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jCASE OUTLINE IN MERCANTILE LAW

Dean Nilo T. Divina


I.

Letters of Credit

A. Definition and Nature of Letter of Credit


Usage and customs apply in commercial transactions in the absence of any particular
provision in the Code of Commerce, as provided in Article 2 of the same Code. Hence,
the rule that all parties concerned in documentary credit operations deal in documents
and not in goods bind the parties in a letter of credit transaction. (Bank of the Philippine
Islands vs. De Reny Fabric Industries, Inc. 35 SCRA 253 (1970))
An order of the court releasing the proceeds of an irrevocable letter of credit to the
applicant, which was issued to pay for tobacco purchased from the beneficiary of the
letter of credit, violates the irrevocable nature of the letter of credit. An irrevocable
letter of credit cannot, during its lifetime, be cancelled or modified without the express
permission of the beneficiary. (Philippine Virginia Tobacco Administration vs. De Los
Angeles, 164 SCRA 543 (1988))
The primary purpose of the letter of credit is to substitute for and therefore support, the
agreement of the buyer/importer to pay money under a contract or other arrangement.
Hence, the failure of a buyer/importer to open a letter of credit as stipulated amounts
to a breach of contract which would entitle the seller/exporter to claim damages for
such breach. (Reliance Commodities, Inc. Vs. Daewoo Industrial Co., Ltd., 228 SCRA 545
(1993))
In a letter of credit transaction, there are three separate and distinct relationships: a)
between the account party (buyer/importer) and the beneficiary (seller/exporter),
which may be a contract of sale or non-sale; b) between the account party and the
issuing bank, where the former applies to the latter for a specified L/C and agrees to
reimburse the bank for amounts paid by it pursuant to the L/C; and c) between the
issuing bank and the beneficiary where the former, upon presentation of stipulated
documents, pays the latter the amount under the L/C. Such relationships are
interrelated but independent of one another. (Rodzssen Supply Company, Inc. vs. Far
East Bank and Trust Company, 357 SCRA 618 (2001))
Commercial letters of credit involve the payment of money under a contract of sale
wherein the seller-beneficiary presents to the issuing bank documents that would show
that he has taken affirmative steps to comply with the sales agreement. On the other
hand, standby letters of credit are used in non-sale setting where the beneficiary
presents documents that would show that the obligor has not complied with his
obligation. (Transfield Philippines, Inc. vs. Luzon Hydro Corp. 443 SCRA 307 (2004))
The stay order issued by the rehabilitation court pursuant to the Interim Rules of
Corporate Rehabilitation does not apply to the beneficiary of the letter of credit against
the banks that issued it because the prohibition on the enforcement of claims against

the debtor, guarantors or sureties of the debtors does not extend to the claims against
the issuing bank in a letter of credit. Letters of credit are primary obligations and not
accessory contracts and while they are security arrangements, they are not thereby
converted into contracts of guaranty. (MWSS vs. Hon. Daway, 432 SCRA 559 (2004))
B. Parties to a Letter of Credit
1. Rights and Obligations of Parties
A buyer who applied for a letter of credit to pay for imported dyestuffs must reimburse
the issuing bank which paid the beneficiary, even if the shipment contained colored
chalks. Banks are not required to investigate if the contract underlying the letter of
credit has been fulfilled or not because in a transaction involving letter of credit, banks
deal only with documents and not with goods. (Bank of the Philippine Islands vs. De Reny
Fabric Industries, Inc. 35 SCRA 253 (1970))
The issuing banks (IBAA) obligation under an Irrevocable Standby Letter of Credit
executed to secure a contract of loan cannot be reduced by the direct payments made
by the principal debtors to the creditor. Although a letter of credit is a security
arrangement, it is not converted thereby into a contract of guaranty; the obligation of
the bank under the letter of credit is original and primary. (Insular Bank of Asia & America
vs. Intermediate Appellate Court, 167 SCRA 450 (1988))
The mere fact that a letter of credit is irrevocable does not necessarily imply that the
correspondent bank, in accepting the instructions of the issuing bank, has also
confirmed the letter of credit. The petitioner, as a notifying bank, assumes no liability
except to notify the beneficiary of the existence of the letter of credit; it does not give
an absolute assurance to the beneficiary that it will undertake the issuing banks
obligation as its own according to the terms and conditions of the credit. (Feati Bank &
Trust Company vs. Court of Appeals, 196 SCRA 576 (1991))
Drafts drawn by the beneficiary need not be presented to the applicant for acceptance
before the issuing bank can seek reimbursement. Once the issuing bank has paid the
beneficiary after the latters compliance with the terms of the letter of credit, the issuing
bank becomes entitled to reimbursement. (Prudential Bank & Trust Company vs. IAC,
216 SCRA 257 (1992))
When the notifying bank entered into a discounting arrangement with the beneficiary,
it acts independently as a negotiating bank. As such, the negotiating bank has a right to
recourse against the issuer bank and until reimbursement is obtained, the beneficiary,
as the drawer of the draft, continues to assume a contingent liability thereon. (Bank of
America vs. Court of Appeals, 228 SCRA 357 (1993))
A notifying or advising bank does not incur any liability arising from a fraudulent letter
of credit as its obligation is limited only to informing the beneficiary of the existence of
the letter of credit. Such notifying bank does not warrant the genuineness of the letter
of credit but is bound only to check its apparent authenticity. (Bank of America vs. Court
of Appeals, 228 SCRA 357 (1993))

While a marginal deposit, a collateral security, earns no interest in favor of the


applicant, the bank is not only able to use the same for its own purposes, interest-free,
but it is also able to earn interest on the money loaned to the applicant. The
buyer/importer's marginal deposit should then be set off against his debt, for it would
be onerous to compute interest and other charges on the face value of the letter of
credit which the bank issued, without first crediting or setting off the marginal deposit
which the importer paid to the bank. (Abad vs. Court of Appeals, 181 SCRA 191 (1990);
Consolidated Bank & Trust Corporation vs. Court of Appeals, 356 SCRA 671 (2001))
An issuing bank which paid the beneficiary of an expired letter of credit can recover
payment from the applicant which obtained the goods from the beneficiary to prevent
unjust enrichment. (Rodzssen Supply Company, Inc. vs. Far East Bank and Trust Company,
357 SCRA 618 (2001))
C. Basic Principles of Letter of Credit
1. Doctrine of Independence
Where the applicant entered into a contract, the performance of which is secured by a
standby letter of credit, the resort to arbitration by the applicant/contractor, in the
absence of a stipulation that any dispute must first be settled through arbitration before
the beneficiay can draw on the letter of credit, does not preclude the beneficiary to
draw on the letter of credit upon its issuance of a certificate of default. The claim of
fraud will not be sufficient to support an injunction against payment by reason of the
independence principle which assures the beneficiary of prompt payment
independent of any breach of the main contract and precludes the issuing bank from
determining whether the main contract is actually accomplished or not. (Transfield
Philippines, Inc. vs. Luzon Hydro Corp. 443 SCRA 307 (2004))
The issuing bank is not liable for damages even if the shipment did not conform to the
specifications of the applicant. Under the independence principle, the obligation of
the issuing bank to pay the beneficiary arises once the latter is able to submit the
stipulated documents under the letter of credit. Hence, the bank is not liable for
damages even if the shipment did not conform to the specifications of the applicant.
(Land Bank of the Philippines vs. Monets Export and Manufacturing Corp., 453 SCRA 173
(2005))
Where the trial court rendered a decision finding the buyer solely liable to pay the seller
and omitted by inadvertence to insert in its decision the phrase without prejudice to
the decision that will be made against the issuing bank , the bank can not evade
responsibility based on this ground. The seller who is entitled to draw on the credit line
of the buyer from a bank against the presentation of sales invoices and official receipts
of the purchases and who obtained a court judgment solely against the buyer even
though the suit is against the bank and the buyer may still enforce the liability of the
same bank under a letter of credit issued to secure the credit line. The so-called
"independence principle" in a letter of credit assures the seller or the beneficiary of

prompt payment independent of any breach of the main contract and precludes the
issuing bank from determining whether the main contract is actually accomplished or
not. Philippine National Bank vs. San Miguel Corporation. No. 186063, January 15, 2014.

2. Fraud Exception Principle


The untruthfulness of a certificate accomplanying a demand for payment under a standy
letter of credit may qualify as fraud sufficient to support injunction against payment.
However, under the fraud exception principle, this must constitute fraud in relation
to the independent purpose or character of the letter of credit and not only fraud under
the main agreement; moreover, irreparable injury will be suffered if injunction will not
be granted. (Transfield Philippines, Inc. vs. Luzon Hydro Corp. 443 SCRA 307 (2004))
3. Doctrine of Strict Compliance
When the letter of credit required the submission of a certification that the
applicant/buyer has approved the goods prior to shipment, the unjust refusal of the
applicant/buyer to issue said certification is not sufficient to compel the bank to pay the
beneficiary thereof. Under the doctrine of strict compliance, the documents tendered
must strictly conform to the terms of the letter of credit, otherwise, the bank which
accepts a faulty tender, acts on its own risks and may not be able to recover from the
applicant/buyer. (Feati Bank & Trust Company vs. Court of Appeals, 196 SCRA 576 (1991))
I.

Trust Receipts Law


A. Definition/Concept of a Trust Receipt Transaction
1. Loan/Security Feature
The Trust Receipts Law punishes the dishonesty and abuse of confidence in the handling
of money or goods to the prejudice of another regardless of whether the latter is the
owner or not. The law does not seek to enforce payment of the loan, thus, there is no
violation of the constitutional provision against imprisonment for non-payment of debt.
(People vs. Hon. Nitafan and Betty Sia Ang, 207 SCRA 726 (1992))
Compensation shall not be proper when one of the debts consists in civil liability arising
from a penal offense; moreover, any compromise relating to the civil liability does not
automatically extinguish the criminal liability of the accused. The mere failure of the
entrustee to deliver the proceeds of the sale or the goods if not sold, constitutes a
criminal offense that causes prejudice not only to another, but more to the public
interest. (Metropolitan Bank & Trust Company vs. Tonda, 338 SCRA 254 (2000))
A trust receipt is a security transaction intended to aid in financing importers and retail
dealers who do not have sufficient funds or resources to finance the importation or
purchase of merchandise, and who may not be able to acquire credit except through
utilization, as collateral of the merchandise imported or purchased. Under a letter of

credit-trust receipt arrangement, a bank extends a loan covered by a letter of credit,


with the trust receipt as a security for the loan; hence, the transaction involves a loan
feature represented by a letter of credit, and a security feature which is in the covering
trust receipt which secures an indebtedness. (Lee vs. Court of Appeals, 375 SCRA 579
(2002))
2. Ownership of the Goods, Documents and Instruments under a Trust Receipt
The transaction is a simple loan when the goods subject of the agreement had been
purchased and delivered to the supposed entrustee prior to the execution of the trust
receipt agreement. The acquisition of ownership over the goods before the execution
of the trust receipt agreement makes the contract a simple loan, regardless of the
denomination of the contract. (Colinares vs. Court of Appeals, 339 SCRA 609 (2000))
Respondent Corporation is not an importer which acquired the bunker fuel oil for resale; it needed the oil for its own operations. More importantly, at no time did title over
the oil pass to petitioner bank, but directly to respondent Corporation to which the oil
was directly delivered long before the trust receipt was executed; thus, the contract
executed by the parties is a simple loan and not a trust receipt
agreement. (Consolidated Bank & Trust Corp. vs. Court of Appeals, 356 SCRA 671 (2001))
In a trust receipt transaction, the entrustee has neither absolute ownership, free disposal
nor the authority to freely dispose of the articles subject of the agreement. Since the
goods could not have been subjected to a valid mortgage, there can also be no valid
foreclosure especially when the mortgagee who subsequently foreclosed and purchased
the said goods were in bad faith, having knowledge of the inclusion of such articles in a
trust receipt agreement. (DBP vs. Prudential Bank, 475 SCRA 623 (2005))
B. Rights of the Entruster
1. Validity of the Security Interest as Against the Creditors of the Entrustee/Innocent
Purchaser for Value
The security interest of the entruster pursuant to the written terms of a trust receipt shall
be valid as against all creditors of the entrustee for the duration of the trust receipt
agreement, including among others, the laborers of the entrustee. The only exception
to the rule is when the properties are in the hands of an innocent purchaser for value
and in good faith. (Prudential Bank vs. National Labor Relations Commission, 251 SCRA
412 (1995))
C. Obligation and Liability of the Entrustee
Commercial invoices attached to the applications for letters of credit and of trust
receipts, which only provide for the list of items sought to be purchased and their prices
will not prove delivery of the goods to the entrustee. Hence, criminal liability will not
attach and the accused should be acquitted in the estafa cases. (Ramos vs. Court of
Appeals, 153 SCRA 276 (1987))

While the presumption found under the Negotiable Instruments Law may not
necessarily be applicable to trust receipts and letters of credit, the presumption of
consideration applies on the drafts drawn in connection with the letters of credit.
Hence, the drafts signed by the beneficiary/suppliers in connection with the
corresponding letters of credit proved that said suppliers were paid by the bank
(entruster) for the account of the entrustee. (Lee vs. Court of Appeals, 375 SCRA 579
(2002))
When there is a violation of the Trust Receipts Law, what is being punished is the
dishonesty and abuse of confidence in the handling of money or goods to the prejudice
of another regardless of whether the latter is the owner. However, failure to comply
with the obligations due to serious liquidity problems and after the entrustee was placed
under rehabilitation does not amount to dishonesty and abuse of confidence, thus, the
entrustee cannot be said to have violated the law. (Pilipinas Bank vs. Ong, 387 SCRA 37
(2002))
1. Payment/Delivery of Proceeds of Sale or Disposition of Goods, Documents or
Instruments
When the goods subject of the transaction, such as chemicals and metal plates, were
not intended for sale or resale but for use in the fabrication of steel communication
towers, the agreement cannot be considered a trust receipt transaction but a simple
loan. P.D. No. 115 punishes the entrustee for his failure to deliver the price of the sale,
or if the goods are not sold, to return them to the entruster, which, in the present case,
is absent and could not have been complied with; therefore, the liability of the entrustee
is only civil in nature. (Anthony L. Ng vs. People of the Philippines, G.R. No. 173905, April
23, 2010)
Under the Trust Receipts Law, intent to defraud is presumed when (1) the entrustee fails
to turn over the proceeds of the sale of goods covered by the trust receipt to the
entruster; or (2) when the entrustee fails to return the goods under trust, if they are not
disposed of in accordance with the terms of the trust receipts. When both parties know
that the entrustee could not have complied with the obligations under the trust receipt
without his fault, as when the goods subject of the agreement were not intended for sale
or resale, the transaction cannot be considered a trust receipt but a simple loan, where
the liability is limited to the payment of the purchase price. (Land Bank of the Philippines
vs. Perez, G.R. No. 166884, June 13, 2012)
When both parties entered into an agreement knowing fully well that the return of the
goods subject of the trust receipt is not possible even without any fault on the part of
the trustee, it is not a trust receipt transaction penalized under Sec. 13 of PD 115 in
relation to Art. 315, par. 1(b) of the RPC, as the only obligation actually agreed upon by
the parties would be the return of the proceeds of the sale transaction. This transaction
becomes a mere loan, where the borrower is obligated to pay the bank the amount spent
for the purchase of the goods. (Hur Tin Yang vs. People of the Philippines, G.R. No.
195117, August 14, 2013)
2. Return of Goods, Documents or Instruments in Case of Non-Sale

A trust receipt transaction is a security agreement, pursuant to which the entruster


acquires a security interest in the goods, which are released to the possession of the
entrustee who binds himself to hold the goods in trust for the entruster and to sell or
otherwise dispose of the goods or to return them in case of non-sale. The return of the
goods to the entruster however, does not relieve the entrustee of the obligation to pay
the loan because the entruster is not the factual owner of the goods and merely holds
them as owner in the artificial concept for the purpose of giving stronger security for
the loan. (Vintola vs. Insular Bank of Asia and America, 150 SCRA 140 (1987))
3. Liability for Loss of Goods, Documents or Instruments
Under the Trust Receipts Law, the loss of the goods subject of the trust receipt
regardless of the cause and period or time it occurred, does not extinguish the civil
obligation of the entrustee. Hence, the fact that the entrustee attempted to make a
tender of goods to the bank and as a consequence of the latters refusal, the goods were
stored in the entrustees warehouse and thereafter gutted by fire, the liability of the
entrustee still subsists; the principle of res perit domino will not apply to the bank which
holds only a security of interest over the goods. (Rosario Textile Mills Corp. vs. Home
Bankers Savings and Trust Company, 462 SCRA 88 (2005))
4. Penal Sanctions if Offender is a Corporation
Recognizing the impossibility of imposing the penalty of imprisonment on a
corporation, it was provided that if the entrustee is a corporation, the penalty shall be
imposed upon the directors, officers, employees or other officials or persons responsible
for the offense. However, the person signing the trust receipt for the corporation is not
solidarily liable with the entrustee-corporation for the civil liability arising from the
criminal offense unless he personally bound himself under a separate contract of surety
or guaranty. (Ong vs. Court of Appeals, 401 SCRA 649 (2003))
When the entrustee is a corporation, the director, officer, employee, or any person
responsible for the violation of the Trust Receipts Law is held criminally liable without
prejudice to the civil liability, which is imposed upon the entrustee-corporation. The
fact that the officer signed in his official capacity means that the corporation is the one
civilly liable; however, when such officer also signed a trust receipt in his personal
capacity, he will also be held civilly liable together with the corporation, with the scope
of liability depending on whether he signed as a surety or as a guarantor. (Tupaz IV vs.
Court of Appeals, 475 SCRA 398 (2005))
The fact that the officer who signed the trust receipt on behalf of the entrusteecorporation signed in his official capacity without receiving the goods as he had never
taken possession of such nor committing dishonesty and abuse of confidence in
transacting with the entrustor, is immaterial. The law specifically makes the director,
officer, employee or any person responsible criminally liable precisely for the reason
that a corporation, being a juridical entity, cannot be the subject of the penalty of
imprisonment. (Alfredo Ching vs. Secretary of Justice, 481 SCRA 609 (2006))

D. Remedies Available
After the infomation is filed in court, compromise of the estafa case arising from
violation of the Trust Receipts Law will not amount to novation and will not extinguish
the criminal liability of the accused. (Ong vs. Court of Appeals, 124 SCRA 578 (1983))
Although the surrender of the goods to the entruster results in the acquittal of the
accused in the estafa case, it is not a bar to the institution of a civil action for collection
because of the loan feature (civil in nature) of the trust receipt transaction, which is
entirely distinct from its security feature (criminal in nature). Accordingly, Article 31 of
the New Civil Code provided that when the civil action is based on an obligation not
arising from the act or omission complained of as a felony, such civil action may proceed
independently of the criminal proceedings and regardless of the result of the latter.
(Vintola vs. Insular Bank of Asia and America, 150 SCRA 140 (1987))
The entrusters repossession of the subject machinery and equipment, not for the
purpose of transferring ownership to the entruster but only to serve as security to the
loan, cannot be considered payment of the loan under the trust receipt and letter of
credit. Payment would legally result only after PNB had foreclosed on said securities,
sold the same and applied the proceeds thereof to TCC's loan obligation. (Philippine
National Bank vs. Pineda, 197 SCRA 1 (1991))
When the entrustee defaults on his obligation, the entruster has the discretion to avail
of remedies which it deems best to protect its right. The law uses the word may in
granting to the entruster the right to cancel the trust and take possession of the goods;
hence, the option is given to the entruster. (South City Homes, Inc. vs. BA Finance
Corporation, 371 SCRA 603 (2001))
A civil case filed by the entruster against the entrustees based on the failure of the latter
to comply with their obligation under the Trust Receipt agreement is proper because
this breach of obligation is separate and distinct from any criminal liability for misuse
and/or misappropriation of goods or proceeds realized from the sale of goods released
under the trust receipts. Being based on an obligation ex contractu and not ex delicto,
the civil action may proceed independently of the criminal proceedings instituted
against the entrustees regardless of the result of the latter. (Sarmiento vs. Court of
Appeals, 394 SCRA 315 (2002))
Novation may take place either by express and unequivocal terms or when the old and
new obligations cannot stand together and are incompatible on every point. The
execution of the Memorandum of Agreement, which provided for principal conditions
incompatible with the trust agreement, extinguished the obligation under the trust
receipts without prejudice to the debtors civil liability. (Pilipinas Bank vs. Ong, 387 SCRA
37 (2002))
As provided under Section 7, P.D. No. 115, in the event of default of the entrustee, the
entruster may cancel the trust and take possession of the goods subject of the trust or
of the proceeds realized therefrom at any time; the entruster may, not less than five days
after serving or sending of notice of intention to sell, proceed with the sale of the goods

at public or private sale where the entrustee shall receive any surplus but shall be liable
to the entruster for any deficiency. This is by reason of the fact that the initial
repossession by the bank of the goods subject of the trust receipt did not result in the
full satisfaction of the entrustees loan obligation. (Landl & Company vs. Metropolitan
Bank, 435 SCRA 639 (2004))
E. Warehousemans Lien
Notwithstanding the right of PNB over the stocks of sugar as the endorsee of the
quedans, delivery to it shall be effected only upon payment of the storage fees. The
warehouseman may demand payment of his lien prior to the delivery of the stocks of
sugar because under Section 29 of the Warehouse Receipts Law, the warehouseman
loses his lien upon the goods by surrendering possession thereof. (Philippine National
Bank vs. Se, Jr., 256 SCRA 380 (1996))
A warehouseman may enforce his lien under the following instances: 1) he may refuse
to deliver the goods until his lien is satisfied; 2) he may sell the goods and apply the
proceeds thereof to the value of the lien; and 3) by other means allowed by law to a
creditor against his debtor, for the collection from the depositor of all charges and
advances which the depositor expressly or impliedly contracted with the
warehouseman; or such remedies allowed by law for the enforcement of a lien against
personal property. (Philippine National Bank vs. Sayo, Jr., 292 SCRA 202 (1998))
The refusal of the warehouseman to deliver the sugar to the endorsee of the quedans
on the ground that it has claimed ownership over the sugar by reason of non-payment
of its buyer, not being one of the remedies available to the warehouseman to enforce
his lien, caused the loss of the warehousemans lien. Nevertheless, the loss did not
extinguish the obligation to pay the warehousemans fees but merely caused the fees
and charges to cease to accrue from the date of the rejection by the warehouseman to
heed the previous lawful demand for the release of the goods. (Philippine National Bank
vs. Sayo, Jr., 292 SCRA 202 (1998))
III. Negotiable Instruments Law
A. Forms and Interpretation
1. Requisites of Negotiability
A check which reads Pay to the EQUITABLE BANKING CORPORATION Order of A/C
OF CASVILLE ENTERPRISES, INC. is not negotiable because the payee ceased to be
indicated with reasonable certainty in contravention of Section 8 of the Negotiable
Instruments Law. As worded, it could be accepted as deposit to the account of the party
named after the symbols "A/C," or payable to the Bank as trustee, or as an agent, for
Casville Enterprises, Inc., with the latter being the ultimate beneficiary. (Equitable
Banking Corporation vs. the Honorable Intermediate Appellate Court and The Edward J.
Nell Co., G.R. No. 74451 May 25, 1988)

