tool that is used to cheat in
gambling or in gambling itself, hence is it contrary
to public order and morality. However, if the
machine can be used in legalized gambling such as
in cases of exclusive use of casinos established by the
government, such device can be patented.
3.
able CA, supra).
1.
X invented a bogus coin detector which can be used
exclusively on self-operating gambling devices
otherwise known as one-armed bandits. Can X apply
for a patent?
Unenforceable. A Technology Transfer Agree­
ment or any Voluntary License that contains a
prohibited provision or does not contain any of
the mandatory provisions shall be considered
unenforceable (Sec. 92, IPC). However, registra­
tion with the IPO is not necessary to make it en­
forceable (Sec. 92, IPC).
The concept of divisional applications comes
__________ into play when two or more inventions are claimed
in a single application but are of such a nature that a
single patent may not be issued for them. The appli­
cant is thus required "to divide," that is, to limit the
' claims to whichever invention he may elect, whereas
those inventions not elected may be made the subject
of separate applications which are called "divisional
■ applications" (Smith Kline Beckman Corp. v. The Honor­
M i
A:
The case should be decided in favor of Franco.
Section 28 of the IPC provides that the right to a
patent belongs to the inventor, his heirs or assigns.
Since Che-che is already dead, the heirs, including
Franco, can file the application. In addition Section
32.2 of the IPC provides that ifthe applicant is hot the
inventor, the IPC shall require the applicant to submit
the inventor's authority. In this case, it does not
'“
REVIEWER ON COMMERCIAL LAW/
542
PART VII — INTELLECTUAL PROPERTY CODE
(R.A. No. 8293)
appear that the corporation was authorized. Besides,
it is dear from die problem that the corporation was
c)
only used as a conduit of Che-che for the filing of the
application.
4.
A:
Supposing Albert Einstein were alive today and he
filed with the Intellectual Property Office (IPO) an
application for patent for his theory of relativity
expressed in the formula E = me2. The IPO disapproved
Einstein's application on the ground that his theory of
relativity is not patentable. Is the IPO's action correct?
8.01. APPLICABLE LAWS
Trade secrets protection is not covered by the
constitutional right to information. It is protected
under Section 66.2 of the Securities Regulations
Code, Articles 291 and 292 of the Revised Penal Code,
Section 278 of the National Internal Revenue Code
and Section 12 of Republic Act No. 6969, otherwise
known as Toxic Substances and Hazardous and
Nuclear Waste Control Act of 1990 (Ibid.).
8 . TRADE SECRETS ■ ■
A trade secret is a plan or process, tool, mechanism
or compound known only to its owner and those of his
employees to whom it is necessary to confide it. Il includes
a secret formula or process not patented, but known only
to certain individuals using it in compounding some article
of trade having a commercial value (Air Philippines Corp.v.
8.02. FACTORS
Thefoltowing factors can be utilized to determine
if an information is a trade secret, to wit:
1)
The extent to which the information is known
outside of the employer's business;
2)
The extent to which the information is known by
employees and others involved in the business;
3)
The extent of measures taken by the employer to
guard the secrecy of the information;
4)
The value of the information to the employer
and to competitors;
5)
The amount of effort or money expended by the
company in developing the information; and
6)
The extent to which the information could be
easily or readily obtained through an indepen—*
dent source (Ibid.).
Pennswell, Inc., G.R. No. 172835, Dec. 13, 2007).
b)
A trade secret may consist of any formula, pat­
tern, device, or compilation of information that:
(1) is used in one's business; and (2) gives the
employer an opportunity to obtain an advantage
over competitors who do not possess the infor­
mation. It can be a (i) chemical composition, (ii)
formulation, (iii) ingredients, (iv) price list, (v)
catalogue, or (vi) specialized customer list (Ibid ).
A trade secret is protected even if it is not
patentable. It is covered by the propriety rights of
the owner of the trade secret and the said owner
cannot be compelled to disclose its trade secret.
Courts cannot generally issue an injunction to
compel such disclosure (Ibid.).
»'T
-.<-*•
The ingredients of consumer products are not
trade secrets. They should be indicated in the
label under Section 77 of the Consumer Act.
However, ingredients of chemicals supplied to
airline companies are not consumer products.
Consumer products are primarily for personal,
family, household or agricultural purposes
(Ibid.).
YES, the IPO is correct. Discoveries, scientific theories
and mathematical methods, are "non-patentable
inventions" under Section 22.1 of the Intellectual
Property Code. A scientific theory like Einstein's
theory of relativity is discovered, it is not invented.
a)
543
*
.