Without the words "or order or "to the order of", the instrument is payable only to the
person designated therein and is therefore non-negotiable. Any subsequent purchaser
thereof will not enjoy the advantages of being a holder of a negotiable instrument, but
will merely "step into the shoes" of the person designated in the instrument and will thus
be open to all defenses available against the latter. (Juanita Salas vs. Hon. Court of
Appeals and First Finance & Leasing Corporation, G.R. No. 76788 January 22, 1990)
The indication of Fund 501 as the source of the payment to be made on the treasury
warrants makes the order or promise to pay "not unconditional" and the warrants
themselves non-negotiable. (Metropolitan Bank & Trust Company vs. Court Of Appeals,
Golden Savings & Loan Association, Inc., Lucia Castillo, Magno Castillo and Gloria
Castillo, G.R. No. 88866 February 18, 1991)
When the documents provide that the amounts deposited shall be repayable to the
depositor, such instrument is negotiable because it is payable to the "bearer." The
documents do not say that the depositor is Angel de la Cruz and that the amounts
deposited are repayable specifically to him, but the amounts are to be repayable to the
bearer of the documents or, for that matter, whosoever may be the bearer at the time
of presentment. [Caltex (Philippines), Inc. vs. Court of Appeals and Security Bank and
Trust Company, G.R. No. 97753, August 10, 1992]
The language of negotiability which characterizes a negotiable paper as a credit
instrument is its freedom to circulate as a substitute for money. This freedom in
negotiability is totally absent in a certificate indebtedness as it merely to pay a sum of
money to a specified person or entity for a period of time. (Traders Royal Bank vs. Court
of Appeals, Filriters Guaranty Assurance Corporation and Central Bank of the Philippines,
G.R. No. 93397, March 3, 1997)
Under the fictitious payee rule, a check made expressly payable to a non-fictitious and
existing person is not necessarily an order instrument if the payee is not the intended
recipient of the proceeds of the check. There is, however, a commercial bad faith
exception to this rule which provides that a showing of commercial bad faith on the part
of the drawee bank, or any transferee of the check for that matter, will work to strip it
of this defense. (Philippine National Bank vs. Erlando T. Rodriguez and Norma Rodriguez,
G.R. No. 170325, September 26, 2008)
Under the Negotiable Instruments Law, a check made payable to cash is payable to the
bearer and could be negotiated by mere delivery without the need of an indorsement.
However, the drawer of the post-dated check can not be liable for estafa to the person
who did not acquire the instrument directly from drawer but through negotiation of
another by mere delivery. This is because the drawer did not use the check to defraud
the holder/private complainant. PEOPLE OF THE PHILIPPINES VS. GILBERT REYES
WAGAS. G.R. No. 157943, September 4, 2013
2. Kinds of Negotiable Instruments
Postal money orders are not negotiable instruments, the reason being that in
establishing and operating a postal money order system, the government is not engaged

in the commercial transactions but merely exercises a governmental power for the
public benefit. Some of the restrictions imposed upon money orders by postal laws and
regulations are inconsistent with the character of negotiable instruments. For instance,
such laws and regulations usually provide for not more than one endorsement; payment
of money orders may be withheld under a variety of circumstances. (Philippine Education
Co., inc. vs. Mauricio A. Soriano, et al., G.R. No. L-22405, June 30, 1971)
Bank withdrawal slips are non-negotiable and the giving of immediate notice of
dishonor of negotiable instruments does not apply in this case. Since the withdrawal
slips deposited with petitioners current account with Citibank were not checks,
Citibank was not bound to accept the withdrawal slips as a valid mode of deposit, but
having erroneously accepted them as such, Citibank and petitioner as account-holder
must bear the risks attendant to the acceptance of these instruments. (Firestone Tire
& Rubber Company of the Philippines vs. Court of Appeals and Luzon Development Bank,
G.R. No. 113236, March 5, 2001)
A check is a bill of exchange drawn on a bank payable on demand which may either
be an order or a bearer instrument. Under Section 9(c) of the NIL, a check payable to a
specified payee may nevertheless be considered as a bearer instrument if it is payable
to the order of a fictitious or non-existing person like checks issued to Prinsipe Abante
or Si Malakas at si Maganda, who are well-known characters in Philippine mythology.
(Philippine National Bank vs. Erlando T. Rodriguez and Norma Rodriguez, G.R. No.
170325, September 26, 2008)
A certificate of deposit is defined as a written acknowledgement by a bank of the receipt of
a sum of money on deposit which the bank promise to pay to the depositor or the order of
the depositor or to some other person or his order whereby the relation of debtor and
creditor between the bank and the depositor is created. A document to be considered a
certificate of deposit need not be in a specific form. Thus, a passbook of an interest-earning
deposit account issued by a bank is a certificate of deposit drawing interest because it is
considered a written acknowledgment by a bank that it has accepted a deposit of a sum of
money from a depositor. Thus, it is subject to documentary stamp tax. Prudential Bank v.
Commissioner of Internal Revenue (CIR) G.R. No. 180390, July 27, 2011
B. Completion and Delivery
The 17 original checks, completed and delivered to petitioner, are sufficient by
themselves to prove the existence of the loan obligation of the respondents to
petitioner. Sec. 16 of the NIL provides that when an instrument is no longer in the
possession of the person who signed it and it is complete in its terms "a valid and
intentional delivery by him is presumed until the contrary is proved. (Ting Ting Pua vs.
Spouses Benito Lo Bun Tiong and Caroline Siok Ching Teng, G.R. No. 198660, October 23,
2013)
1. Insertion of Date
2. Completion of Blanks

In any case, it is no defense that the promissory notes were signed in blank as Section 14
of the Negotiable Instruments Law concedes the prima facie authority of the person in
possession of negotiable instruments to fill in the blanks. (Quirino Gonzales Logging
Concessionaire, Quirino Gonzales and Eufemia Gonzales vs. the Court of Appeals (CA) and
Republic Planters Bank, G. R. No. 126568, April 30, 2003)
3. Incomplete and Undelivered Instruments
4. Complete but Undelivered Instruments
As Assistant City Fiscal, the source of the salary of the payee is public funds which he
receives in the form of checks from the Department of Justice. Since the payee of a
negotiable interest acquires no interest with respect thereto until it is delivered, such
checks, as a necessary consequence of being public fund, may not be garnished because
such funds do not belong to him. (Loreto D. de la Victoria, as City Fiscal of Mandaue City
and in his personal capacity as garnishee vs. Hon. Jose P. Burgos, Presiding Judge, RTC, Br.
XVII, Cebu City, and Raul H. Sesbreo, G.R. No. 111190, June 27, 1995)
If the post-dated check was given to the payee in payment of an obligation, the purpose
of giving effect to the instrument is evident, thus title or ownership the check was
transferred to the payee. However, if the PDC was not given as payment, then there was
no intent to give effect to the instrument and ownership was not transferred. The
evidence proves that the check was accepted, not as payment, but in accordance with
the policy of the payee to cover the transaction ( purchase of beer products ) and in the
meantime the drawer was to pay for the transaction by some other means other than the
check. This being so, title to the check did not transfer to the payee; it remained with
the drawer. The second element of the felony of theft was therefore not
established. Hence, there is no probable cause for theft.- San Miguel Corporation vs.
Puzon, Jr. G.R. No. 167567, 22 September 2010
The fact that a person, other than the named payee of the crossed check, was presenting
it for deposit should have put the bank on guard. It should have verified if the payee
authorized the holder to present the same in its behalf or indorsed it to him. The banks
reliance on the holders assurance that he had good title to the three checks constitutes
gross negligence even though the holder was related to the majority stockholder of the
payee. While the check was not delivered to the payee, the suit may still prosper
because the payee did not assert a right based on the undelivered check but on quasidelict. Equitable Banking Corporation vs Special Steel Products, June 13, 2012
C. Signature
1. Signing in Trade Name
2. Signature of Agent
Under Section 20 of the Negotiable Instruments Law, where the instrument contains or
a person adds to his signature words indicating that he signs for or on behalf of a

principal or in a representative capacity, he is not liable on the instrument if he was duly


authorized; but the mere addition of words describing him as an agent or as filing a
representative character, without disclosing his principal, does not exempt him from
personal liability. In the instant case, an inspection of the drafts accepted by the
defendant shows that nowhere has he disclosed that he was signing as a representative
of the Philippine Education Foundation Company and such failure to disclose his
principal makes him personally liable for the drafts he accepted. (The Philippine Bank of
Commerce vs. Jose M. Aruego, G.R. Nos. L-25836-37, January 31, 1981)
3. Indorsement by Minor or Corporation
4. Forgery
As a general rule, a bank or corporation who has obtained possession of a check upon
an unauthorized or forged indorsement of the payees signature and who collects the
amount of the check from the drawee, is liable for the proceeds thereof to the payee or
other owner, notwithstanding that the amount has been paid to the person from whom
the check was obtained. The theory of the rule is that the possession of the check on the
forged or unauthorized indorsement is wrongful and when the money had been
collected on the check, the proceeds are held for the rightful owners who may recover
them. The payee ought to be allowed to recover directly from the collecting bank,
regardless of whether the check was delivered to the payee or not. (Westmont Bank
(formerly Associated Banking Corp.) vs. Eugene Ong, G.R. No. 132560, January 30, 2002)
The possession of a check on a forged or unauthorized indorsement is wrongful, and
when the money is collected on the check, the bank can be held for moneys had and
received. The proceeds are held for the rightful owner of the payment and may be
recovered by him. The position of the bank taking the check on the forged or
unauthorized indorsement is the same as if it had taken the check and collected without
indorsement at all. The act of the bank amounts to conversion of the check. (Associated
Bank and Conrado Cruz, vs. Hon. Court of Appeals, and Merle V. Reyes, doing business
under the name and style "Melissas RTW," G.R. No. 89802, May 7, 1992)
It is a rule that when a signature is forged or made without the authority of the person
whose signature it purports to be, the check is wholly inoperative and no right to retain
the instrument, or to give a discharge therefor, or to enforce payment thereof against
any party, can be acquired through or under such signature. However, the rule does
provide for an exception, namely: "unless the party against whom it is sought to enforce
such right is precluded from setting up the forgery or want of authority." In the instant
case, it is the exception that applies as the petitioner is precluded from setting up the
forgery, assuming there is forgery, due to his own negligence in entrusting to his
secretary his credit cards and checkbook including the verification of his statements of
account. (Ramon K. Ilusorio vs. Hon. Court of Appeals, G.R. No. 139130, November 27,
2002)
A forged signature is a real or absolute defense, and a person whose signature on a
negotiable instrument is forged is deemed to have never become a party thereto and to
have never consented to the contract that allegedly gave rise to it. The counterfeiting

of any writing, consisting in the signing of anothers name with intent to defraud, is
forgery. (Bank of the Philippine Islands vs. Casa Montessori Internationale and Leonardo
T. Yabut, G.R. No. 149454, May 28, 2004)
Even if the bank performed with utmost diligence, the drawer whose signature was
forged may still recover from the bank as long as he or she is not precluded from setting
up the defense of forgery. After all, Section 23 of the Negotiable Instruments Law plainly
states that no right to enforce the payment of a check can arise out of a forged signature.
Since the drawer is not precluded by negligence from setting up the forgery, the general
rule should apply. (Samsung Construction Company Philippines, Inc. vs. Far East Bank and
Trust Company and Court Of Appeals, G.R. NO. 129015, August 13, 2004)
As between a bank and its depositor, where the banks negligence is the proximate
cause of the loss and the depositor is guilty of contributory negligence, the greater
proportion of the loss shall be borne by the bank. The bank was negligent because it did
not properly verify the genuineness of the signatures in the applications for managers
checks while the depositor was negligent because it clothed its accountant/bookkeeper
with apparent authority to transact business with the Bank and it did not examine its
monthly statement of account and report the discrepancy to the Bank. the court
allocated the damages between the bank and the depositor on a 60-40 ratio.Philippine
National Bank vs. FF Cruz and Company, G.R. No. 173259, July 25, 2011
While its manager forged the signature of the authorized signatories of clients in the
application for managers checks and forged the signatures of the payees thereof, the
drawee bank also failed to exercise the highest degree of diligence required of banks in
the case at bar. It allowed its manager to encash the Managers checks that were plainly
crossed checks. A crossed check is one where two parallel lines are drawn across its face
or across its corner. Based on jurisprudence, the crossing of a check has the following
effects: (a) the check may not be encashed but only deposited in the bank; (b) the check
may be negotiated only once to the one who has an account with the bank; and (c)
the act of crossing the check serves as a warning to the holder that the check has been
issued for a definite purpose and he must inquire if he received the check pursuant to
this purpose; otherwise, he is not a holder in due course. In other words, the crossing of
a check is a warning that the check should be deposited only in the account of the payee.
When a check is crossed,it is the duty of the collecting bank to ascertain that the check
is only deposited to the payees account. Philippine Commercial International Bank vs.
Balmaceda,G.R. No. 158143, September 21, 2011
D. Consideration
A check which is regular on its face is deemed prima facie to have been issued for a
valuable consideration and every person whose signature appears thereon is deemed to
have become a party thereto for value. Thus, the mere introduction of the instrument
sued on in evidence prima facie entitles the plaintiff to recovery. Further, the rule is
quite settled that a negotiable instrument is presumed to have been given or indorsed
for a sufficient consideration unless otherwise contradicted and overcome by other

competent evidence. (Travel-On, Inc. vs. Court of Appeals and Arturo S. Miranda, G.R.
No. L-56169, June 26, 1992)
In actions based upon a negotiable instrument, it is unnecessary to aver or prove
consideration, for consideration is imported and presumed from the fact that it is a
negotiable instrument. The presumption exists whether the words "value received"
appear on the instrument or not. (Remigio S. Ong vs. People of the Philippines and Court
of Appeals, G.R. No. 139006, November 27, 2000)
Letters of credit and trust receipts are not negotiable instruments, but drafts issued in
connection with letters of credit are negotiable instruments. While the presumption
found under the Negotiable Instruments Law may not necessarily be applicable to trust
receipts and letters of credit, the presumption that the drafts drawn in connection with
the letters of credit have sufficient consideration applies. (Charles Lee, Chua Siok Suy,
Mariano Sio, Alfonso Yap, Richard Velasco and Alfonso Co vs. Court of Appeals and
Philippine Bank of Communications, G.R. NO. 117913, February 1, 2002)
When promissory notes appear to be negotiable as they meet the requirements of
Section 1 of the Negotiable Instruments Law, they are prima facie deemed to have been
issued for consideration unless sufficient evidence was adduced to show otherwise.
(Quirino Gonzales Logging Concessionaire, Quirino Gonzales and Eufemia Gonzales vs.
the Court of Appeals (CA) and Republic Planters Bank, G. R. No. 126568, April 30, 2003)
Upon issuance of a negotiable check, in the absence of evidence to the contrary, it is
presumed that the same was issued for valuable consideration which may consist either
in some right, interest, profit or benefit accruing to the party who makes the contract,
or some forbearance, detriment, loss or some responsibility, to act, or labor, or service
given, suffered or undertaken by the other side. Under the Negotiable Instruments
Law, it is presumed that every party to an instrument acquires the same for a
consideration or for value. As petitioner alleged that there was no consideration for
the issuance of the subject checks, it devolved upon him to present convincing evidence
to overthrow the presumption and prove that the checks were in fact issued without
valuable consideration. Petitioner, however, has not presented any credible evidence to
rebut the presumption, as well as North Stars assertion, that the checks were issued as
payment for the US$85,000 petitioner owed to the corporation and not to the manager
who facilitate the fund transfer. - Cayanan v. North Star International Travel Inc.,G.R. No.
172954, October 5, 2011
E. Accommodation Party
Section 29 of the Negotiable Instruments Law by clear mandate makes the
accomodation party "liable on the instrument to a holder for value, notwithstanding that
such holder at the time of taking the instrument knew him to be only an accommodation
party." It is not a valid defense that the accommodation party did not receive any
valuable consideration when he executed the instrument. It is not correct to say that the
holder for value is not a holder in due course merely because at the time he acquired
the instrument, he knew that the indorser was only an accommodation party. (Ang Tiong

vs. Lorenzo Ting, doing business under the name & style of Prunes Preserves MFG., &
Felipe Ang, G.R. No. L-26767, February 22, 1968)
When a promissory note which is payable to GSIS is not payable to bearer or order, such
instrument is non-negotiable. As such, third party mortgagor who mortgaged his
property to secure the obligation of another is not liable as an accommodation party
but liable under Article 2085 of the Civil Code to the effect that third persons who are
not parties to the principal obligation may secure the latter by pledging or mortgaging
their own property. (GSIS vs. Court of Appeals, G.R. No. L-40824, February 23, 1989)
When the checks are dishonored for lack of funds, the party who indorsed those checks
as accommodation endorser is liable for the payment of the checks. (People vs. Maniego,
148 SCRA 30, 1987)
When a married couple signed a promissory note in favor of a bank to enable the sister
of the husband to obtain a loan, they are considered as accommodation parties who are
liable for the payment of said loan. (Town Saving and Loan Bank, Inc. vs. Court of Appeals,
223 SCRA 459, 1993)
While a maker who signed a promissory note for the benefit of his co-maker ( who
received the loan proceeds ) is considered an accommodation party, he is, nevertheless,
entitled to a written notice on the default and the outstanding obligation of the party
accommodated. There being no such written notice, the Bank is grossly negligent in
terminating the credit line of the accommodation party for the unpaid interest dues
from the loans of the party accommodated and in dishonoring a check drawn against
the such credit line. Gonzales vs Phillippine Commercial and International Bank, GR No.
180257, February 23, 2011
F. Negotiation
1. Distinguished from Assignment
If an assigned promissory note had already been extinguished because its maker is
similarly indebted to the assignor, then the defense of set-off or legal compensation
could also be invoked against the assignee of the note. The debtors consent is not
needed to effectuate assignment of credit and negotiation. (Sesbreno vs. Court of
Appeals, 222 SCRA 466, 1993)
2. Modes of Negotiation
Where a check is made payable to the order of cash, the word cashdoes not purport
to be the name of any person, and hence the instrument is payable to bearer. The
drawee bank need not obtain any indorsement of the check, but may pay it to the person
presenting it without any indorsement. (Ang Tek Lian vs. the Court of Appeals, G.R. No.
L-2516, September 25, 1950)
Under the Negotiable Instruments Law, an instrument is negotiated when it is
transferred from one person to another in such a manner as to constitute the transferee

the holder thereof, and a holder may be the payee or indorsee of a bill or note, who is in
possession of it, or the bearer thereof. In case of a bearer instrument, mere delivery
would suffice. [Caltex (Philippines), Inc. vs. Court of Appeals and Security Bank and Trust
Company, G.R. No. 97753, August 10, 1992]
3. Kinds of Indorsements
G. Rights of the Holder
1. Holder in Due Course
Where the payee acquired the check under circumstances that should have put it to
inquiry as to the title of the holder who negotiated the check to him, the payee has the
duty to present evidence that he acquired the check in good faith. As holder's title was
defective or suspicious, it cannot be stated that the payee acquired the check without
knowledge of said defect in holder's title, and for this reason the presumption that it is
a holder in due course or that it acquired the instrument in good faith does not exist.
(Vicente R. De Ocampo & Co. vs. Anita Gatchalian, et al., G.R. No. L-15126, November
30, 1961)
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. This being so, petitioner cannot
set up against respondent the defense of nullity of the contract of sale between her and
VMS. (Juanita Salas vs. Hon. Court of Appeals and First Finance & Leasing Corporation,
G.R. No. 76788 January 22, 1990)
Possession of a negotiable instrument after presentment and dishonor, or payment, is
utterly inconsequential; it does not make the possessor a holder for value within the
meaning of the law. It gives rise to no liability on the part of the maker or drawer and
indorsers. (Stelco Marketing Corporation vs. Hon. Court of Appeals and Steelweld
Corporation of the Philippines, Inc., G.R. No. 96160 June 17, 1992)
It is then settled that crossing of checks should put the holder on inquiry and upon him
devolves the duty to ascertain the indorsers title to the check or the nature of his
possession. Failing in this respect, the holder is declared guilty of gross negligence
amounting to legal absence of good faith, contrary to Sec. 52(c) of the Negotiable
Instruments Law, and as such the consensus of authority is to the effect that the holder
of the check is not a holder in due course. (Bataan Cigar and Cigarette Factory, Inc. vs.
the Court of Appeals and State Investment House, Inc., G.R. No. 93048, March 3, 1994)
The disadvantage of not being a holder in due course is that the negotiable instrument
is subject to defenses as if it were non-negotiable. One such defense is absence or failure
of consideration. (Atrium Management Corporation vs. Court of Appeals, et al., G.R. No.
109491, February 28, 2001)
The weight of authority sustains the view that a payee may be a holder in due course.
Hence, the presumption that he is a prima facie holder in due course applies in his favor.

However, said presumption may be rebutted and vital to the resolution of this issue is
the concurrence of all the requisites provided for in Section 52 of the Negotiable
Instruments Law. (Cely Yang vs. Hon. Court of Appeals, Philippine Commercial
International Bank, Far East Bank & Trust Co., Equitable Banking Corporation, Prem
Chandiramani and Fernando David, G.R. No. 138074, August 15, 2003)
2. Defenses Against the Holder
H. Liabilities of Parties
1. Maker
Under the Negotiable Instruments Law, persons who write their names on the face of
promissory notes are makers and liable as such. (Republic Planters Bank vs. Court of
Appeals, 216 SCRA 730, 1992)
2. Drawer
The acceptance of a 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.
If no presentment is made at all, the drawer cannot be held liable irrespective of loss or
injury unless presentment is otherwise excused. (Myron C. Papa vs. A.U. Valencia & Co.,
Inc., et al. G.R. No. 105188. January 23, 1998)
In the case of DAUD, the depositor has, on its face, sufficient funds in his account,
although it is not available yet at the time the check was drawn, whereas in DAIF, the
depositor lacks sufficient funds in his account to pay the check. Moreover, DAUD does
not expose the drawer to possible prosecution for estafa and violation of BP 22, while
DAIF subjects the depositor to liability for such offenses. (Bank of the Philippine Islands
vs. Reynald R. Suarez, G.R. No. 167750, March 15, 2010)
3. Acceptor
To simplify proceedings, the payee of the illegally encashed checks should be allowed
to recover directly from the bank responsible for such encashment regardless of
whether or not the checks were actually delivered to the payee. (Associated Bank and
Conrado Cruz, vs. Hon. Court of Appeals, and Merle V. Reyes, doing business under the
name and style "Melissas RTW," G.R. No. 89802, May 7, 1992)
As a general rule, a bank or corporation who has obtained possession of a check upon
an unauthorized or forged indorsement of the payees signature and who collects the
amount of the check from the drawee, is liable for the proceeds thereof to the payee or
other owner, notwithstanding that the amount has been paid to the person from whom
the check was obtained. The theory of the rule is that the possession of the check on the
forged or unauthorized indorsement is wrongful and when the money had been
collected on the check, the proceeds are held for the rightful owners who may recover
them. The payee ought to be allowed to recover directly from the collecting bank,

regardless of whether the check was delivered to the payee or not. [Westmont Bank
(formerly Associated Banking Corp.) vs. Eugene Ong, G.R. No. 132560, January 30, 2002]
If a bank pays a forged check, it must be considered as paying out of its funds and cannot
charge the amount so paid to the account of the depositor. A bank is liable, irrespective
of its good faith, in paying a forged check. (Samsung Construction Company Philippines,
Inc. vs. Far East Bank and Trust Company and Court Of Appeals, G.R. NO. 129015, August
13, 2004)
4. Indorser
Section 63 of the Negotiable Instruments Law makes "a person placing his signature
upon an instrument otherwise than as maker, drawer or acceptor" a general indorser
"unless he clearly indicates by appropriate words his intention to be bound in some other
capacity." (Ang Tiong vs. Lorenzo Ting, doing business under the name & style of Prunes
Preserves MFG., & Felipe Ang, G.R. No. L-26767, February 22, 1968)
After an instrument is dishonored by non-payment, indorsers cease to be merely
secondarily liable; they become principal debtors whose liability becomes identical to
that of the original obligor.The holder of the negotiable instrument need not even
proceed against the drawer before suing the indorser. (Maria Tuazon vs. Heirs of
Bartolome Ramos, 463 SCRA 408, 2005)
The collecting bank which accepted a post-dated check for deposit and sent it for
clearing and the drawee bank which cleared and honored the check are both liable to
the drawer for the entire face value of the check. Allied Banking Corporation vs. Bank of
the Philippine Islands, GR. 188363, February 27, 2013
5. Warranties
The subject checks were accepted for deposit by the Bank for the account of Sayson
although they were crossed checks and the payee was not Sayson but Melissas RTW.
The Bank stamped thereon its guarantee that "all prior endorsements and/or lack of
endorsements (were) guaranteed." By such deliberate and positive act, the Bank had for
all legal intents and purposes treated the said checks as negotiable instruments and,
accordingly, assumed the warranty of the endorser. (Associated Bank and Conrado Cruz,
vs. Hon. Court of Appeals, and Merle V. Reyes, doing business under the name and style
"Melissas RTW," G.R. No. 89802, May 7, 1992)
I. Presentment for Payment
The effects of crossing a check relate to the mode of its presentment for payment. Under
Section 72 of the Negotiable Instruments Law, presentment for payment must be made
by the holder or by some person authorized to receive payment on his behalf. Who the
holder or authorized person depends on the face of the check. (Associated Bank and
Conrado Cruz, vs. Hon. Court of Appeals, and Merle V. Reyes, doing business under the
name and style "Melissas RTW," G.R. No. 89802, May 7, 1992)

1. Necessity of Presentment for Payment


Under the Negotiable Instruments Law, an instrument not payable on demand must be
presented for payment on the day it falls due. When the instrument is payable on
demand, presentment must be made within a reasonable time after its issue. In the case
of a bill of exchange, presentment is sufficient if made within a reasonable time after
the last negotiation thereof. (International Corporate Bank vs. Gueco, 351 SCRA 516,
2001)
2. Parties to Whom Presentment for Payment Should Be Made
3. Dispensation with Presentment for Payment
4. Dishonor by Non-Payment
J. Notice of Dishonor
The term "notice of dishonor" denotes that a check has been presented for payment and
was subsequently dishonored by the drawee bank. This means that the check must
necessarily be due and demandable because only a check that has become due can be
presented for payment and subsequently be dishonored. A postdated check cannot be
dishonored if presented for payment before its due date. (Jaime Dico vs. Hon. Court of
Appeals and People of the Philippines, G.R. NO. 141669, February 28, 2005)
1. Parties to Be Notified
Notice of dishonor to the corporation, which has a personality distinct and separate
from the officer of the corporation, does not constitute notice to the latter. The absence
of notice of dishonor necessarily deprives an accused an opportunity to preclude a
criminal prosecution. (Lao vs. Court of Appeals, G.R. No. 119178, June 20, 1997)
If the drawer or maker is an officer of a corporation, the notice of dishonor to the said
corporation is not notice to the employee or officer who drew or issued the check for
and in its behalf. (Ofelia Marigomen vs. People of the Philippines, G.R. No. 153451, May
26, 2005)
Under the Negotiable Instruments Law, notice of dishonor is not required if the drawer
has no right to expect or require the bank to honor the check, or if the drawer has
countermanded payment. In the instant case, all the checks were dishonored for any of
the following reasons: "account closed", "account under garnishment", insufficiency of
funds", or "payment stopped." In the first three instances, the drawers had no right to
expect or require the bank to honor the checks, and in the last instance, the drawers had
countermanded payment. (Great Asian Sales Center Corporation and Tan Chong Lin vs.
the Court of Appeals and Bancasia Finance and Investment Corporation, G.R. No. 105774,
April 25, 2002)
2. Parties Who May Give Notice and Dishonor

When what was stamped on the check was Payment Stopped Funded and DAUD
which means drawn against uncollected deposits, the check was not issued without
sufficient funds and was not dishonored due to insufficiency of funds. Even with
uncollected deposits, the bank may honor the check at its discretion in favor of favored
clients, in which case there would be no violation of B. P. 22. (Eliza T. Tan vs. People of
the Philippines, G.R. No. 141466, January 19, 2001)
3. Effect of Notice
In the case of DAUD, the depositor has, on its face, sufficient funds in his account,
although it is not available yet at the time the check was drawn, whereas in DAIF, the
depositor lacks sufficient funds in his account to pay the check. Moreover, DAUD does
not expose the drawer to possible prosecution for estafa and violation of BP 22, while
DAIF subjects the depositor to liability for such offenses. (Bank of the Philippine Islands
vs. Reynald R. Suarez, G.R. No. 167750, March 15, 2010)
The failure of the prosecution to prove the existence and receipt by petitioner of the
requisite written notice of dishonor and that he was given at least five banking days
within which to settle his account constitutes sufficient ground for his acquittal in a case
for violation of BP 22. (James Svendsen vs. People of the Philippines, G.R. NO. 175381,
February 26, 2008)
4. Form of Notice
A notice of dishonor received by the maker or drawer of the check is thus indispensable
before a conviction for violation of BP 22 can ensue. The notice of dishonor may be sent
by the offended party or the drawee bank, and it must be in writing. A mere oral notice
to pay a dishonored check will not suffice. The lack of a written notice is fatal for the
prosecution. (Jaime Dico vs. Hon. Court of Appeals and People of the Philippines, G.R.
NO. 141669, February 28, 2005)
5. Waiver
6. Dispensation with Notice
7. Effect of Failure to Give Notice
K. Discharge of Negotiable Instrument
1. Discharge of Negotiable Instrument
In depositing the check in his name, the depositor did not become the out-right owner
of the amount stated therein. By depositing the check with the bank, depositor was, in
a way, merely designating the bank as the collecting bank. This is in consonance with
the rule that a negotiable instrument, such as a check, whether a managers check or
ordinary check, is not legal tender. As such, after receiving the deposit, under its own
rules, the bank shall credit the amount to the depositors account or infuse value thereon
only after the drawee bank shall have paid the amount of the check or the check has

been cleared for deposit. The depositors contention that after the lapse of the 35-day
period the amount of a deposited check could be withdrawn even in the absence of a
clearance thereon, otherwise it could take a long time before a depositor could make a
withdrawal is untenable. Said practice amounts to a disregard of the clearance
requirement of the banking system. Bank of the Philippine Islands vs. Court of Appeals,
326 SCRA 641 (2000)
Mere delivery of a check does not discharge the obligation. The obligation is not
extinguished and remains suspended until the payment by commercial document is
actually realized. Thus, although the value of a check was deducted from the funds of
the drawer but the funds were never delivered to the payee because the drawee bank
set off the amount against the losses it incurred from the forgery of the drawers check,
the drawers obligation to the payee remains unpaid. Cebu International Finance
Corporation vs. Court of Appeals, 316 SCRA 488 (1999)
While Section 119 of the Negotiable Instrument Law in relation to Article 1231 of the
Civil Code provides that one of the modes of discharging a negotiable instrument is by
any other act which will discharge a simple contract for the payment of money, such as
novation, the acceptance by the holder of another check which replaced the dishonored
bank check did not result to novation. There are only two ways which indicate the
presence of novation and thereby produce the effect of extinguishing an obligation by
another which substitutes the same. First, novation must be explicitly stated and
declared in unequivocal terms as novation is never presumed. Secondly, the old and the
new obligations must be incompatible on every point. In the instant case, there was no
express agreement that the holders acceptance of the replacement check will
discharge the drawer and endorser from liability. Neither is there incompatibility
because both checks were given precisely to terminate a single obligation arising from
the same transaction. Anamer Salazar vs. JY Brothers Marketing Corporation, GR no.
171998, October 20, 2010
2. Discharge of Parties Secondarily Liable
3. Right of Party Who Discharged Instrument
4. Renunciation by Holder
L. Material Alteration
1. Concept
An alteration is said to be material if it alters the effect of the instrument. It means an
unauthorized change in an instrument that purports to modify in any respect the
obligation of a party or an unauthorized addition of words or numbers or other change
to an incomplete instrument relating to the obligation of a party. In other words, a
material alteration is one which changes the items which are required to be stated under

Section 1 of the Negotiable Instruments Law. (Philippine National Bank vs. Court of
Appeals, Capitol City Development Bank, Philippine Bank of Communications, and F.
Abante Marketing, G.R. No. 107508, April 25, 1996)
The serial number is not an essential requisite for negotiability under Section 1 of the
Negotiable Instrument Law and an alteration of which is not material. The alteration of
the serial number does not change the relations between the parties. (Philippine
National Bank vs. Court of Appeals, Capitol City Development Bank, Philippine Bank of
Communications, and F. Abante Marketing, G.R. No. 107508, April 25, 1996)
Alterations of the serial numbers do not constitute material alterations on the checks.
Since there were no material alterations on the checks, respondent as drawee bank has
no right to dishonor them and return them to petitioner, the collecting bank. (The
International Corporate Bank, Inc. vs. Court of Appeals and Philippine National Bank, G.R.
NO. 129910, September 5, 2006)
2. Effect of Material Alteration
Payment made under materially altered instrument is not payment done in accordance
with the instruction of the drawer. When the drawee bank pays a materially altered
check, it violates the terms of the check, as well as its duty to charge its client's account
only for bona fide disbursements he had made. Since the drawee bank, in the instant
case, did not pay according to the original tenor of the instrument, as directed by the
drawer, then it has no right to claim reimbursement from the drawer, much less, the right
to deduct the erroneous payment it made from the drawer's account which it was
expected to treat with utmost fidelity. (Metropolitan Bank and Trust Company vs. Renato
D. Cabilzo, G.R. No. 154469, December 6, 2006)
M. Acceptance
1. Definition
The acceptance of a bill is the signification by the drawee of his assent to the order of
the drawer. (Prudential Bank, Petitioner, v. Intermediate Appellate Court, Philippine
Rayon Mills Inc. and Anacleto R. Chi, G.R. No. 74886, December 8, 1992)
Indeed, "acceptance" and "payment" are, within the purview of the law, essentially
different things, for the former is "a promise to perform an act," whereas the latter is the
"actual performance" thereof. In the words of the Law, "the acceptance of a bill is the
signification by the drawee of his assent to the order of the drawer," which, in the case
of checks, is the payment, on demand, of a given sum of money. (Philippine National
Bank vs. the Court of Appeals and Philippine Commercial and Industrial Bank, G.R. No. L26001, October 29, 1968)
2. Manner
When a check had been certified by the drawee bank, such certification is equivalent to
acceptance because it enables the holder to use it as money. Also, where a holder

procures a check to be certified, the check operates as an assignment of a part of the


funds to the creditor. (New Pacific Timber vs. Seneris, 101 SCRA 686, 1980)
Acceptance may be done in writing by the drawee in the bill itself, or in a separate
instrument. (Prudential Bank, Petitioner, v. Intermediate Appellate Court, Philippine
Rayon Mills Inc. and Anacleto R. Chi, G.R. No. 74886, December 8, 1992)
3. Time for Acceptance
4. Rules Governing Acceptance
N. Presentment for Acceptance
1. Time/Place/Manner of Presentment
Presentment for acceptance is defined as the production of a bill of exchange to a
drawee for acceptance. Presentment for acceptance is necessary only where the bill is
payable after sight or in any other case, where presentment for acceptance is necessary
in order to fix the maturity of the instrument, or where the bill expressly stipulates that
it shall be presented for acceptance, or where the bill is drawn payable elsewhere than
at the residence or place of business of the drawee. (Prudential Bank vs. Intermediate
Appellate Court, Philippine Rayon Mills Inc. and Anacleto R. Chi, G.R. No. 74886,
December 8, 1992)
2. Effect of Failure to Make Presentment
While it is true that the delivery of a check produces the effect of payment only when it
is encashed, pursuant to Art. 1249 of the Civil Code, the rule is otherwise if the debtor is
prejudiced by the creditors unreasonable delay in presentment. After more than ten
(10) years from the payment in part by cash and in part by check, the presumption is that
the check had been encashed, and the failure to encash for more than ten (10) years
undoubtedly resulted in the impairment of the check through unreasonable and
unexplained delay on the part of the payee. (Myron C. Papa vs. A.U. Valencia & Co., Inc.,
et al. G.R. No. 105188. January 23, 1998)
3. Dishonor by Non-Acceptance
O. Promissory Notes
Where an instrument containing the words I promise to pay is signed by two or more
persons, they are deemed to be jointly and severally liable thereon. Under Section 17
(g) of the Negotiable Instrument Law and Art. 1216 of the Civil Code, where the
promissory note was executed jointly and severally by two or more persons, the payee
of the promissory note had the right to hold any one or any two of the signers of the
promissory note responsible for the payment of the amount of the note. (Philippine
National Bank vs. Concepcion Mining Company, Inc., et al., G.R. No. L-16968. July 31,
1962.)

The buyer of a car shall be liable to pay the unpaid balance on the promissory note and
not just the installments due and payable before the said automobile was carnapped.
Being the principal contract, the promissory note is unaffected by whatever befalls the
subject matter of the accessory contract. (Perla Compania De Seguros, Inc. vs. the Court
of Appeals, Herminio Lim And Evelyn Lim, G.R. No. 96452, May 7, 1992)
When a promissory note expresses "no time for payment," it is deemed "payable on
demand. (Jose L. Ponce de leon vs. Rehabilitation Finance Corporation, G.R. No. L-24571,
December 18, 1970)
When there is a discrepancy between the amount in words and the amount in figures in
the check, the rule in the Negotiable Instruments Law is that it would be the amount in
words that would prevail. (People of the Philippines vs. Martin L. Romero and Ernesto C.
Rodriguez, G.R. No. 112985, April 21, 1999)
An instrument which begins with I, We, or Either of us promise to pay, when signed by
two or more persons, makes them solidarily liable. Also, the phrase joint and several
binds the makers jointly and individually to the payee so that all may be sued together
for its enforcement, or the creditor may select one or more as the object of the suit.
(Astro Electronics Corp. and Peter Roxas vs. Philippine Export and Foreign Loan Guarantee
Corporation, G.R. No. 136729, September 23, 2003)
P. Checks
1. Definition
Settled is the doctrine that a check is the only a substitute for money and not money;
hence, the delivery of such an instrument does not, by itself, operate as payment. This is
especially true in case of post-dated check. Thus, the issuance of a post-dated check was
not effective payment. It did not comply with the cardholders obligation to pay his past
due credit card charges. Consequently, the card company was justified in suspending his
credit card. BPI Card Corporation vs. Court of Appeals, 296 SCRA 260 (1998)
2. Kinds
Under accepted banking practice, crossing a check is done by writing two 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 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 the two parallel lines are "and Co." or "for
payees account only," which means that the drawee bank should not encash the check
but merely accept it for deposit. (Associated Bank and Conrado Cruz, vs. Hon. Court of
Appeals, and Merle V. Reyes, doing business under the name and style "Melissas RTW,"
G.R. No. 89802, May 7, 1992)
The effects of crossing a check are: (1) that the check may not be encashed but only
deposited in the bank; (2) that the check may be negotiated only once to one who
has an account with a bank; and (3) that the act of crossing the check serves as a warning

to the holder that the check has been issued for a definite purpose so that he must
inquire if he has received the check pursuant to that purpose. (State Investment House
vs. IAC, 175 SCRA 310, 1989)
A memorandum check is an evidence of debt against the drawer and although may not
be intended to be presented, has the same effect as an ordinary check and if passed on
to a third person, will be valid in his hands like any other check. (People vs. Nitafan, G.R.
No. 75954, October 22, 1992)
A cashiers check is a primary obligation of the issuing bank and accepted in advance by
its mere issuance. By its very nature, a cashiers check is the banks order to pay drawn
upon itself, committing in effect its total resources, integrity and honor behind the
check. A cashiers check by its peculiar character and general use in the commercial
world is regarded substantially to be as good as the money which it represents. (Tan vs.
Court of Appeals, G.R. No. 108555, December 20, 1994)
Payment in check by the debtor may be acceptable as valid, if no prompt objection to
said payment is made. Consequently, the debtors tender of payment in the form of
managers check is valid. Thus, where the seller of real property tendered the return of
the reservation fee in the form of managers check because the sale agreement was not
fully consummated owing to the failure of the buyer to pay the balance of the purchase
price within the stipulated period, the tender of the managers check was considered a
valid tender of payment. When the buyer refused to accept the check, the consignation
of the check with the court was sufficient to satisfy the obligation. (Teddy G. Pabugais
vs. Dave Sahijiwani, G.R. No. 156846, February 23, 2004)
While its manager forged the signature of the authorized signatories of clients in the
application for managers checks and forged the signatures of the payees thereof, the
drawee bank also failed to exercise the highest degree of diligence required of banks in
the case at bar. It allowed its manager to encash the Managers checks that were plainly
crossed checks. A crossed check is one where two parallel lines are drawn across its face
or across its corner. Based on jurisprudence, the crossing of a check has the following
effects: (a) the check may not be encashed but only deposited in the bank; (b) the check
may be negotiated only once to the one who has an account with the bank; and (c)
the act of crossing the check serves as a warning to the holder that the check has been
issued for a definite purpose and he must inquire if he received the check pursuant to
this purpose; otherwise, he is not a holder in due course. In other words, the crossing of
a check is a warning that the check should be deposited only in the account of the payee.
When a check is crossed,it is the duty of the collecting bank to ascertain that the check
is only deposited to the payees account. Philippine Commercial International Bank vs.
Balmaceda,G.R. No. 158143, September 21, 2011
3. Presentment for Payment
A judgment creditor cannot validly refuse acceptance of the payment of the judgment
obligation tendered in the form of a cashiers check. A cashiers check issued by a bank
of good standing is deemed as cash. (New Pacific Timber vs. Seneris, G.R. No. 41764,
December 19, 1980)

The obligation of the judgment debtor subsists when the check issued by a judgment
debtor was made payable to the sheriff who encashed the same but failed to deliver its
proceeds to the judgment creditor. This is because a check does not produce the effect
of payment until encashed. (Philippine Airlines vs. Court of Appeals, G.R. No. 49188,
January 30, 1990)
Tendering a check on the last day of the grace period to pay the purchase price is not
valid and a seller has a right to cancel the contract. A check, be it a managers check or
ordinary check, is not legal tender, and an offer of a check in payment of a debt is not a
valid tender of payment and may be refused by the creditor. (Bishop of Malolos vs.
Intermediate Appellate Court, G.R. No. 72110, November 16, 1990)
A check may be used for the exercise of the right of redemption, the same being a right
and not an obligation. (Fortunado vs. Court of Appeals, 196 SCRA 26, 1991)
The judgment creditor may validly refuse the tender of payment partly in check and
partly in cash. A cashiers check tendered by the judgment debtor to satisfy the
judgment debt is not a legal tender. (Tibajia, Jr. vs. Court of Appeals, G.R. No. 100290,
June 4, 1993)
A check does not constitute legal tender, but once the creditor accepted a fully funded
check to settle an obligation, he is estopped from later on denouncing the efficacy of
such tender of payment. By accepting the tendered check and converting it into money,
the creditor is presumed to have accepted it as payment and to hold otherwise would
be inequitable and unfair to the obligor. (Far East Bank & Trust Company vs. Diaz Realty,
Inc., G.R. No. 138588, August 23, 2001)
A stale check is one which has not been presented for payment within a reasonable time
after its issue. It is valueless and, therefore, should not be paid. (International Corporate
Bank vs. Sps. Francis S. Gueco and Ma. Luz E. Gueco, G.R. No. 141968, February 12, 2001)
Where a managers check made payable to cash and appearing regular on its face,
was presented to another bank that immediately honors it no faulty may be attributed
to such bank in relying upon the integrity of the check, even if payment thereon was
later ordered stopped by the drawer-bank because the one who encashed the check
was actually not the intended payee. In other words, as between the bank that honored
the managers check and the drawer-bank, it is the latter that should bear the loss.
(Security Bank and Trust Company vs. Rizal Commercial Banking Corporation, G.R. No.
170984, 30 January 2009)
a. Time
A check must be presented for payment within a reasonable time after its issue, and in
determining what is a reasonable time, regard is to be had to the nature of the
instrument, the usage of trade or business with respect to such instruments and the facts
of the particular case. The test is whether the payee employed such diligence as a
prudent man exercise in his own affairs. This is because the nature and theory behind

the use of a check points to its immediate use and payability. (International Corporate
Bank vs. Sps. Francis S. Gueco and Ma. Luz E. Gueco, G.R. No. 141968, February 12, 2001)
b. Effect of Delay
Failure to present for payment within a reasonable time will result to the discharge of
the drawer only to the extent of the loss caused by the delay. Failure to present on time,
thus, does not totally wipe out all liability. In fact, the legal situation amounts to an
acknowledgment of liability in the sum stated in the check. In this case, the debtors have
not alleged, much less shown that they or the bank which issued the managers check
has suffered damage or loss caused by the delay or non-presentment. Definitely, the
original obligation to pay certainly has not been erased. (International Corporate Bank
vs. Sps. Francis S. Gueco and Ma. Luz E. Gueco, G.R. No. 141968, February 12, 2001)
IV. Insurance Code
A. Concept of Insurance
One test in order to determine whether one is engaged in insurance business is whether
the assumption of risk and indemnification of loss (which are elements of an insurance
business) are the principal object and purpose of the organization or whether they are
merely incidental to its business. If these are the principal objectives, the business is that
of insurance. But if they are merely incidental and service is the principal purpose, then
the business is not insurance. In this case, Health Maintenance Organizations (HMOs)
are not insurance business. (Philippine Health Care Providers, Inc., vs. Commissioner of
Internal Revenue, G.R. No. 167330, September 18, 2009)
The contract of insurance is one of perfect good faith (uferrimal fidei) not for the insured
alone, but equally so for the insurer; in fact, it is mere so for the latter, since its dominant
bargaining position carries with it stricter responsibility. (Qua Chee Gan v. Law Union, 98
Phil 85, 1955)
Being a contract of adhesion, terms of a policy are to be construed strictly against the
party which prepared the contract - the insurer. By reason of exclusive control of
insurance contract, ambiguity must be strictly interpreted against the insurer and
liberally in favor of the insured, especially to avoid forfeiture. (Philamcare Health System
vs. Court of Appeals, 379 SCRA 356, 2002)
The cardinal principle in Insurance Law is that a policy or contract of insurance is to be
construed liberally in favor of the insured and strictly as against the insurance company,
yet, contracts of insurance, like other contracts, are to be construed according to the
sense and meaning of the terms, which the parties themselves have used. (Lalican vs.
Insular Life Assurance Company, Ltd. 597 SCRA 159, 2009)
Contracts of insurance, like other contracts, are to be construed according to the sense
and meaning of the terms which the parties themselves have used. If such terms are clear
and unambiguous, they must be taken and understood in their plain, ordinary and
popular sense. Accordingly, in interpreting the exclusions in an insurance contract, the

terms used specifying the excluded classes therein are to be given their meaning as
understood in common speech. A contract of insurance is a contract of adhesion. So,
when the terms of the insurance contract contain limitations on liability, courts should
construe them in such a way as to preclude the insurer from non-compliance with his
obligation. Alpha Insurance and Surety Co. vs. Castor, GR No. 198174, September 2, 2013
B. Elements of an Insurance Contract
Under Sec. 2(a) of the Insurance Code, an insurance contract is an agreement whereby
one undertakes for a consideration to indemnify another against loss, damage or liability
arising from an unknown or contingent event, and with the following elements: 1.)
Insured has an insurable interest; 2.) Insured is subject to a risk of loss by the happening
of the designated peril; 3.) Insurer assumes risk; 4.) Such assumption of risk is part of a
general scheme to distribute actual losses among a large group of persons bearing a
similar risk; and 5.) In consideration of the insurers promise, the insured pays a premium.
(Philamcare Health System vs. Court of Appeals, 379 SCRA 432, 1997)
For purposes of determining the liability of a health care provider to its members, a health
care agreement is in the nature of non-life insurance, which is primarily a contract of
indemnity. Once the member incurs hospital, medical or any other expense arising from
sickness, injury or other stipulated contingent, the health care provider must pay for the
same to the extent agreed upon under the contract. Limitations as to liability must be
distinctly specified and clearly reflected in the extent of coverage which the company
voluntary assume, otherwise, any ambiguity arising therein shall be construed in favor of the
member. Being a contract of adhesion, the terms of an insurance contract are to be
construed strictly against the party which prepared the contract - the insurer. This is equally
applicable to Health Care Agreements. The phraseology used in medical or hospital service
contracts, such as standard charges , must be liberally construed in favor of the subscriber,
and if doubtful or reasonably susceptible of two interpretations the construction conferring
coverage is to be adopted, and exclusionary clauses of doubtful import should be strictly
construed against the provider. Thus, if the member, while on vacation, underwent a
procedure in the USA, the standard charges referred to in the contract should mean
standard charges in USA and not the cost had the procedure been conducted in the
Philippines. Fortune Medicare Inc. vs Amorin. G.R. No. 195872, March 12, 2014.

C. Characteristics/Nature of Insurance Contracts


The only persons entitled to claim the insurance proceeds are either the insured, if still
alive; or the beneficiary, if the insured is already deceased, upon the maturation of the

policy. The exception to this rule is a situation where the insurance contract was
intended to benefit third persons who are not parties to the same in the form of
favorable stipulations or indemnity. In such a case, third parties may directly sue and
claim from the insurer. Because no legal proscription exists in naming as beneficiaries
the children of illicit relationships by the insured, the shares of Eva in the insurance
proceeds, whether forfeited by the court in view of the prohibition on donations under
Article 739 of the Civil Code or by the insurers themselves for reasons based on the
insurance contracts, must be awarded to the said illegitimate children, the designated
beneficiaries, to the exclusion of heirs. (Heirs Of Loreto c. Maramag vs. Eva Verna De
Guzman Maramag, et al., G.R. No. 181132, June 5, 2009)
The insurance contract is primarily a risk-distributing device, a mechanism by which all
members of a group exposed to a particular risk contribute premiums to an insurer. From
these contributory funds are paid whatever losses occur due to exposure to the peril
insured against. Each party therefore takes a risk: the insurer being compelled upon the
happening of the contingency to pay the entire sum agreed upon; and the insured of a
parting with the amount required as premium, without receiving anything therefore in
case the contingency does not happen. (Tibay vs. Court of Appeals, 257 SCRA 126, 1996)
D. Classes
1. Marine
The evidence shows that the loss of the cargo was due to the perils of the ship; that the
sinking of the barge was due to improper loading of the logs on one side so that the
barge was tilting on one side and for that it did not navigate on even keel; that it was no
longer seaworthy that was why it developed leak. A loss which, in the ordinary course of
events, results from the natural and inevitable action of the sea, from the ordinary wear
and tear of the ship, or from the negligent failure of the ship's owner to provide the
vessel with proper equipment to convey the cargo under ordinary conditions, is not a
peril of the sea but such a loss is rather due to what has been aptly called the 'peril of
the ship.' The insurer undertakes to insure against perils of the sea and similar perils, not
against perils of the ship. (Isabela Roque, doing business under the name and style of
Isabela Roque Timber Enterprises, et al., vs. The Intermediate Appellate Court, et al., G.R.
No. L-66935, November 11, 1985)
The rusting of steel pipes in the course of a voyage is a peril of the sea in view of the
toll on the cargo of wind, water, and salt conditions. (Cathay Insurance Co., vs. The Court
of Appeals, et al., G.R. No. L-76145, June 30, 1987)
Fire may not be considered a natural disaster or calamity since it almost always arises
from some act of man or by human means. It cannot be an act of God unless caused by
lightning or a natural disaster or casualty not attributable to human agency. In the case
at bar, it is not disputed that a small flame was detected on the acetylene cylinder and
that by reason thereof, the same exploded despite efforts to extinguish the fire. Verily,
the cause of the fire was the fault or negligence of ESLI. (Philippine Home Assurance
Corporation vs. Court of Appeals, G.R. No. 106999, June 20, 1996)

A marine insurance policy providing that the insurance was to be against all risks must
be construed as creating a special insurance and extending to other risks than are usually
contemplated, and covers all losses except such as arise from the fraud of the insured.
The burden of the insured, therefore, is to prove merely that the goods he transported
have been lost, destroyed or deteriorated and thereafter, the burden is shifted to the
insurer to prove that the loss was due to excepted perils. In the present case, there being
no showing that the loss was caused by any of the excepted perils, the insurer is liable
under the policy. (Filipino Merchants Insurance Co., Inc., vs. Court Of Appeals, et al., G.R.
No. 85141, November 28, 1989)
An all risks provision of a marine policy creates a special type of insurance which
extends coverage to risks not usually contemplated and avoids putting upon the insured
the burden of establishing that the loss was due to peril falling within the policys
coverage. The insurer can avoid coverage upon demonstrating that a specific provision
expressly excludes the loss from coverage but in this case, the damage caused to the
cargo has not been attributed to any of the exceptions provided for nor is there any
pretension to this effect. (Choa Tiek Seng, doing business under the name and style of
Sengs Commercial Enterprises vs. The Court of Appeals, et al., G.R. No. 84507, March 15,
1990)
2. Fire
As defined by Section 60 of the Insurance Code, an open policy is one in which the value
of the thing insured is not agreed upon but is left to be ascertained in case of loss. This
means that the actual loss, as determined, will represent the total indemnity due the
insured from the insurer except only that the total indemnity shall not exceed the face
value of the policy. Where the actual loss in an open policy has been ascertained, the
factual determination should be respected in the absence of proof that it was arrived at
arbitrarily. (Development Insurance Corporation vs. Intermediate Appellate Court, et al.,
G.R. No. L-71360, July 16, 1986)
3. Casualty
It should be noted that the insurance policy entered into by the parties is a theft or
robbery insurance policy which is a form of casualty insurance. Except with respect to
compulsory motor vehicle liability insurance, the Insurance Code contains no other
provisions applicable to casualty insurance or to robbery insurance in particular. These
contracts are, therefore, governed by the general provisions applicable to all types of
insurance. Outside of these, the rights and obligations of the parties must be determined
by the terms of their contract, taking into consideration its purpose and always in
accordance with the general principles of insurance law. (Fortune Insurance and Surety
Co., Inc. vs. Court of Appeals and Producers Bank of the Philippines, G.R. No. 115278, May
23, 1995)
It has been aptly observed that in burglary, robbery, and theft insurance, the opportunity
to defraud the insurerthe moral hazardis so great that insurers have found it
necessary to fill up their policies with countless restrictions, many designed to reduce
this hazard. Seldom does the insurer assume the risk of all losses due to the hazards

insured against. Persons frequently excluded under such provisions are those in the
insureds service and employment. The purpose of the exception is to guard against
liability should the theft be committed by one having unrestricted access to the
property. (Fortune Insurance and Surety Co., Inc. vs. Court of Appeals and Producers Bank
of the Philippines, G.R. No. 115278, May 23, 1995)
4. Suretyship
A surety contract is merely a collateral one, its basis is the principal contract or
undertaking which it secures. Necessarily, the stipulations in such principal agreement
must at least be communicated or made known to the surety. (First Lepanto-Taisho
Insurance Corporation vs. Chevron Philippines, Inc., G.R. No. 177839, January 18, 2012)
The surety bond must be read in its entirety and together with the contract between
NPC and the contractors. The provisions must be construed together to arrive at their
true meaning. Certain stipulations cannot be segregated and then made to control. In
the case at bar, it cannot be denied that the breach of contract in this case, that is, the
abandonment of the unfinished work of the transmission line of the NPC by the
contractor FEEI was within the effective date of the contract and the surety bond. Such
abandonment gave rise to the continuing liability of the bond as provided for in the
contract which is deemed incorporated in the surety bond executed for its completion.
(National Power Corporation vs. Court of Appeals, et al., G.R. No. L-43706, November 14,
1986)
Under Section 176 of the Insurance Code, as amended, the liability of a surety in a surety
bond is joint and several with the principal obligor. Finman's bond was posted by Pan
Pacific in compliance with the requirements of Article 31 of the Labor Code in order to
guarantee compliance with prescribed recruitment procedures, rules and regulations,
and terms and, conditions of employment as appropriate. While Finman has refrained
from attaching a copy of the bond it had issued to its Petition for Certiorari, there can
be no question that the conditions of the surety bond include the POEA Rules and
Regulation. It is settled doctrine that the conditions of a bond specified and required in
the provisions of the statute or regulation providing for the submission of the bond, are
incorporated or built into all bonds tendered under that statute or regulation, even
though not there set out in printer's ink. (Finman General Assurance Corporation vs.
William Inocencio, et al., G.R. No. 90273-75, November 15, 1989)
Section 177 of the Insurance Code states that the surety is entitled to payment of the
premium as soon as the contract of suretyship or bond is perfected and delivered to the
obligor. No contract of suretyship or bonding shall be valid and binding unless and until
the premium therefor has been paid, except where the obligee has accepted the bond,
in which case the bond becomes valid and enforceable irrespective of whether or not
the premium has been paid by the obligor to the surety. A continuing bond, as in this
case where there is no fixed expiration date, may be canceled only by the obligee, which
is the NFA, by the Insurance Commissioner, and by the court. By law and by the specific
contract involved in this case, the effectivity of the bond required for the obtention of a
license to engage in the business of receiving rice for storage is determined not alone

by the payment of premiums but principally by the Administrator of the NFA. (Country
Bankers Insurance Corporation vs. Antonio Lagman, G.R. No. 165487, July 13, 2011)
The extent of the suretys liability is determined by the language of the suretyship contract
or bond itself. It can not be extended by implications beyond the terms of the contract.
Having accepted the bond, the creditor is bound by the recital in the surety bond that the
terms and conditions of its distributorship contract be reduced in writing or at the very least
communicated in writing to the surety. Such non-compliance by the creditor impacts not on
the validity or legality of the surety contract but on the creditors right to demand
performance. First Lepanto-Taisho Insurance Corporation vs Chevron Philippines, GR No.
177839, January 18, 2012

5. Life
Where a GSIS member failed to state his beneficiary or beneficiaries in his application
for membership, the proceeds of the retirement benefits shall accrue to his estate and
will be distributed among his legal heirs in accordance with the law on intestate
succession. (Re: Claims for Benefits of the Heirs of the Late Mario vs. Chanliongco, Adm.
Matter No. I90-RET., October 18, 1977)
A life insurance policy is no different from a civil donation insofar as the beneficiary is
concerned for both are founded upon the same consideration: liberality. A beneficiary
is like a donee, because from the premiums of the policy which the insured pays, out of
liberality, the beneficiary will receive the proceeds or profits of said insurance. As a
consequence, the proscription in Article 739 of the new Civil Code should equally
operate in life insurance contracts. The conviction for adultery or concubinage is not
necessary before the disabilities mentioned in Article 739 may effectuate. It would be
sufficient if evidence preponderates upon the guilt of the consort for the offense
indicated. (The Insular Life Assurance Company, Ltd., vs. Carponia t. Ebrado And Pascuala
Vda. De Ebrado, G.R. No. l-44059, October 28, 1977)
There is nothing in the policy that relieves the insurer of the responsibility to pay the
indemnity agreed upon if the insured is shown to have contributed to his own accident.
Indeed, most accidents are caused by negligence. Lim was unquestionably negligent
and that negligence cost him his own life. But it should not prevent his widow from
recovering from the insurance policy he obtained precisely against accident. (Sun
Insurance Office, Ltd., vs. The Court of Appeals, G.R. No. 92383, July 17, 1992)
The legitimate heirs of the insured who were not designated as beneficiaries in the life
insurance policies are considered third parties to the insurance contracts and, thus are not
entitled to the proceeds thereof. The insurance companies have no legal obligation to turn
over the insurance proceeds to them. The revocation of the common law spouse of the
insured as a beneficiary in one policy and her disqualification as such in another are of no
moment considering that the designation of the illegitimate children as beneficiaries in the
Insurance Policies remains valid. Because no legal proscription exists in naming as
beneficiaries children of illicit relationships by the insured, the shares of the common-law

spouse in the insurance proceeds, whether forfeited by the Court in view of the prohibition
on donation under Article 739 of the Civil Code or by the insurers themselves for reasons
based on the insurance contracts, must be awarded to the said illegitimate children, the
designated beneficiaries, to the exclusion of the legitimate heirs. It is only in cases where
the insured has not designated any beneficiary, or when the designated beneficiary is
disqualified by law to receive the proceeds, that the insurance policy proceeds shall
redound to the benefit of the estate of the insured. Heirs of Loreto C. Maramag vs. Maramag,
GR No. 181132, June 5, 2009

6. Compulsory Motor Vehicle Liability Insurance


Insurers liability under Third Party Liability coverage accrues immediately upon
occurrence of injury or event upon which the liability depends and does not depend on
the recovery of judgment by the injured party against the insured. Therefore, insurer can
be sued and held directly liable by the injured party to the extent of the coverage (Vda.
De Maglana vs. Hon. Cosolacion, 212 SCRA 268, 1992)
The liability of the insured carrier or vehicle owner is based on tort, in accordance with
the provisions of the Civil Code; while that of the insurer arises from contract,
particularly, the insurance policy. The third-party liability of the insurer is only up to the
extent of the insurance policy and that required by law; and it cannot be held solidarily
liable for anything beyond that amount. (The Heirs of George Y. Poe vs. Malayan
Insurance Company, Inc., G.R. No. 156302, April 7, 2009 14, 1996)
The main purpose of the authorized driver clause is that a person other than the
insured owner, who drives the car on the insureds order, such as his regular driver, or
with his permission, such as a friend or member of the family or the employees of a car
service or repair shop must be duly licensed drivers and have no disqualification to drive
a motor vehicle. The mere happenstance that the employee(s) of the shop owner diverts
the use of the car to his own illicit or unauthorized purpose in violation of the trust
reposed in the shop by the insured car owner does not mean that the authorized driver
clause has been violated such as to bar recovery, provided that such employee is duly
qualified to drive under a valid drivers license. It is the theft clause, not the authorized
driver clause, that applies. (Jewel Villacorta vs. The Insurance Commission, et al., G.R.
No. 54171. October 28, 1980)
Under the authorized driver clause, an authorized driver must not only be permitted
to drive by the insured but it is also essential that he is permitted under the law and
regulations to drive the motor vehicle and is not disqualified from so doing under any
enactment or regulation. At the time of the accident, Stokes had been in the Philippines
for more than 90 days and under the law, he could not drive a motor vehicle without a
Philippine drivers license. He was therefore not an authorized driver under the terms
of the insurance policy in question, and MALAYAN was right in denying the claim of the
insured. (James Stokes, as Attorney-in-Fact of Daniel Stephen Adolfson vs. Malayan
Insurance Co., Inc., G.R. No. L-34768. February 24, 1984)

The requirement under the authorized driver clause that the driver be permitted in
accordance with the licensing or other laws or regulations to drive the Motor Vehicle
and is not disqualified from driving such motor vehicle by order of a Court of Law or by
reason of any enactment or regulation in that behalf, applies only when the driver is
driving on the insureds order or with his permission. It does not apply when the person
driving is the insured himself. (Andrew Palermo vs. Pyramid Insurance Co., Inc., G.R. No.
L-36480. May 31, 1988)
Where the drivers temporary operators permit had expired, and the insurance policy
states that a driver with an expired Traffic Violation Receipt or expired Temporary
Operators permit is not considered an authorized driver within the meaning of the
policy, the expiration of the same bars recovery under the policy. In liability insurance,
the parties are bound by the terms of the policy and the right of insured to recover is
governed thereby. (Agapito Gutierrez vs. Capital Insurance & Surety Co., Inc., G.R. No. L26827, June 29, 1984)
From a reading Section 378, the following rules on claims under the no fault indemnity
provision, where proof of fault or negligence is not necessary for payment of any claim
for death or injury to a passenger or a third party, are established: 1.) A claim may be
made against one motor vehicle only. 2.) If the victim is an occupant of a vehicle, the
claim shall lie against the insurer of the vehicle in which he is riding, mounting or
dismounting from. 3.) In any other case (i.e. if the victim is not an occupant of a vehicle),
the claim shall lie against the insurer of the directly offending vehicle. 4.) 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. (Perla Compania De Seguros, Inc., vs.
Hon. Constante A. Ancheta, Presiding Judge of the Court of First Instance of Camarines
Norte, Branch III, et al., G.R. No. L-49699, August 8, 1988)
E. Insurable Interest
1. In Life/Health
Every person has an insurable interest in the life and health of: 1.) Himself, or his spouse
and of his children; 2.) Any person: (a) on whom he depends wholly or in part for
education or support, or in whom he has a pecuniary interest; (b) under legal obligation
to him for the payment of money, respecting property or service, of which death or
illness might delay or prevent the performance; and (c) upon whom whose life any estate
or interest vested in him depends. (Philamcare Health System vs. Court of Appeals, 379
SCRA 356, 2002)
The existence of an insurance interest gives a person the legal right to insure the subject
matter of the policy of insurance. Section 19 of the Insurance Code states that an
interest in the life or health of a person insured must exist when the insurance takes
effect, but need not exist thereafter or when the loss occurs. (Lalican vs. Insular Life
Assurance Company Ltd, 597 SCRA 159, 2009)
An employer corporation has an insurable interest on its manager where the death of
the manager will be detrimental to the corporations operations. (El Oriente Fabrica de

Tabacos vs. Posada, 56 Phil 147, 1931)


2. In Property
A non-life insurance policy such as the fire insurance policy taken by spouses Cha over
their merchandise is primarily a contract of indemnity. Insurable interest in the property
insured must exist at the time the insurance takes effect and at the time the loss occurs.
The basis of such requirement of insurable interest in property insured is based on sound
public policy: to prevent a person from taking out an insurance policy on property upon
which he has no insurable interest and collecting the proceeds of said policy in case of
loss of the property. In such a case, the contract of insurance is a mere wager which is
void under Section 25 of the Insurance Code. (Spouses Nilo Cha and Stella Uy Cha vs.
Court of Appeals, G.R. No. 124520. August 18, 1997)
With the transfer of the location of the subject properties, without notice and without the
insurers consent, after the renewal of the policy, the insured clearly committed
concealment, misrepresentation and a breach of a material warranty. Section 26 of the
Insurance Code provides that a neglect to communicate that which a party knows and ought
to communicate, is called a concealment.
Under Section 27 of the Insurance Code, a concealment entitles the injured party to
rescind a contract of insurance. Moreover, under Section 168 of the Insurance Code, the
insurer is entitled to rescind the insurance contract in case of an alteration in the use or
condition of the thing insured. Section 168 of the Insurance Code provides, as follows: An
alteration in the use or condition of a thing insured from that to which it is limited by the
policy made without the consent of the insurer, by means within the control of the insured,
and increasing the risks, entitles an insurer to rescind a contract of fire insurance. Malayan
Insurance Company vs. PAP Co. (PHIL. BRANCH). G.R. No. 200784, August 07, 2013.
3. Double Insurance and Over Insurance
A double insurance exists where the same person is insured by several insurers
separately in respect of the same subject and interest. Since, the insurable interests of a
mortgagor and a mortgagee on the mortgaged property are distinct and separate, the
two policies of the PFIC do not cover the same interest as that covered by the policy of
the private respondent, no double insurance exists. (Armando Geagonia vs. Court of
Appeals, et al., G.R. No. 114427, February 6, 1995)
By the express provision of Section 93 of the Insurance Code, double insurance exists
where the same person is insured by several insurers separately in respect to the same
subject and interest. The requisites in order for double insurance to arise are as follows:
1.) The person insured is the same; 2.) Two or more insurers insuring separately; 3.) There
is identity of subject matter; 4.) There is identity of interest insured; and 5.) There is
identity of the risk or peril insured against. In the present case, even though the two
insurance policies were issued over the same goods and cover the same risk, there arises
no double insurance since they were issued to two different persons/entities having
distinct insurable interests. Necessarily, over insurance by double insurance cannot

likewise exist. (Malayan Insurance Co., Inc., vs. Philippine First Insurance Co., Inc. and
Reputable Forwarder Services, Inc., G.R. No. 184300, July 11, 2012)
4. Multiple or Several Interests on Same Property
As to a mortgaged property, the mortgagor and the mortgagee have each an
independent insurable interest therein and both interests may be covered by one policy,
or each may take out a separate policy covering his interest, either at the same or at
separate times. The mortgagor's insurable interest covers the full value of the
mortgaged property, even though the mortgage debt is equivalent to the full value of
the property. The mortgagee's insurable interest is to the extent of the debt, since the
property is relied upon as security thereof, and in insuring he is not insuring the property
but his interest or lien thereon. (Armando Geagonia vs. Court of Appeals, et al., G.R. No.
114427, February 6, 1995)
Where a mortgagor pays insurance premium under group insurance policy (Mortgage
Redemption Insurance), making loss payable to mortgagee, the insurance is on
mortgagors interest, and mortgagor continues to be a party to the contract. In this type
of policy insurance, mortgagee is simply an appointee of the insurance fund, such losspayable clause does not make mortgagee a party to the contract (Great Pacific Life vs.
Court of Appeals, 316 SCRA 677, 1999)
F. Perfection of the Contract of Insurance
1. Offer and Acceptance/Consensual
It needs not much emphasis to say that an application form does not prove that
insurance was secured. Anybody can get an application form for insurance, fill it up at
home before filing it with the insurance company. In fact, the very first sentence of the
form states that it merely forms the basis of a contract between you and NZILife. There
was no contract yet. Furthermore, there is no proof that the insurance company
approved the proposal, no proof that any premium payments were made, and no proof
from the record of exhibits as to the date it was accomplished. It appearing that no
insurance was issued to Lam Po Chun with accused-appellant as the beneficiary, the
motive capitalized upon by the trial court vanishes. (People of the Philippines vs. Yip Wai
Ming, G.R. No. 120959, November 14, 1996)
Where the provisions in the binding deposit receipt shows that it is intended to be
merely a provisional or temporary insurance contract and the same is merely an
acknowledgment, on behalf of the company, that the latter's branch office had received
from the applicant the insurance premium and had accepted the application subject for
processing by the insurance company, the acceptance thereof is merely conditional and
is subordinated to the act of the company in approving or rejecting the application.
Since Pacific Life disapproved the insurance application, the binding deposit receipt in
question never become in force at anytime since in life insurance, a "binding slip" or
"binding receipt" does not insure by itself. (Great Pacific Life Assurance Company vs.
Honorable Court of Appeals, G.R. No. L-31845. April 30, 1979)

For a valid cancellation of the policy,the following requisites must concur: 1.) There must
be prior notice of cancellation to the insured; 2.) The notice must be based on the
occurrence, after the effective date of the policy, of one or more of the grounds
mentioned; 3.) The notice must be (a) in writing, (b) mailed, or delivered to the named
insured, (c) at the address shown in the policy; 4. It must state (a) which of the grounds
mentioned in Section 64 is relied upon and (b) that upon written request of the insured,
the insurer will furnish the facts on which the cancellation is based. MICO claims it
canceled the policy in question for non-payment of premium. However, there is no
proof that the notice, assuming it complied with the other requisites, was actually
mailed to and received by Pinca. (Malayan Insurance Co., Inc. vs. Gregoria Cruz Arnaldo,
in her capacity as the Insurance Commissioner, et al., G.R. No. L-67835, October 12, 1987)
a. Delay in Acceptance
b. Delivery of Policy
2. Premium Payment
By accepting the promise of Plastic Era to to pay the insurance premium within thirty
(30) days from the effective date of policy, Capital Insurance has implicitly agreed to
modify the tenor of the insurance policy and in effect, waived the provision therein that
it would only pay for the loss or damage in case the same occurs after the payment of
the premium. Considering that the insurance policy is silent as to the mode of payment,
Capital Insurance is deemed to have accepted the promissory note in payment of the
premium. This rendered the policy immediately operative on the date it was delivered.
By accepting its promise to pay, Capital Insurance had in effect extended credit to
Plastic Era. Therefore, Capital Insurance did not have the right to cancel the policy for
nonpayment of the premium except by putting Plastic Era in default and giving it
personal notice to that effect. (Capital Insurance & Surety Co., Inc., vs. Plastic Era Co.,
Inc., et al., G.R. No. L-22375, July 18, 1975)
It is explicit in the policy that PSIC's agreement to indemnify Woodwork for loss by fire
only arises "after payment of premium,". Compliance by the insured with the terms of
the contract is a condition precedent to the right of recovery. Since the premium had
not been paid, the policy must be deemed to have lapsed. The non-payment of
premiums does not merely suspend but put, an end to an insurance contract, since the
time of the payment is peculiarly of the essence of the contract. (Philippine Phoenix
Surety & Insurance Company vs. Woodwork, Inc., G.R. No. L-25317, August 6, 1979)
The non-payment of premium on the cover note is no cause for Pacific to lose what is
due it as if there had been payment of premium, for non-payment by it was not
chargeable against its fault. Had all the logs been lost during the loading operations,
but after the issuance of the cover note, liability on the note would have already arisen
even before payment of premium. This is how the cover note as a "binder" should legally
operate otherwise, it would serve no practical purpose in the realm of commerce, and is
supported by the doctrine that where a policy is delivered without requiring payment of
the premium, the presumption is that a credit was intended and policy is valid. (Pacific

Timber Export Corporation vs. Court of Appeals, et al., G.R. No. L-38613, February 25,
1982)
It is obvious from both the Insurance Act and the stipulation of the parties that time is
of the essence in respect of the payment of the insurance premium so that if it is not
paid the contract does not take effect unless there is still another stipulation to the
contrary. In the instant case, Arce was given a grace period to pay the premium but the
period having expired with no payment made, he cannot insist that Capital is
nonetheless obligated to him. (Pedro Arce vs. Capital Insurance & Surety Co., Inc., G.R.
No. L-28501, September 30, 1982)
Under Section 77 of the Insurance Code, the remedy for the non-payment of premiums
is to put an end to and render the insurance policy not binding. The non-payment of
premium does not merely suspend but puts an end to an insurance contract since the
time of the payment is peculiarly of the essence of the contract. Unless premium is paid,
an insurance contract does not take effect. Since admittedly the premiums have not
been paid, the policies issued have lapsed. The insurance coverage did not go into effect
or did not continue and the obligation of Philamgen as insurer ceased. (Arturo
Valenzuela, et al. vs. Court Of Appeals, et al., G.R. No. 83122, October 19, 1990)
Section 177 of the Insurance Code states that the surety is entitled to payment of the
premium as soon as the contract of suretyship or bond is perfected and delivered to the
obligor. No contract of suretyship or bonding shall be valid and binding unless and until
the premium therefor has been paid, except where the obligee has accepted the bond,
in which case the bond becomes valid and enforceable irrespective of whether or not
the premium has been paid by the obligor to the surety. (Philippine Pryce Assurance
Corporation vs. Court Of Appeals, et al., G.R. No. 107062, February 21, 1994)
Section 78 of the Insurance Code explicitly provides that an acknowledgment in a policy
or contract of insurance of the receipt of premium is conclusive evidence of its payment,
so far as to make the policy binding, notwithstanding any stipulation therein that it shall
not be binding until the premium is actually paid. This Section establishes a legal fiction
of payment and should be interpreted as an exception to Section 77. (American Homes
Assurance vs. Antonio Chua, G.R. 130421, June 28, 1999)
Section 77 of the Insurance Code of 1978 provides that an insurer is entitled to payment
of the premium as soon as the thing insured is exposed to the peril insured against. The
first exception is provided by Section 77 itself, and that is, in case of a life or industrial
life policy whenever the grace period provision applies. The second is that covered by
Section 78 of the Insurance Code, which provides that any acknowledgment in a policy
or contract of insurance of the receipt of premium is conclusive evidence of its payment,
so far as to make the policy binding, notwithstanding any stipulation therein that it shall
not be binding until premium is actually paid. A third exception was laid down in Makati
Tuscany Condominium Corporation vs. Court of Appeals, wherein the Court ruled that
Section 77 may not apply if the parties have agreed to the payment in installments of
the premium and partial payment has been made at the time of loss. Tuscany has also
provided a fourth exception, namely, that the insurer may grant credit extension for the
payment of the premium. This simply means that if the insurer has granted the insured a

credit term for the payment of the premium and loss occurs before the expiration of the
term, recovery on the policy should be allowed even though the premium is paid after
the loss but within the credit term. Moreover, as a fifth exception, estoppel bars it from
taking refuge under said Section, since Masagana relied in good faith on such practice.
(Ucpb General Insurance Co. Inc., vs. Masagana Telemart, Inc., G.R. No. 137172, April 4,
2001)
FEBTC is estopped from claiming that the insurance premium has been unpaid. FEBTC
induced Maxilite and Marques to believe that the insurance premium has in fact been
debited from Maxilites account. However, FEBTC failed to do so. FEBTCs conduct
clearly constitutes gross negligence in handling Maxilites and Marques accounts. As a
consequence, FEBTC must be held liable for damages pursuant to Article 2176 of the
Civil Code. (Jose Marques and Maxilite Technologies, Inc., vs. Far East Bank And Trust
Company, et al., G.R. No. 171379, January 10, 2011)
In life insurance, even though insured may have obtained an endowment policy,
payment of premiums is not a debt or obligation, but an exercise of a right on the part
of the insured. If insured wants to keep policy alive, he may pay premium. But the insurer
may not compel him to pay the premium if insured desires to let the policy lapse.
(Constantino vs. Asia Life, 87 Phil 248, 1950)
The age of the insured was not concealed to the insurance company for her application
for insurance coverage which was on a printed form furnished by Manila Bankers and
which contained very few items of information clearly indicated her age of the time of
filing the same to be almost 65 years of age. Despite such information which could
hardly be overlooked in the application form, Manila Bankers received her payment of
premium and issued the corresponding certificate of insurance without question. As
there was sufficient time (45 days) for the Manila Bankers to process the application and
issue notice that the applicant was over 60 years of age and thereby cancel the policy
on that ground if it was minded to do so, Manila Bankers failure to act, is therefore
either attributable to its willingness to waive such disqualification; or, through the
negligence or to the incompetence of its employees for which it has only itself to blame.
(Regina Edillon vs. Manila Bankers Life Insurance, et al., G.R. No. L-34200, September 30,
1982)
3. Non-Default Options in Life Insurance
4. Reinstatement of a Lapsed Policy of Life Insurance
The stipulation in a life insurance policy giving the insured the privilege to reinstate it
upon written application within three years from the date it lapses and upon of evidence
of insurability satisfactory to the insurance company and the payment of all overdue
premiums and any other indebtedness to the company, does not give the insured
absolute right to such reinstatement by the mere filing of an application therefor. The
company has the right to deny the reinstatement if it is not satisfied as to the insurability
of the insured and of the latter does not pay all overdue premiums and all other
indebtedness to the company. After the death of the insured the insurance company
cannot be compelled to entertain an application for reinstatement of the policy because

the conditions precedent to reinstatement can no longer be determined and satisfied.


(James McGuire v. The Manufacturers Life Insurance Co., G.R. No. L-3581. September 21,
1950)
Where a life insurance policy lapsed, and as compliance with the conditions for
reinstatement of the policy, the insured paid only part of the overdue premium, the
failure to pay the balance of the overdue premium prevented the reinstatement said
policy and thereafter the recovery therefrom. (Andres vs. Crown Life Ins. Co., G.R. No. L10875, January 28, 1958)
5. Refund of Premiums
Great Pacific should have informed Cortez of the deadline for paying the first premium
before or at least upon delivery of the policy to him, so he could have complied with
what was needful and would not have been misled into believing that his life and his
family were protected by the policy, when actually they were not. And, if the premium
paid by Cortez was unacceptable for being late, it was the company's duty to return it.
By accepting his premiums without giving him the corresponding protection, Great
Pacific acted in bad faith and since his policy was in fact inoperative or ineffectual from
the beginning, the company was never at risk, hence, it is not entitled to keep the
premium. (Great Pacific Life Insurance Corporation vs. Court of Appeals, et al., G.R. No.
L-57308, April 23, 1990)
G. Rescission of Insurance Contracts
a. Concealment
Where the applicant, in apparent bad faith, withheld the fact material to the risk to be
assumed by the insurance company, the latter is entitled to rescind the contract of
insurance. The contract of insurance is one of perfect good faith, not for the insured
alone but equally so for the insurer. Where there is concealment or a neglect to
communicate that which a party knows and ought to communicate, whether intentional
or unintentional, rescission is available as a remedy to the insurer. (Great Pacific Life
Assurance Company vs. Honorable Court of Appeals, G.R. No. L-31845. April 30, 1979)
Concealment exists where the assured had knowledge of a fact material to the risk, and
honesty, good faith, and fair dealing requires that he should communicate it to the
assurer, but he designedly and intentionally withholds the same. In the absence of
evidence that the insured had sufficient medical knowledge as to enable him to
distinguish between "peptic ulcer" and "a tumor", his statement that said tumor was
"associated with ulcer of the stomach, " should be construed as an expression made in
good faith of his belief as to the nature of his ailment and operation. (Ng Gan Zee vs.
Asian Crusader Life Assurance Corporation, G.R. No. L-30685, May 30, 1983)
Where the insured is specifically required to disclose to the insurer any other insurance
and its particulars which he may have effected on the same subject matter, the
knowledge of such insurance by the insurer's agents, even assuming the acquisition

thereof by the former, is not the "notice" that would estop the insurers from denying the
claim. Obligations arising from contracts have the force of law between the contracting
parties and should be complied with in good faith. (New Life Enterprises and Julian Sy vs.
Court of Appeals, et al., G.R. No. 94071, March 31, 1992)
Where the insured is specifically required to disclose to the insurer matters relating to
his health, the insured's failure to disclose the fact that he was hospitalized for two weeks
prior to filing his application for insurance, raises grave doubts about his bona fides.
Materiality is to be determined not by the event, but solely by the probable and
reasonable influence of the facts upon the party to whom communication is due, in
forming his estimate of the disadvantages of the proposed contract or in making his
inquiries. (Sunlife Assurance Company of Canada vs. The Court of Appeals, et al., G.R. No.
105135, June 22, 1995)
In group insurance, there is no medical examination required. But if in group insurance
an application form requires an answer to previous sickness, and that is falsely denied,
then there is concealment. (Saturnino v. Phil-Am Life, 7 SCRA 316, 1963)
One who solicits insurance is an underwriter and not an agent of the insurance company.
If insurer appoints a general agent, then such agent can bind the company by virtue of
the written appointment. On the other hand, an underwriter who fills up a policy with
false answers and later insured signs the policy, the false answers become the insureds
own answer because he signed the policy. (Soliman v. U.S. Life, 104 Phil. 1046, 1958)
b. Misrepresentation/Omissions
When the insured signed the pension plan application, he adopted as his own the
written representations and declarations embodied in it. It is clear from these
representations that he concealed his chronic heart ailment and diabetes. He cannot
sign the application and disown the responsibility for having it filled up. Thus, the
insurance company had every right to act on the faith of that certification. (Ma. Lourdes
s. Florendo vs. Philam Plans, Inc., et al., G.R. No. 186983, February 22, 2012)
By virtue of the incontestability clause, the insurer has two 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. After two years, the
defenses of concealment or misrepresentation, no matter how patent or well founded,
no longer lie. Considering that the insured died before the two-year period had lapsed,
Phil-Am Insurance is not, therefore, barred from proving that the policy is void ab initio
by reason of the insureds fraudulent concealment or misrepresentation. (Emilio Tan vs.
The Court of Appeals, G.R. No. 48049. June 29, 1989)
The "Incontestability Clause" under Section 48 of the Insurance Code provides that an
insurer is given two years from the effectivity of a life insurance contract and while the
insured is alive to discover or prove that the policy is void ab initio or is rescindible by
reason of the fraudulent concealment or misrepresentation of the insured or his agent.
After the two-year period lapses, or when the insured dies within the period, the insurer
must make good on the policy, even though the policy was obtained by fraud,

concealment, or misrepresentation. (Manila Bankers Life Insurance Corporation vs.


Cresencia p. Aban, G.R. No. 175666, July 29, 2013)
The incontestability clause precludes the insurer from disowning liability under the policy it
issued on the ground of concealment or misrepresentation regarding the health of the
insured after a year of its issuance. Since insured died on the 11th month following the
issuance of his plan, the incontestability period has not yet set in. Consequently, the insurer
was not barred from questioning the beneficiarys entitlement to the benefits of the pension
plan. Florendo vs. Philam Plans, GR. No 186983, February 22, 2012

c. Breach of Warranties
The insurance company is barred by waiver (or rather estoppel) to claim violation of the
so-called fire hydrants warranty, for the reason that knowing fully all that the number of
hydrants demanded therein never existed from the very beginning, the insurance
company nevertheless issued the policies in question subject to such warranty, and
received the corresponding premiums. It would be perilously close to conniving at fraud
upon the insured to allow insurance company to claim now as void ab initio the policies
that it had issued to the plaintiff without warning of their fatal defect, of which it was
informed, and after it had misled the defendant into believing that the policies were
effective. (Qua Chee Gan v. Law Union, 98 Phil 85, 1955)
An alteration in the use or condition of a thing insured from that to which it is limited by
the policy made without the consent of the insurer, by means within the control of the
insured, and increasing the risks, entitles an insurer to rescind a contract of fire
insurance. (Malayan Insurance Company, Inc. vs. Pap Co., Ltd., G.R. No. 200784, August
7, 2013)
H. Claims Settlement and Subrogation
Where the insurance policy clearly and categorically placed PCSI's liability for all
damages arising out of death or bodily injury sustained by one person as a result of any
one accident at P12,000.00 and under the law prevailing, P.D. 612, the minimum liability
is P12,000 per passenger, the stipulation regarding PCSIs liability under the insurance
contract not being less than P12,000.00, and therefore not contrary to law, morals, good
customs, public order or public policy, must be upheld as effective, valid and binding as
between the parties. (Perla Compania De Seguros, Inc. vs. Court of Appeals, G.R. No.
78860, May 28, 1990)
The right of subrogation accrues simply upon payment by the insurance company of the
insurance claim. When it is not disputed that the insurance company indeed paid, then
there is valid subrogation in its favor. Malayan Insurance Co vs Alberto, GR No. 194320,
February 1, 2012

1. Notice and Proof of Loss


The Insurance Code provides that a policy may declare that a violation of specified
provisions thereof shall avoid it. Thus, in fire insurance policies, which contain provisions
such as Condition No. 15 of the insurance policy, a fraudulent discrepancy between the
actual loss and that claimed in the proof of loss voids the insurance policy. Mere filing
of such a claim will exonerate the insurer. (United Merchants Corporation vs. Country
Bankers Insurance Corporation, G.R. No. 198588, July 11, 2012)
A perusal of the records shows that Usiphil Incorporated, after the occurrence of the
fire, immediately notified Finman Gen. Assurance thereof. Thereafter, Usiphil
Incorporated submitted the following documents: (1) Sworn Statement of Loss and
Formal Claim and; (2) Proof of Loss. The submission of these documents, constitutes
substantial compliance. Indeed, as regards the submission of documents to prove loss,
substantial, not strict as urged by Finman Gen. Assurance, compliance with the
requirements will always be deemed sufficient. (Finman Gen. Assurance vs. Court of
Appeals, 361 SCRA 214, 2001)
Plaintiff's verified claim totalled P31,860.85, of which, in accordance with the terms of
the policy, three-fourths was asked, or P23,895.64. Dependant's inventory of the goods
found after the fire came to P13,113. The difference between plaintiff's claim and
defendant's estimate of the loss, which was confirmed in the trial court, was P18,747.85.
In connection with these figures plaintiff suggests too low a valuation by the
representatives of the defendant. Computed at plaintiff's valuation, the goods
inventoried by the defendant's committee would amount to P19,346.30. There would,
however, still remain a considerable void between the two amounts, of P12.514.55. In
this case, the difference under one hypothesis is about 50 per cent, and under another
hypothesis, about 25 per cent. Still that constitutes a serious discrepancy between the
true value of the property and that sworn to in the proofs of loss, and is an outstanding
fact to be considered as bearing upon the presence of fraud. It is more than an honest
misstatement, more than inadvertence or mistake, more than a mere error in opinion,
more than a slight exaggeration, and in connection with all the surrounding
circumstances, discloses a material overvaluation made intentionally and willfully. The
insured cannot therefore recover. (Tan It v. Sun Insurance, 51 Phil. 212, 1927)
2.

Guidelines on Claims Settlement


a. Unfair Claims Settlement; Sanctions
b. Prescription of Action
There is absolutely nothing in the law which mandates that the two periods prescribed
in Section 384 of the Insurance Codethat is, the six-month period for filing the notice
of claim and the one-year period for bringing an action or suit must always concur. On
the contrary, it is very clear that the one-year period is only required in proper cases.
The one-year period should instead be counted from the date of rejection by the insurer
as this is the time when the cause of action accrues. Since in the case at hand, there has
yet been no accrual of cause of action, prescription has not yet set in. This is because,

before such final rejection, there was no real necessity for bringing suit. (Summit
Guaranty And Insurance Company, Inc. vs. Hon. Jose C. De Guzman, in his capacity as
Presiding Judge of Branch III, CFI of Tarlac, et al., G.R. No. L-50997, June 30, 1987)
In case the claim was denied by the insurer but the insured filed a petition for
reconsideration, the prescriptive period should be counted from the date the claim was
denied at the first instance by the insurance company and not from the denial of the
reconsideration (Sun Life Office, Ltd. vs. Court of Appeals, GR. No. 89741, Mar 13, 1991)
Where the delay in bringing the suit against the insurance company was not caused by
the insured or its subrogee but by the insurance company itself, it is unfair to penalize
the insured or its subrogee by dismissing its action against the insurance company on
the ground of prescription. To prevent the insurance company from evading its
responsibility to the insured through this clever scheme, and to protect the insuring
public against similar acts by other insurance companies, the one-year period under
Section 384 should be counted not from the date of the accident but from the date of
the rejection of the claim by the insurer. It is only from the rejection of the claim by the
insurer that the insureds cause of action accrued since a cause of action does not accrue
until the party obligated refuse, expressly or impliedly, to comply with its duty. (Country
Bankers Insurance Corp., vs. The Travellers Insurance and Surety Corp., et al., G.R. No.
82509, August 16, 1989)
c.

Subrogation

Payment by the insurer to the assured operates as an equitable assignment to the former
of all remedies which the latter may have against the third party whose negligence or
wrongful act caused the loss. There are a few recognized exceptions to this rule. For
instance, if the assured by his own act releases the wrongdoer or third party liable for
the loss or damage, from liability, the insurers right of subrogation is defeated. Similarly,
where the insurer pays the assured the value of the lost goods without notifying the
carrier who has in good faith settled the assureds claim for loss, the settlement is
binding on both the assured and the insurer, and the latter cannot bring an action
against the carrier on his right of subrogation . And where the insurer pays the assured
for a loss which is not a risk covered by the policy, thereby effecting voluntary
payment, the former has no right of subrogation against the third party liable for the
loss. (Pan Malayan Insurance Corporation vs. Court Of Appeals, et al., G.R. No. 81026,
April 3, 1990)
The payment by the insurer to the assured operates as an equitable assignment of all
remedies the assured may have against the third party who caused the damage.
Subrogation is not dependent upon, nor does it grow out of, any privity of contract or
upon written assignment of claim. It accrues simply upon payment of the insurance claim
by the insurer. (Aboitiz Shipping Corporation v. Insurance Company Of North America,
G.R. No. 168402, August 6, 2008; Malayan Insurance Co., Inc., vs. Rodelio Alberto, et al.,
G.R. No. 194320, February 1, 2012)
The proximate cause of the sinking of the vessel was her condition of unseaworthiness
arising from her having been top-heavy when she departed from the Port of

Zamboanga. Since the vessel was unseaworthy with reference to the cargo, there was
therefore a breach of warranty of seaworthiness that rendered the assured not entitled
to the payment of its claim under the policy. Hence, when PhilAmGen paid the claim of
the bottling firm there was in effect a voluntary payment and no right of subrogation
accrued in its favor. In other words, when PhilAmGen paid it did so at its own risk. (The
Philippine American General Insurance Company, Inc., vs. Court of Appeals, et al., G.R.
No. 116940, June 11, 199)
As the insurer, Fireman's Fund is entitled to go after the person or entity that violated its
contractual commitment to answer for the loss insured against.. Upon payment of the
loss, the insurer is entitled to be subrogated pro tanto to any right of action which the
insured may have against the third person whose negligence or wrongful act caused the
loss. When the insurance company pays for the loss, such payment operates as an
equitable assignment to the insurer of the property and all remedies which the insured
may have for the recovery thereof. (Firemans Fund Insurance Copany vs. Jamila &
Company, Inc., G.R. No. L-27427, April 7, 1976)
St. Paul, as insurer, after paying the claim of the insured for damages under the
insurance, is subrogated merely to the rights of the assured. As subrogee, it can recover
only the amount that is recoverable by the latter. Since the right of the assured, in case
of loss or damage to the goods, is limited or restricted by the provisions in the bill of
lading, a suit by the insurer as subrogee necessarily is subject to like limitations and
restrictions. (St. Paul Fire & Marine Insurance Co. vs. Macondray & Co., Inc., et al., G.R.
No. L-27796, March 25, 1976)
When Manila Mahogany executed a release claim discharging San Miguel Corporation
from all actions, claims, demands and rights of action arising out of or as a consequence
of the accident after the insurer had paid the proceeds of the policy, the insurer is
entitled to recover from the insured the amount of insurance money paid. Since the
insurer can be subrogated to only such rights as the insured may have, should the
insured, after receiving payment from the insurer, release the wrongdoer who caused
the loss, the insurer loses his rights against the wrongdoer. But in such a case, the insurer
will be entitled to recover from the insured whatever it has paid to the latter, unless the
release was made with the consent of the insurer. (Manila Mahogany Manufacturing
Corporation vs. Court of Appeals, G.R. No. L-52756, October 12, 1987)
The presentation in evidence of the marine insurance policy is not indispensable before
the insurer may recover from the common carrier the insured value of the lost cargo in
the exercise of its subrogatory right. The subrogation receipt, by itself, is sufficient to
establish not only the relationship of American Home as insurer and Caltex, as the
assured shipper of the lost cargo of industrial fuel oil, but also the amount paid to settle
the insurance claim. The right of subrogation accrues simply upon payment by the
insurance company of the insurance claim. (Delsan Transport Lines, Inc. vs. Court of
Appeals, et al., G.R. No. 127897, November 15, 2001)
The insurer, upon happening of the risk "insured" against and after payment to the
insured, is subrogated to the rights and cause of action of the latter. As such, the insurer
has the right to seek reimbursement for all the expenses paid. However, in a contract of

carriage involving the shipment of knock-down auto parts of Nissan motor vehicles
which were allegedly lost and destroyed, the insurer was not properly subrogated
because of the non-presentation of any marine insurance policy. The submission of a
marine risk note instead of the insurance policy doesn't satisfy the requirement for
subrogation. The marine risk note is not an insurance policy. It is only an
acknowledgment or declaration of the insurer confirming the specific shipment covered
by its marine open policy, the evaluation of the cargo and the chargeable premium.
(Eastern Shipping Lines, Inc. vs. Prudential Guarantee and Assurance, Inc., G.R. No.
174116, September 11, 2009)
V. Transportation Laws
I. Transportation Laws
A. Common Carriers
There is no doubt that FPIC is a common carrier. It is engaged in the business of
transporting or carrying goods, i.e. petroleum products, for hire as a public employment. It
undertakes to carry for all persons indifferently, that is, to all persons who choose to
employ its services, and transports the goods by land and for compensation. The fact that
FPIC has a limited clientele does not exclude it from the definition of a common carrier.
(First Philippine Industrial Corporation vs. Court of Appeals, G.R. No. 125948, 29 December
1989)
Article 1732 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 (in local Idiom as "a sideline"). It also carefully avoids making 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 it 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. (Pedro De Guzman vs.
Court of Appeals, G. R. No. L-47822, 22 December 1988).
Article 1732 does not distinguish between one whose principal business activity is the
carrying of goods and one who does such carrying only as an ancillary activity. The
contention of Sanchez Brokerage that it is not a common carrier but a customs broker
whose principal function is to prepare the correct customs declaration and proper
shipping documents as required by law is bereft of merit. It suffices that Sanchez
Brokerage undertakes to deliver the goods for pecuniary consideration. (A.F. Sanchez
Brokerage Inc. vs. The Hon. Court of Appeals, G.R. No. 147079, 21 December 2004)
There is no dispute that Cebu Salvage was a common carrier. At the time of the loss of the
cargo, it was engaged in the business of carrying and transporting goods by water, for
compensation, and offered its services to the public. Cebu Salvage was the one which
contracted with MCCII for the transport of the cargo. It had control over what vessel it
would use. All throughout its dealings with MCCII, it represented itself as a common
carrier. The fact that it did not own the vessel it decided to use to consummate the contract

of carriage did not negate its character and duties as a common carrier. The MCCII
(respondents subrogor) could not be reasonably expected to inquire about the ownership
of the vessels which petitioner carrier offered to utilize. As a practical matter, it is very
difficult and often impossible for the general public to enforce its rights of action under a
contract of carriage if it should be required to know who the actual owner of the vessel
is. In fact, in this case, the voyage charter itself denominated Cebu Salvage as the
"owner/operator" of the vessel. (Cebu Salvage Corporation vs. Philippine Home Assurance
Corporation, G.R. No. 150403, January 25, 2007)
Much of 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 an isolated
transaction, not a part of the business or occupation, and the carrier does not hold itself
out to carry the goods for the general public or to a limited clientele, although involving
the carriage of goods for a fee, the person or corporation providing such service could
very well be just a private carrier. (Philippine American General Insurance Company vs. Pks
Shipping Company, G.R. No. 149038, 9 April 2003)
In a contract of private carriage, the parties may validly stipulate that responsibility for the
cargo rests solely on the charterer, exempting the shipowner from liability for loss of or
damage to the cargo caused even by the negligence of the ship captain. Pursuant to
Article 1306 of the Civil Code, such stipulation is valid because it is freely entered into by
the parties and the same is not contrary to law, morals, good customs, public order, or
public policy. Unlike in a contract involving a common carrier, private carriage does not
involve the general public. Hence, the stringent provisions of the Civil Code on common
carriers protecting the general public cannot justifiably be applied to a ship transporting
commercial goods as a private carrier. (Valenzuela Hardwood And Industrial Supply, Inc.
vs. Court of Appeals, G.R. No. 102316, 30 June 1997)
A freight forwarders liability is limited to damages arising from its own negligence,
including negligence in choosing the carrier; however, where the forwarder contracts to
deliver goods to their destination instead of merely arranging for their transportation, it
becomes liable as a common carrier for loss or damage to goods. A freight forwarder
assumes the responsibility of a carrier, which actually executes the transport, even though
the forwarder does not carry the merchandise itself.Unsworth Transport International (
Phils. vs. Court of Appeals ,G.R. No. 166250, 26 July 2010
A customs broker whose services were engaged for the release and withdrawal of the
cargoes from the pier and their subsequent delivery to the consignees warehouse and the
owner of the delivery truck whom the customs broker contracted to transport the cargoes
to the warehouse are both common carriers. The latter is considered a common carrier in
the absence of indication that it solely and exclusively rendered services to the customs
broker. Thus, when the truck failed to deliver one of the cargoes, both the broker and owner
of the truck are liable. Being both common carriers, they are mandated from the nature of
their business and for reasons of public policy, to observe the extraordinary diligence in the
vigilance over the goods transported by them according to all the circumstances of such
case. Thus, in case of loss of the goods, the common carrier is presumed to have been at
fault or to have acted negligently. Loadmasters Customs Services, Inc. vs. Glodel Brokerage
Corporation, GR No. 179446, January 10, 2011

Persons engaged in the business of transporting students from their respective residences
to their school and back are considered common carrier. Despite catering to a limited
clientele, they operated as a common carrier because they held themselves out as a ready
transportation indiscriminately to the students of a particular school living within or near
where they operated the service and for a fee. Spouses Perena vs Spouses Nicolas, GR No.
157917, August 29, 2012
1. Diligence Required of Common Carriers
Under Article 1733 of the Civil Code, common carriers from the nature of their business
and for reasons of public policy are bound to observe extraordinary diligence in the
vigilance over the goods and for the safety of passengers transported by them according
to all circumstances of each case. Thus, under Article 1735 of the same Code, in all cases
other than those mentioned in Article 1734 thereof, the common carrier shall be
presumed to have been at fault or to have acted negligently, unless it proves that it has
observed the extraordinary diligence required by law. More importantly, common carriers
cannot limit their liability for injury or loss of goods where such injury or loss was caused
by its own negligence. Otherwise stated, the law on averages under the Code of
Commerce cannot be applied in determining liability where there is negligence.
(American Home Assurance Company vs. The Court of Appeals, G.R. No. 94149, 5 May 1992)
Article 1736 of the Civil Code imposes upon common carriers the duty to observe
extraordinary diligence from the moment the goods are unconditionally placed in their
possession "until the same are delivered, actually or constructively, by the carrier to the
consignee or to the person who has a right to receive them. However, in the bills of lading
issued for the cargoes in question, the parties agreed to limit the responsibility of the
carrier for the loss or damage by inserting a stipulation stating that the carrier shall not be
responsible for loss or damage to shipments billed 'owner's risk' unless such loss or damage
is due to negligence of carrier. Since such stipulation is valid, and there is nothing therein
that is contrary to law, morals or public policy, the absence of negligence on the part of its
employees exempt the carrier from liability for loss of goods due to fire. (Amparo C.
Servando, Clara Uy Bico vs. Philippine Steam Navigation Co., G.R. No. L-36481-2, 23
October 1982)
A common carrier is presumed at fault in the absence of a satisfactory explanation on how
the airplane crash occured. (Vda. De Abeto vs. Philippine Air Lines, Inc. 115 SCRA 489,
1982)
When a bus hit a tree and house due to the fast and reckless driving of the bus driver
resulting in injury to one of its passengers, the bus owner is liable and such liability does not
cease even upon proof that he exercised all the diligence of a good father of family in the
selection and supervision of its employees. R Transport Corporation vs. Pante, GR No.
162104, September 15, 2009
Though it is true that common carriers are presumed to have been at fault or to have acted
negligently if the goods transported by them are lost, destroyed, or deteriorated, and that

the common carrier must prove that it exercised extraordinary diligence in order to
overcome the presumption, the plaintiff must still, before the burden is shifted to the
defendant, prove that the subject shipment suffered actual shortage. This can only be done
if the weight of the shipment at the port of origin and its subsequent weight at the port of
arrival have been proven by a preponderance of evidence, and it can be seen that the former
weight is considerably greater than the latter weight, taking into consideration the
exceptions provided in Article 1734 of the Civil Code. Asian Terminals, Inc vs. Simon
Enterprises, Inc. GR No. 177116, February 27, 2013

2. Liabilities of Common Carriers


If a railroad company maintains a signaling device at a crossing to give warning of the
approach of a train, the failure of the device to operate is generally held to be evidence
of negligence, which may be considered with all the circumstances of the case in
determining whether the railroad company was negligent as a matter of fact. (Victorino
Cusi and Pilar Pobre vs. Philippine National Railways, G.R. No. L-29889, 31 May 1979).
For a vessel to be seaworthy, it must be adequately equipped for the voyage and manned
with a sufficient number of competent officers and crew. The failure of a common carrier
to maintain in seaworthy condition its vessel involved in a contract of carriage is a clear
breach of its duty prescribed in Article 1755 of the Civil Code. (Loadstar Shipping Co., Inc.
vs. Court of Appeals, G.R. No. 131621, September 28, 1999)
The foundation of LRTAs liability is the contract of carriage and its obligation to indemnify
the victim arises from the breach of that contract by reason of its failure to exercise the
high diligence required of the common carrier. In the discharge of its commitment to
ensure the safety of passengers, a carrier may choose to hire its own employees or avail
itself of the services of an outsider or an independent firm to undertake the task. In either
case, the common carrier is not relieved of its responsibilities under the contract of
carriage. (Light Rail Transit Authority & Rodolfo Roman vs. Marjorie Navidad, G.R. No.
145804, 6 February 2003)
The "kabit system" is an arrangement whereby a person who has been granted a certificate
of convenience allows another person who owns motors vehicles to operate under such
franchise for a fee. A certificate of public convenience is a special privilege conferred by
the government. Although not outrightly penalized as a criminal offense, the "kabit
system" is invariably recognized as being contrary to public policy and, therefore, void and
inexistent under Article 1409 of the Civil Code. (Lita Enterprises, Inc. vs. Intermediate
Appellate Court, G.R. No. L-64693, 27 April 1984)
It is settled in our jurisprudence that only the registered owner of a public service vehicle
is responsible for damages that may arise from consequences incident to its operation, or
maybe caused to any of the passengers therein. (Victor Juaniza vs. Eugenio Jose, G.R. No.L50127-28, 30 March 1979)

In dealing with vehicles registered under the Public Service Law, the public has the right
to assume that the registered owner is the actual or lawful owner thereof. It would be very
difficult and often impossible as a practical matter, for members of the general public to
enforce the rights of action that they may have for injuries inflicted by the vehicles being
negligently operated if they should be required to prove who the actual owner is. (Ma.
Luisa Benedicto vs. Hon. Intermediate Appellate Court, G.R. No. 70876, 19 July 1990)
While the registered owner or operator of a passenger vehicle is jointly and severally liable
with the driver of the said vehicle for damages incurred by passengers or third persons as
a consequence of injuries or death sustained in the operation of the said vehicle, the
registered owner or operator has the right to be indemnified by the real or actual owner
of the amount that he may be required to pay as damage for the injury caused. The right
to be indemnified being recognized, recovery by the registered owner or operator may be
made in any form-either by a cross-claim, third-party complaint, or an independent action.
(Angel Jereos vs. Hon. Court of Appeals, G.R. No. L-48747, 30 September 1982)
In an action based on quasi delict, the registered owner of a motor vehicle is solidarily
liable for the injuries and damages caused by the negligence of the driver, in spite of the
fact that the vehicle may have already been the subject of an unregistered Deed of Sale in
favor of another person. Unless registered with the Land Transportation Office, the sale - while valid and binding between the parties -- does not affect third parties, especially
the victims of accidents involving the said transport equipment. (Equitable Leasing
Corporation vs. Lucita Suyom et al., G.R. No. 143360, 5 September 2002)
The principle of last clear chance only applies in a suit between the owners and drivers of
two colliding vehicles. It does not arise where a passenger demands responsibility from
the carrier to enforce its contractual obligations, for it would be inequitable to exempt the
negligent driver and its owner on the ground that the other driver was likewise guilty of
negligence. (William Tiu, doing business under the name and style of D Rough Riders,
vs. Pedro A. Arriesgado, G.R. No. 138060, 1 September 2004)
When an airline issues a ticket to a passenger confirmed on a particular flight, on a certain
date, a contract of carriage arises, and the passenger has every right to expect that he
would fly on that flight and on that date. If he does not, then the carrier opens itself to a
suit for breach of contract of carriage. Where an airline had deliberately overbooked, it
took the risk of having to deprive some passengers of their seats in case all of them would
show up for the check in. For the indignity and inconvenience of being refused a confirmed
seat on the last minute, said passenger is entitled to an award of moral damages. (Spouses
Cesar & Suthira Zalamea vs. Court of Appeals, G.R. No. 104235 November 18, 1993)
In an action for breach of contract of carriage, the aggrieved party does not have to prove
that the common carrier was at fault or was negligent. All that is necessary to prove is the
existence of the contract and the fact of its non-performance by the carrier. (Singapore
Airlines Limited vs. Fernandez, G.R. No. 142305, December 10, 2003)
It is PALs duty to provide assistance to Spouses Miranda and, for that matter, any other
passenger similarly inconvenienced due to delay in the completion of the transport and
the receipt of their baggage. Therefore, its unilateral and voluntary act of providing cash

assistance is deemed part of its obligation as an air carrier, and is hardly anything to rave
about. (Philippine Airlines, Inc., vs. Court of Appeals, G.R. No. 119641, May 17, 1996)
Assuming arguendo that the airline passengers have no vested right to these amenities in
case a flight is cancelled due to force majeure, what makes PAL liable for damages in this
particular case and under the facts obtaining herein is its blatant refusal to accord the socalled amenities equally to all its stranded passengers who were bound for Surigao
City. No compelling or justifying reason was advanced for such discriminatory and
prejudicial conduct. The refund of hotel expenses was surreptitiously and discriminatorily
made by PAL since the same was not made known to everyone, except through word of
mouth to a handful of passengers. This is a sad commentary on the quality of service and
professionalism of an airline company, which is the countrys flag carrier at that. The
discriminatory act of PAL against Pantejo ineludibly makes the former liable for moral
damages under Article 21 in relation to Article 2219 (10) of the Civil Code. (Philippine
Airlines, Inc. vs. Court of Appeals, G.R. No. 120262, July 17, 1997)
Cathays contention that there was no contract of carriage that was breached because
Singsons ticket was open-dated is untenable. To begin with, the round trip ticket issued
by the carrier to the passenger was in itself a complete written contract by and between
the carrier and the passenger. It had all the elements of a complete written contract, to
wit: (a) the consent of the contracting parties manifested by the fact that the passenger
agreed to be transported by the carrier to and from Los Angeles via San Francisco and
Hongkong back to the Philippines, and the carriers acceptance to bring him to his
destination and then back home; (b) cause or consideration, which was the fare paid by
the passenger as stated in his ticket; and, (c) object, which was the transportation of the
passenger from the place of departure to the place of destination and back, which are also
stated in his ticket. Clearly therefore Singson was not a mere "chance passenger with no
superior right to be boarded on a specific flight," as erroneously claimed by Cathay and
sustained by the Court of Appeals. (Carlos Singson vs. Court of Appeals, G.R. No.
119995, November 18, 1997)
Spouses Vazquez had every right to decline the upgrade and insist on the Business Class
accommodation they had booked for and which was designated in their boarding
passes. They clearly waived their priority or preference when they asked that other
passengers be given the upgrade. It should not have been imposed on them over their
vehement objection. By insisting on the upgrade, Cathay breached its contract of carriage
with Spouses Vazquez. (Cathay Pacific Airways, Ltd., vs. Spouses Daniel Vazquez And Maria
Luisa Madrigal Vazquez, G.R. No. 150843, March 14, 2003)
When an airline issues a ticket to a passenger, confirmed for a particular flight on a certain
date, a contract of carriage arises. The passenger has every right to expect that he be
transported on that flight and on that date, and it becomes the airlines obligation to carry
him and his luggage safely to the agreed destination without delay. If the passenger is not
so transported or if in the process of transporting, he dies or is injured, the carrier may be
held liable for a breach of contract of carriage. (Philippine Airlines Inc. vs. Court of Appeals,
G.R. No. 123238, September 22, 2008)

It was established that the primary cause of the death of the passenger of the jeepney was
the negligence of the driver of the truck which collided with the passenger jeepney. Thus,
the truck owner is liable for this failure to rebut the presumption of negligence in hiring and
supervision of his employee. Whenever an employees negligence causes damage or injury
to another, there instantly arises a presumption juris tantum that the employer failed to
exercise diligentissimi patris families in the selection or supervision of his employee. Thus,
in the selection of prospective employees, employers are required to examine them as to
their qualification, experience and service record. With respect to the supervision of
employees, employers must formulate standard operating procedures, monitor their
implementation, and impose disciplinary measures for breaches thereof. These facts must
be shown by concrete proof. The Heirs of the late Ruben Reinoso, Sr. vs. Court of Appeals,
GR No. 116121, July 18, 2011
In a contract of carriage, it is presumed that the common carrier is at fault or is negligent
when a passenger dies or is injured. In fact, there is even no need for the court to make an
express finding of fault or negligence on the part of the common carrier. This statutory
presumption may only be overcome by evidence that the carrier exercised extraordinary
diligence. Unfortunately, the common carrier miserably failed to overcome this
presumption as the accident which led to the passengers death was due to the reckless
driving and gross negligence of its driver. Heirs of Josemaria Ochoa vs. G&S Transport
Corporation, March 19, as affirmed in the July 16, 2012 decision
B. Vigilance over Goods
1. Exempting Causes
a. Requirement of Absence of Negligence
It is a well known physical fact that cars may skid on greasy or slippery roads, as in the
instant case, without fault on account of the manner of handling the car. Skidding means
partial or complete loss of control of the car under circumstances not necessarily implying
negligence. It may occur without fault. (Saturnino Bayasen vs. Court of Appeals, G.R. No.L25785, 26 February 1981)
A fortuitous event is possessed of the following characteristics: (a) the cause of the
unforeseen and unexpected occurrence, or the failure of the debtor to comply with his
obligations, must be independent of human will; (b) it must be impossible to foresee the
event which constitutes the caso fortuito, or if it can be foreseen, it must be impossible to
avoid; (c) the occurrence must be such as to render it impossible for the debtor to fulfill
his obligation in a normal manner; and (d) the obligor must be free from any participation
in the aggravation of the injury resulting to the creditor. Under the circumstances of this
case, the explosion of the new tire may not be considered a fortuitous event. There are
human factors involved in the situation. The fact that the tire was new did not imply that
it was entirely free from manufacturing defects or that it was properly mounted on the
vehicle. Neither may the fact that the tire bought and used in the vehicle is of a brand

name noted for quality, resulting in the conclusion that it could not explode within five
days use. (Alberta Yobido vs. Court of Appeals, G.R. No. 113003, 17 October 1997)
In order that a common carrier may be absolved from liability in case of force majeure, it
is not enough that the accident was caused by force majeure. The common carrier must
still prove that it was not negligent in causing the injuries resulting from such accident.
Considering that the bus driver did not immediately stop the bus at the height of the
commotion; the bus was speeding from a full stop; the victims fell from the bus door when
it was opened or gave way while the bus was still running; the conductor panicked and
blew his whistle after people had already fallen off the bus; and the bus was not properly
equipped with doors in accordance with law - it is clear that Bachelor and Rivera have
failed to overcome the presumption of fault and negligence found in the law governing
common carriers. (Bachelor Express, Incorporated vs. The Honorable Court of Appeals
(Sixth Division), G.R. No. 85691, 31 July 1990)
Mechanical defects in the carrier are not considered a caso fortuito that exempts the
carrier from responsibility. Even granting arguendo that the engine failure was a fortuitous
event, when the vessel finally left the port of Cebu, there was no longer any force
majeure that justified by-passing a port of call. The "interruption" was caused by the
captain upon instruction of management, hence, the owner of the vessel and the ship
agent shall be civilly liable for the acts of the captain. (Sweet Lines, Inc. vs. The Honorable
Court of Appeals, Micaela b. Quintos, et al., G.R. No. L-43640, 28 April 1983)
A mishap caused by defective brakes can not be consideration as fortuitous in character.
Certainly, the defects were curable and the accident preventable. (Vicente Vergara vs. The
Court of Appeals, G.R. No. 77679, 30 September 1987)
The intervention of the municipal officials was not In any case, of a character that would
render impossible the fulfillment by the carrier of its obligation. Ganzon was not duty
bound to obey the illegal order to dump into the sea the scrap iron. Moreover, there is
absence of sufficient proof that the issuance of the same order was attended with such
force or intimidation as to completely overpower the will of the petitioner's employees.
The mere difficulty in the fulfillment of the obligation is not considered force majeure.
(Mauro Ganzon vs. Court of Appeals, G.R. no. L-48757, 30 May 1988)
Despite the report of Philippine Constabulary agent Generalao that the Maranaos were
going to attack its buses, Fortune took no steps to safeguard the lives and properties of its
passengers. The seizure of the bus of the Fortune was foreseeable and, therefore, was not
a fortuitous event which would exempt petitioner from liability. (Fortune Express, Inc.
vs. Court of Appeals, G.R. No. 119756, 18 March 1999)
Indeed, the typhoon was an inevitable occurrence, yet, having been kept posted on the
course of the typhoon by weather bulletins at intervals of six hours, the captain and crew
were well aware of the risk they were taking as they hopped from island to island. In so
doing, they failed to observe that extraordinary diligence required of them explicitly by
law. (Pedro Vasquez, et al., vs. The Court of Appeals, G.R. No. L-42926, 13 September 1985)

Loadstar was at fault or negligent in not maintaining a seaworthy vessel and in having
allowed its vessel to sail despite knowledge of an approaching typhoon. In any event, it
did not sink because of any storm that may be deemed as force majeure, inasmuch as the
wind condition in the area where it sank was determined to be moderate. Since it was
remiss in the performance of its duties, Loadstar cannot hide behind the limited liability
doctrine to escape responsibility for the loss of the vessel and its cargo. (Loadstar Shipping
Co., Inc. vs. Court of Appeals, G.R. No. 131621, 28 September 1999)
Negligence is conduct that creates undue risk of harm to another. It is the failure to
observe that degree of care, precaution and vigilance that the circumstances justly
demand, whereby that other person suffers injury. Petitioners vessel was carrying
chemical cargoalkyl benzene and methyl methacrylate monomer. While knowing that
their vessel was carrying dangerous inflammable chemicals, its officers and crew failed to
take all the necessary precautions to prevent an accident. Petitioner was, therefore,
negligent. (Smith Bell Dodwell Shipping Agency Corporation vs. Catalino Borja, G.R. No.
143008. June 10, 2002)
b. Absence of Delay
The oft-repeated rule regarding a carrier's liability for delay is that in the absence of a
special contract, a carrier is not an insurer against delay in transportation of goods. When
a common carrier undertakes to convey goods, the law implies a contract that they shall
be delivered at destination within a reasonable time, in the absence, of any agreement as
to the time of delivery. But where a carrier has made an express contract to transport and
deliver property within a specified time, it is bound to fulfill its contract and is liable for
any delay, no matter from what cause it may have arisen. This result logically follows from
the well-settled rule that where the law creates a duty or charge, and the party is disabled
from performing it without any default in himself, and has no remedy over, then the law
will excuse him, but where the party by his own contract creates a duty or charge upon
himself, he is bound to make it good notwithstanding any accident or delay by inevitable
necessity because he might have provided against it by contract. Whether or not there has
been such an undertaking on the part of the carrier to be determined from the
circumstances surrounding the case and by application of the ordinary rules for the
interpretation of contracts. (Aniceto Saludo, Jr. vs. Hon. Court of Appeals, G.R. No. 95536,
March 23, 1992).
Petitioner's late delivery of the baggage for eleven (11) days was not motivated by ill will
or bad faith. In fact, it immediately coordinated with its Central Baggage Services to trace
private respondent's suitcase and succeeded in finding it. Under the circumstances,
considering that petitioner's actuation was not attendant with bad faith, the award of
moral damages is unfair. (Philippine Air Lines vs. Florante Miano, G.R. No. 106664, March
8, 1995).
c. Due Diligence to Prevent or Lessen the Loss
The rule is that if the improper packing or, in this case, the defect/s in the container, is/are
known to the carrier or his employees or apparent upon ordinary observation, but he

nevertheless accepts the same without protest or exception notwithstanding such


condition, he is not relieved of liability for damage resulting therefrom. In this case, Calvo
accepted the cargo without exception despite the apparent defects in some of the
container vans. Hence, for failure of Calvo to prove that she exercised extraordinary
diligence in the carriage of goods in this case or that she is exempt from liability, the
presumption of negligence as provided under Art. 1735 holds. (Virgines Calvo doing
business under the name and style Transorient Container Terminal Services, Inc. vs. Ucpb
General Insurance Co., Inc., G.R. No. 148496, 19 March 2002)
While it may be true that the tire that blew-up was still good because the grooves of the
tire were still visible, this fact alone does not make the explosion of the tire a fortuitous
event. No evidence was presented to show that the accident was due to adverse road
conditions or that precautions were taken by the Camoro to compensate for any
conditions liable to cause accidents. The sudden blowing-up, therefore, could have been
caused by too much air pressure injected into the tire coupled by the fact that the jeepney
was overloaded and speeding at the time of the accident. (Roberto Juntilla vs. Clemente
Fontanar, G.R. No. L-45637, 31 May 1985)
Immediately before the collision, Llamoso was actually violating the following traffic rules
and regulations. Thus, a legal presumption arose that Llamoso was negligent, a
presumption KBL was unable to overthrow. (Kapalaran Bus Line vs. Angel Coronado, G.R.
No. 85331, 25 August 1989)
Even if the weather encountered by the ship is to be deemed a natural disaster under
Article 1739 of the Civil Code, Central Shipping failed to show that such natural disaster
or calamity was the proximate and only cause of the loss. Human agency must be entirely
excluded from the cause of injury or loss. In other words, the damaging effects blamed on
the event or phenomenon must not have been caused, contributed to, or worsened by the
presence of human participation. Hence, if a common carrier fails to exercise due
diligence - or that ordinary care that the circumstances of the particular case demand, to
prevent or minimize the loss before, during and after the occurrence of the natural
disaster, the carrier shall be deemed to have been negligent. (Central Shipping Company,
Inc., vs. Insurance Company of North America, G.R. No. 150751, September 20, 2004)
2. Contributory Negligence
Where he contributes to the principal occurrence, as one of its determining factors, he
can not recover. Where, in conjunction with the occurrence, he contributes only to his own
injury, he may recover the amount that the defendant responsible for the event should pay
for such injury, less a sum deemed a suitable equivalent for his own imprudence. (M. H.
Rakes vs. The Atlantic Gulf and Pacific Company, G.R. No. 1719, January 23, 1907).
3. Duration of Liability
a. Delivery of Goods to Common Carrier
By the said act of delivery, the scraps were unconditionally placed in the possession and
control of the common carrier, and upon their receipt by the carrier for transportation,

the contract of carriage was deemed perfected. Consequently, the petitioner-carrier's


extraordinary responsibility for the loss, destruction or deterioration of the goods
commenced. Pursuant to Art. 1736, such extraordinary responsibility would cease only
upon the delivery, actual or constructive, by the carrier to the consignee, or to the person
who has a right to receive them. The fact that part of the shipment had not been loaded
on board the lighter did not impair the said contract of transportation as the goods
remained in the custody and control of the carrier, albeit still unloaded. (Mauro Ganzon
vs. Court of Appeals, G.R. No. L-48757, May 30, 1988)
b. Actual or Constructive Delivery
Delivery to the customs authorities is not the delivery contemplated by Article 1736,
supra, in connection with second paragraph of Article 1498, supra, because, in such a case,
the goods are then still in the hands of the Government and their owner could not exercise
dominion whatever over them until the duties are paid. (Lu Do & Lu YM Corporation v. I.V.
Binamira, G.R. No. L-9840, April 22, 1957)
The receipt of goods by the carrier has been said to lie at the foundation of the contract
to carry and deliver, and if actually no goods are received there can be no such contract.
The liability and responsibility of the carrier under a contract for the carriage of goods
commence on their actual delivery to, or receipt by, the carrier or an authorized agent and
delivery to a lighter in charge of a vessel for shipment on the vessel, where it is the custom
to deliver in that way, is a good delivery and binds the vessel receiving the freight, the
liability commencing at the time of delivery to the lighter and, similarly, where there is a
contract to carry goods from one port to another, and they cannot be loaded directly on
the vessel and lighters are sent by the vessel to bring the goods to it, the lighters are for
the time its substitutes, so that the bill of landing is applicable to the goods as soon as they
are placed on the lighters. (Compaia Maritima vs. Insurance Company of North America,
G.R. No. L-18965, October 30, 1964)
The liability of a common carrier does not cease by mere transfer of custody of the cargo to
the arrastre operator. Like the duty of seaworthiness, the duty of care of the cargo is nondelegable and the carrier is accordingly responsible for the acts of the master, the crew, the
stevedore and his other agents. The fact that a consignee is required to furnish persons to
assist in unloading a shipment may not relieve the carrier of its duty as to such unloading. It
is settled in maritime law jurisprudence that cargoes while being unloaded generally remain
under the custody of the carrier. Since the damage to the cargo was incurred during the
discharge of the shipment and while under the supervision of the carrier, the latter is liable
for the damage caused to the cargo.
The arrastre operator is likewise liable. The functions of an arrastre operator involve the
handling of cargo deposited on the wharf or between the establishment of the consignee
or shipper and the ships tackle. Being the custodian of the goods discharged from a vessel,

an arrastre operators duty is to take good care of the goods and to turn them over to the
party entitled to their possession. While it is true that an arrastre operator and a carrier may
not be held solidarily liable at all times, the facts of these cases show that apart from the
stevedores of the arrastre operator being directly in charge of the physical unloading of the
cargo, its foreman picked the cable sling that was used to hoist the packages for transfer to
the dock. Moreover, the fact that the packages were unloaded with the same sling
unharmed is telling of the inadequate care with which the stevedore handled and
discharged the cargo.Westwind Shipping Corporation vs. UCPB General Insurance Co., GR
no. 2002289, November 25, 2013
c. Temporary Unloading or Storage
4. Stipulation for Limitation of Liability
a. Void Stipulations
Condition No. 14 printed at the back of the passage tickets should be held as void and
unenforceable for first, it is not just and fair to bind passengers to the terms of the
conditions printed at the back of the passage tickets, and second, Condition No. 14
subverts the public policy on transfer of venue of proceedings of this nature, since the
same will prejudice rights and interests of innumerable passengers in different parts of the
country who, under Condition No. 14, will have to file suits against Sweet Lines only in the
City of Cebu. (Sweet Lines, Inc. vs. Hon. Bernardo Teves, Presiding Judge, CFI of Misamis
Oriental, Branch VII, G.R. No. L-37750, 19 May 1978)
b. Limitation of Liability to Fixed Amount
c. Limitation of Liability in Absence of Declaration of Greater Value
The stipulation in the bill of lading limiting the common carrier's liability to the value of
the goods appearing in the bill, unless the shipper or owner declares a greater value, is
valid and binding. This limitation of the carrier's liability is sanctioned by the freedom of
the contracting parties to establish such stipulations, clauses, terms, or conditions as they
may deem convenient, provided they are not contrary to law, morals, good customs and
public policy. A stipulation fixing or limiting the sum that may be recovered from the
carrier on the loss or deterioration of the goods is valid, provided it is (a) reasonable and
just under the circumstances, and (b) has been fairly and freely agreed upon. In the case
at bar, the shipper and consignee are, therefore, bound by such stipulations. (St. Paul Fire
& Marine Insurance Co., vs. Macondray & Co, Inc., et al., G.R. No. L-27796, 25 March 1976)
A stipulation in a contract of carriage that the carrier will not be liable beyond a specified
amount unless the shipper declares the goods to have a greater value is generally deemed
to be valid and will operate to limit the carrier's liability, even if the loss or damage results
from the carrier's negligence. Pursuant to such provision, where the shipper is silent as to
the value of his goods, the carrier's liability for loss or damage thereto is limited to the
amount specified in the contract of carriage and where the shipper states the value of his

goods, the carrier's liability for loss or damage thereto is limited to that amount. Under a
stipulation such as this, it is the duty of the shipper to disclose, rather than the carrier's to
demand the true value of the goods and silence on the part of the shipper will be sufficient
to limit recovery in case of loss to the amount stated in the contract of carriage. (Eastern
and Australian Steamship Co., Ltd. vs. Great American Insurance Co., G.R. No. L-37604
October 23, 1981)
5. Liability for Baggage of Passengers
a. Checked-In Baggage
Where airline passengers luggage was left at airlines fault in Manila and passenger was
not adequately or properly given assistance in Hawaii to locate his luggage an award of
moral damages is proper (Pan American World Airways, Inc. vs. Intermediate Appellate
Court, G.R. No. 68988. June 21, 1990)
b. Baggage in Possession of Passengers
C. Safety of Passengers
A common carrier is bound to carry its passengers safely as far as human care and foresight
can provide, using the utmost diligence of very cautious persons, with due regard to all
the circumstances. In a contract of carriage, it is presumed that the common carrier was at
fault or was negligent when a passenger dies or is injured. Unless the presumption is
rebutted, the court need not even make an express finding of fault or negligence on the
part of the common carrier. This statutory presumption may only be overcome by evidence
that the carrier exercised extraordinary diligence. (Victory Liner, Inc. vs. Rosalito Gammad,
G.R. No. 159636, November 25, 2004)
The petitioner has the obligation to transport its passengers to their destinations and to
observe extraordinary diligence in doing so. Death or any injury suffered by any of its
passengers gives rise to the presumption that it was negligent in the performance of its
obligation under the contract of carriage. (Philippine National Railways vs. The Honorable
Court of Appeals, G.R. No. L-55347. October 4, 1985)
But while petitioner failed to exercise extraordinary diligence as required by law, it
appears that the deceased was chargeable with contributory negligence. Since he opted
to sit on the open platform between the coaches of the train, he should have held tightly
and tenaciously on the upright metal bar found at the side of said platform to avoid falling
off from the speeding train. Such contributory negligence, while not exempting the PNR
from liability, nevertheless justified the deletion of the amount adjudicated as moral
damages. (Philippine National Railways vs. The Honorable Court of Appeals, G.R. No. L55347. October 4, 1985)

It is a matter of common knowledge and experience about common carriers like trains and
buses that before reaching a station or flagstop they slow down and the conductor
announces the name of the place. It is also a matter of common experience that as the
train or bus slackens its speed, some passengers usually stand and proceed to the nearest
exit, ready to disembark as the train or bus comes to a full stop. This is especially true of a
train because passengers feel that if the train resumes its run before they are able to
disembark, there is no way to stop it as a bus may be stopped. It was negligence on the
conductors part to announce the next flag stop when said stop was still a full three minutes
ahead. That the announcement was premature and erroneous is shown by the fact that
immediately after the train slowed down, it unexpectedly accelerated to full speed. The
negligence of petitioner-appellant in prematurely and erroneously announcing the next
flag stop was the proximate cause of the deaths of Martina Bool and Emelita Gesmundo.
Any negligence of the victims was at most contributory and does not exculpate the
accused from criminal liability. (Clemente Brias vs. The People of the Philippines, G.R. No.
L-30309. November 25, 1983)
1. Void Stipulations
2. Duration of Liability
a. Waiting for Carrier or Boarding of Carrier
A public utility bus, once it stops, is in effect making a continuous offer to bus riders.
Hence, it becomes the duty of the driver and the conductor, every time the bus stops, to
do no act that would have the effect of increasing the peril to a passenger while he was
attempting to board the same. The premature acceleration of the bus in this case was a
breach of such duty. Pedrito, by stepping and standing on the platform of the bus, is
already considered a passenger and is entitled all the rights and protection pertaining to
such a contractual relation. Hence, it has been held that the duty which the carrier
passengers owes to its patrons extends to persons boarding cars as well as to those
alighting therefrom. (Dangwa Transportation Co., Inc. vs. Court of Appeals, G.R. No. 95582,
7 October 1991)
b. Arrival at Destination
Anacleto Viana was still a passenger at the time of the incident. When the accident
occurred, the victim was in the act of unloading his cargoes, which he had every right to
do, from Aboitiz's vessel. A carrier is duty bound not only to bring its passengers safely to
their destination but also to afford them a reasonable time to claim their baggage. (Aboitiz
Shipping Corporation vs. Hon. Court of Appeals, Eleventh Division, G.R. No. 884458, 6
November 1989)
It has been recognized as a rule that the relation of carrier and passenger does not cease
at the moment the passenger alights from the carrier's vehicle at a place selected by the

carrier at the point of destination, but continues until the passenger has had a reasonable
time or a reasonable opportunity to leave the carrier's premises. And, what is a reasonable
time or a reasonable delay within this rule is to be determined from all the circumstances.
In the present case, the father returned to the bus to get one of his baggages which was
not unloaded when they alighted from the bus. Raquel, the child that she was, must have
followed the father. However, although the father was still on the running board of the
bus awaiting for the conductor to hand him the bag or bayong, the bus started to run, so
that even he (the father) had to jump down from the moving vehicle. It was at this instance
that the child, who must be near the bus, was run over and killed. In the circumstances, it
cannot be claimed that the carrier's agent had exercised the "utmost diligence" of a "very
cautions person" required by Article 1755 of the Civil Code to be observed by a common
carrier in the discharge of its obligation to transport safely its passengers. (La Mallorca vs.
Honorable Court of Appeals, G.R. No. L-20761, July 27, 1966)
3. Liability for Acts of Others
a. Employees
The misconduct on the part of the carriers employees toward a passenger gives the latter
an action for damages against the carrier. (Sabena Belgian World Airlines vs. Honorable
Court of Appeals G.R. No. 82068. March 31, 1989)
The negligence of the employee gives rise to the presumption of negligence on the part
of the employer. This is the presumed negligence in the selection and supervision of the
employee. The theory of presumed negligence, in contrast with the American doctrine
of respondent superior, where the negligence of the employee is conclusively presumed
to be the negligence of the employer, is clearly deducible from the last paragraph of
Article 2180 of the Civil Code which provides that the responsibility therein mentioned
shall cease if the employers prove that they observed all the diligence of a good father of
a family to prevent damages. (Leopoldo Poblete vs. Donato Fabros, G.R. No. L-29803, 14
September 1979)
It must be emphasized that a contract to transport passengers is quite different in kind
and degree from any other contractual relations, and this is because of the relation, which
an air carrier sustains with the public. Its business is mainly with the travelling public. It
invites people to avail [themselves] of the comforts and advantages it offers. The contract
of air carriage, therefore, generates a relation attended with a public duty. Neglect or
malfeasance of the carriers employees naturally could give ground for an action for
damages. (Collin A. Morris vs. Court of Appeals, G.R. No. 127957. February 21, 2001)
The basis of the carrier's liability for assaults on passengers committed by its drivers rests
either on (1) the doctrine of respondeat superior or (2) the principle that it is the carrier's
implied duty to transport the passenger safely. Under the first, which is the minority view,
the carrier is liable only when the act of the employee is within the scope of his authority

and duty. It is not sufficient that the act be within the course of employment only. Under
the second view, upheld by the majority and also by the later cases, it is enough that the
assault happens within the course of the employee's duty. It is no defense for the carrier
that the act was done in excess of authority or in disobedience of the carrier's orders.The
carrier's liability here is absolute in the sense that it practically secures the passengers from
assaults committed by its own employees. As can be gleaned from Art. 1759, the Civil Code
of the Philippines evidently follows the rule based on the second view. At least three very
cogent reasons underlie this rule: (1) the special undertaking of the carrier requires that it
furnish its passenger that full measure of protection afforded by the exercise of the high
degree of care prescribed by the law, inter alia from violence and insults at the hands of
strangers and other passengers, but above all, from the acts of the carrier's own servants
charged with the passenger's safety; (2) said liability of the carrier for the servant's
violation of duty to passengers, is the result of the formers confiding in the servant's hands
the performance of his contract to safely transport the passenger, delegating therewith
the duty of protecting the passenger with the utmost care prescribed by law; and (3) as
between the carrier and the passenger, the former must bear the risk of wrongful acts or
negligence of the carrier's employees against passengers, since it, and not the passengers,
has power to select and remove them. (Antonia Maranan vs. Pascual Perez, et al, G.R. No.
L-22272, June 26, 1967)
b. Other Passengers and Strangers
A tort committed by a stranger which causes injury to a passenger does not accord the
latter a cause of action against the carrier. The negligence for which a common carrier is
held responsible is the negligent omission by the carrier's employees to prevent the tort
from being committed when the same could have been foreseen and prevented by them.
(Jose Pilapil vs. Hon. Court of Appeals, G.R. No. 52159, 22 December 1989)
4. Extent of Liability for Damages
It is well-settled that when death occurs as a result of the commission of a crime (reckless
imprudence), the following items of damages may be recovered: (1) an indemnity for the
death of the victim; (2) an indemnity for loss of earning capacity of the deceased; (3) moral
damages; (4) exemplary damages; (5) attorneys fees and expenses of litigation, and (6)
interest in proper cases. (Clemente Brias vs. The People of the Philippines, G.R. No. L30309. November 25, 1983)
Article 1764 in relation to Article 2206 of the Civil Code, holds the common carrier in
breach of its contract of carriage that results in the death of a passenger liable to pay the
following: (1) indemnity for death, (2) indemnity for loss of earning capacity, and (3) moral
damages. (Victory Liner, Inc. vs. Rosalito Gammad, G.R. No. 159636, November 25, 2004)
The Civil Code, in Article 1764 thereof, expressly makes Article 2206 applicable "to the
death of a passenger caused by the breach of contract by a common carrier." Accordingly,
a common carrier is liable for actual or compensatory damages under Article 2206 in

relation to Article 1764 of the Civil Code for deaths of its passengers caused by the breach
of the contract of transportation. (Sulpicio Lines, Inc. vs. The Honorable Court of Appeals,
G.R. No. 113578, 14 July 1995)
Under Article 1764 and Article 2206 (1) of the Civil Code, the award of damages for death
is computed on the basis of the life expectancy of the deceased, not of his beneficiary.
(Philippine Airlines, Inc. vs. Hon. Court of Appeals, G.R. No. 54470. May 8, 1990)
Article 2220 of the Civil Code says that moral damages may be awarded in breaches of
contract where the defendant acted fraudulently or in bad faith. So, proof of
infringement of an agreement by a party, standing alone, will not justify an award of moral
damages. There must, in addition, as the law points out, be competent evidence of fraud
of bad faith by that party. If the plaintiff, for instance, fails to take the witness stand and
testify as to his social humiliation, wounded feelings, anxiety, etc., moral damages cannot
be recovered. The rules applies, of course, to common carriers. (Pan American World
Airways, Inc. vs. Intermediate Appellate Court, G.R. No. 68988. June 21, 1990)
In awarding moral damages for breach of contract of carriage, the breach must be wanton
and deliberately injurious or the one responsible acted fraudulently or with malice or bad
faith. Where in breaching the contract of carriage the defendant airline is not shown to
have acted fraudulently or in bad faith, liability for damages is limited to the natural and
probable consequences of the breach of obligation which the parties had foreseen or
could have reasonably foreseen. In that case, such liability does not include moral and
exemplary damages. Moral damages are generally not recoverable in culpa contractual
except when bad faith had been proven. However, the same damages may be recovered
when breach of contract of carriage results in the death of a passenger. The award of
exemplary damages has likewise no factual basis. It is a requisite that the act must be
accompanied by bad faith or done in wanton, fraudulent or malevolent manner
circumstances which are absent in this case. In addition, exemplary damages cannot be
awarded as the requisite element of compensatory damages was not present. (Collin A.
Morris vs. Court of Appeals, G.R. No. 127957. February 21, 2001)
The rule is that moral damages are recoverable in a damage suit predicated upon a breach
of contract of carriage only where (a) the mishap results in the death of a passenger and
(b) it is proved that the carrier was guilty of fraud and bad faith even if death does not
result. For having arrived at the airport after the closure of the flight manifest,
respondents employee could not be faulted for not entertaining petitioners tickets and
travel documents for processing, as the checking in of passengers for SAS Flight SK 893
was finished. There was no fraud or bad faith as would justify the courts award of moral
damages. (Collin A. Morris vs. Court of Appeals, G.R. No. 127957. February 21, 2001)
The law distinguishes a contractual breach effected in good faith from one attended by
bad faith. Where in breaching the contract, the defendant is not shown to have acted
fraudulently or in bad faith, liability for damages is limited to the natural and probable
consequences of the breach of the obligation and which the parties had foreseen or could
reasonably have foreseen; and in that case, such liability would not include liability for
moral and exemplary damages. Under Article 2232 of the Civil Code, in a contractual or
quasi-contractual relationship, exemplary damages may be awarded only if the defendant

had acted in a wanton, fraudulent, reckless, oppressive or malevolent manner. (China


Airlines Limited vs. Court of Appeals, 211 SCRA 897, 1992)
Exemplary damages may be allowed only in cases where the defendant acted in a wanton,
fraudulent, reckless, oppressive or malevolent manner, There being no evidence of fraud,
malice or bad faith on the part of petitioner, the grant of exemplary damages should be
discarded. (Philippine National Railways vs. The Honorable Court of Appeals, G.R. No. L55347. October 4, 1985)
D. Bill of Lading
A bill of lading is a written acknowledgment of the receipt of goods and an agreement to
transport and to deliver them at a specified place to a person named or on his or her order.
It operates both as a receipt and as a contract. It is a receipt for the goods shipped and a
contract to transport and deliver the same as therein stipulated. As a receipt, it recites the
date and place of shipment, describes the goods as to quantity, weight, dimensions,
identification marks, condition, quality, and value. As a contract, it names the contracting
parties, which include the consignee; fixes the route, destination, and freight rate or
charges; and stipulates the rights and obligations assumed by the parties. (Unsworth
Transport International Phils., Inc. vs. Court of Appeals, G.R. No. 166250, July 26, 2010)
The bill of lading defines the rights and liabilities of the parties in reference to the contract
of carriage. Stipulations therein are valid and binding in the absence of any showing that
the same are contrary to law, morals, customs, public order and public policy. Where the
terms of the contract are clear and leave no doubt upon the intention of the contracting
parties, the literal meaning of the stipulations shall control. In light of the foregoing, there
can be no question about the validity and enforceability of Stipulation No. 7 in the bill of
lading. The twenty-four hour requirement under the said stipulation is, by agreement of
the contracting parties, a sine qua non for the accrual of the right of action to recover
damages against the carrier. (Provident Insurance Corp., vs. Court of Appeals, G.R. No.
118030, January 15, 2004)
The holding in most jurisdictions has been that a shipper who receives a bill of lading
without objection after an opportunity to inspect it, and permits the carrier to act on it by
proceeding with the shipment is presumed to have accepted it as correctly stating the
contract and to have assented to its terms. In other words, the acceptance of the bill
without dissent raises the presumption that all the terms therein were brought to the
knowledge of the shipper and agreed to by him and, in the absence of fraud or mistake,
he is estopped from thereafter denying that he assented to such terms. This rule applies
with particular force where a shipper accepts a bill of lading with full knowledge of its
contents and acceptance under such circumstances makes it a binding contract. (Magellan
Manufacturing Marketing Corporation vs. Court of Appeals, G.R. No. 95529, August 22,
1991)
1. Three-Fold Character

A bill of lading serves two functions: First, it is a receipt for the goods shipped; Second, it
is a contract by which three parties, namely, the shipper, the carrier, and the consignee
undertake specific responsibilities and assume stipulated obligations. A bill of lading
delivered and accepted constitutes the contract of carriage even though not signed,
because the acceptance of a paper containing the terms of a proposed contract generally
constitutes an acceptance of the contract and of all its terms and conditions of which the
acceptor has actual or constructive notice (Keng Hua Paper Products Co., Inc. vs. Court of
Appeals, 286 SCRA 257, 1998).
A bill of lading, aside from being a contract and a receipt, is also a symbol of the goods
covered by it. A bill of lading which has no notation of any defect or damage in the goods
is called a clean bill of lading. A clean bill of lading constitutes prima facie evidence of
the receipt by the carrier of the goods as therein described. (Lorenzo Shipping Corp.
vs. Chubb and Sons, Inc., G.R. No. 147724, June 8, 2004)
2. Delivery of Goods
a. Period of Delivery
b. Delivery Without Surrender of Bill of Lading
The surrender of the original bill of lading is not a condition precedent for a common
carrier to be discharged of its contractual obligation. If surrender of the original bill of
lading is not possible, acknowledgment of the delivery by signing the delivery receipt
suffices. This is what respondent did. (National Trucking and Forwarding Corporation vs.
Lorenzo Shipping Corporation, G.R. No. 153563, February 07, 2005)
c. Refusal of Consignee to Take Delivery
3. Period for Filing Claims
The twenty-four-hour period prescribed by Art. 366 of the Code of Commerce within
which claims must be presented does not begin to run until the consignee has received
such possession of the merchandise that he may exercise over it the ordinary control
pertinent to ownership. In other words, there must be delivery of the cargo by the carrier
to the consignee at the place of destination. (Lorenzo Shipping Corp. vs. Chubb and Sons,
Inc., G.R. No. 147724, June 8, 2004)
In order that the condition therein provided in Article 366 of the Code of Commerce may
be demanded there should be a consignment of goods, through a common carrier, by a
consignor in one place to a consignee in another place. And said article provides that the
claim for damages must be made "within twenty-four hours following the receipt of the
merchandise" by the consignee from the carrier. In other words, there must be delivery of
the merchandise by the carrier to the consignee at the place of destination. In the instant
case, the consignor is the branch office of Lee Teh & Co., Inc., at Catarman, Samar, which
placed the cargo on board the ship Jupiter, and the consignee, its main office at Manila.
The cargo never reached Manila, its destination, nor was it ever delivered to the

consignee, the office of the shipper in Manila, because the ship ran aground upon entering
Laoang Bay, Samar on the same day of the shipment. Such being the case, it follows that
the aforesaid article 366 does not have application because the cargo was never received
by the consignee. (New Zealand Insurance Co., Ltd., vs. Adriano Choa Joy, Etc., G.R. No. L7311, September 30, 1955)
Under the Code of Commerce, the notice of claim must be made within twenty four (24)
hours from receipt of the cargo if the damage is not apparent from the outside of the
package. For damages that are visible from the outside of the package, the claim must be
made immediately. Provisions specifying a time to give notice of damage to common
carriers are ordinarily to be given a reasonable and practical, rather than a strict
construction. Understandably, when the goods were delivered, the necessary clearance
had to be made before the package was opened. Upon opening and discovery of the
damaged condition of the goods, a report to this effect had to pass through the proper
channels before it could be finalized and endorsed by the institution to the claims
department of the shipping company. The call to Aboitiz was made two days from delivery,
a reasonable period considering that the goods could not have corroded instantly
overnight such that it could only have sustained the damage during transit. Moreover,
Aboitiz was able to immediately inspect the damage while the matter was still fresh. In so
doing, the main objective of the prescribed time period was fulfilled. Thus, there was
substantial compliance with the notice requirement in this case. (Aboitiz Shipping
Corporation vs. Insurance Company of North America, G.R. No. 168402, August 6, 2008)
4. Period for Filing Actions
In this jurisdiction, the filing of a claim with the carrier within the time limitation therefor
actually constitutes a condition precedent to the accrual of a right of action against a
carrier for loss of or damage to the goods. The shipper or consignee must allege and prove
the fulfillment of the condition. If it fails to do so, no right of action against the carrier can
accrue in favor of the former. The aforementioned requirement is a reasonable condition
precedent; it does not constitute a limitation of action. The requirement of giving notice
of loss of or injury to the goods is not an empty formalism. The fundamental reasons for
such a stipulation are (1) to inform the carrier that the cargo has been damaged, and that
it is being charged with liability therefor; and (2) to give it an opportunity to examine the
nature and extent of the injury. This protects the carrier by affording it an opportunity to
make an investigation of a claim while the matter is fresh and easily investigated so as to
safeguard itself from false and fraudulent claims. (Federal Express Corporation vs. American
Home Assurance Company, G.R. No. 150094, August 18, 2004)
The Court has construed the 24-hour claim requirement as a condition precedent to the
accrual of a right of action against a carrier for loss of, or damage to, the goods. The
shipper or consignee must allege and prove the fulfillment of the condition. Otherwise,
no right of action against the carrier can accrue in favor of the shipper or consignee. (Ucpb
General Insurance Co., Inc., vs. Aboitiz Shipping Corporation, et. Al., G.R. No. 168433,
February 10, 2009)

The bills of lading unequivocally prescribes a time frame of thirty (30) days for filing a claim
with the carrier in case of loss of or damage to the cargo and sixty (60) days from accrual
of the right of action for instituting an action in court, which periods must concur. As the
requirements in Article 366, restated with a slight modification in the assailed paragraph
5 of the bills of lading, are reasonable conditions precedent, they are not limitations of
action. Being conditions precedent, their performance must precede a suit for
enforcement and the vesting of the right to file spit does not take place until the
happening of these conditions. (Philippine American General Insurance Co., Inc. and
Tagum Plastics, Inc., vs. Sweet Lines, Inc., G.R. No. 87434 August 5, 1992)
E. Maritime Commerce
1. Charter Parties
a. Bareboat/Demise Charter
b. Time Charter
Where the agreement executed by the parties was a time charter where the possession and control
of the barge was retained by the owner, the latter is, therefore, a common carrier legally charged
with extraordinary diligence in the vigilance over the goods transported by him. The sinking of the
vessel created a presumption of negligence and/or unseaworthiness which the barge owner failed
to overcome and gave rise to his liability for the charterer lost cargo despite the latters failure to
insure the same. Oceaneering Contractrors (Phils), Inc. v. Nestor Barreto, doing business as NNB
Lighterage , GR No. 184215, February 9, 2011
c. Voyage/Trip Charter
It bears stressing that subject Letter of Agreement is considered a Charter Party. A charter
party is classified into (1) bareboat or demise charter and (2) contract of
affreightment. Subject contract is one of affreightment, whereby the owner of the vessel
leases part or all of its space to haul goods for others. It is a contract for special service to
be rendered by the owner of the vessel. Under such contract the ship owner retains the
possession, command and navigation of the ship, the charterer or freighter merely having
use of the space in the vessel in return for his payment of the charter hire. (National Food
Authority vs. Court of Appeals, G.R. No. 96453, August 4, 1999)
A charter party is a contract by which an entire ship, or some principal part thereof, is let
by the owner to another person for a specified time or use; a contract of affreightment is
one by which the owner of a ship or other vessel lets the whole or part of her to a merchant
or other person for the conveyance of goods, on a particular voyage, in consideration of
the payment of freight. A contract of affreightment may be either time charter, wherein

the leased vessel is leased to the charterer for a fixed period of time, or voyage charter,
wherein the ship is leased for a single voyage. In both cases, the charter-party provides
for the hire of the vessel only, either for a determinate period of time or for a single or
consecutive voyage, the ship owner to supply the ships store, pay for the wages of the
master of the crew, and defray the expenses for the maintenance of the ship. Under
a demise or bareboat charter on the other hand, the charterer mans the vessel with his own
people and becomes, in effect, the owner for the voyage or service stipulated, subject to
liability for damages caused by negligence. If the charter is a contract of affreightment,
which leaves the general owner in possession of the ship as owner for the voyage, the rights
and the responsibilities of ownership rest on the owner. The charterer is free from liability
to third persons in respect of the ship. It is only when the charter includes both the vessel
and its crew, as in a bareboat or demise that a common carrier becomes private, at least
insofar as the particular voyage covering the charter-party is concerned. (Caltex
Philippines, Inc. vs. Sulpicio Lines, Inc., et. al., G.R. No. 131166, September 30, 1999)
A bareboat or demise charter is where the ship owner turns over possession of his vessel
to the charterer, with the latter undertaking to provide the crew, victuals, supplies, and
fuel during the term of the charter. In a time charter, the ship owner retains possession
and control of his vessel through the master and crew who remain in his employ. A voyage
charter is simply a contract of affreightment where the master and crew remain in the
employ of the ship owner. In a demise or bareboat charter, the charterer who is treated
ass owner pro hac vice, and not the general owner, is liable for expenses of the voyage
including wages of seamen. (Lintonjua Shipping Company, Inc. vs. National Seamen Board,
176 SCRA 189)
Cebu Salvage and MCCII entered into a "voyage charter," also known as a contract of
affreightment wherein the ship was leased for a single voyage for the conveyance of
goods, in consideration of the payment of freight. Under a voyage charter, the shipowner
retains the possession, command and navigation of the ship, the charterer or freighter
merely having use of the space in the vessel in return for his payment of freight. An owner
who retains possession of the ship remains liable as carrier and must answer for loss or nondelivery of the goods received for transportation. (Cebu Salvage Corporation vs. Philippine
Home Assurance Corporation, G.R. No. 150403, January 25, 2007)
2. Liability of Ship Owners and Shipping Agents
The real and hypothecary nature of maritime law simply means that the liability of the
carrier in connection with losses related to maritime contract is confined to the vessel,
which is hypothecated for such obligations or which stands as the guaranty for their
settlement. The only time the Limited Liability Rule does not apply is when there is an
actual finding of negligence on the part of the vessel owner or agent. (Aboitiz Shipping
Corporation vs. General Accident Fire and Life Assurance Corporation Ltd., 217 SCRA 359,
1993)

In case of collision of vessels, in order to avail of the benefits of Article 837 of the Code of
Commerce the shipowner or agent must abandon the vessel. In such case the civil liability
shall be limited to the value of the vessel with all the appurtenances and freight earned
during the voyage. However, where the injury or average is due to the ship-owner's fault
as in this case, the shipowner may not avail of his right to limited liability by abandoning
the vessel. (Luzon Stevedoring Corporation vs. Court of Appeals, G.R. No. L-58897, 3
December 1987)
The term "ship agent" as used in the foregoing provision is broad enough to include the
ship owner. Pursuant to said provision, therefore, both the ship owner and ship agent are
civilly and directly liable for the indemnities in favor of third persons, which may arise from
the conduct of the captain in the care of goods transported, as well as for the safety of
passengers transported. However, under the same Article, this direct liability is moderated
and limited by the ship agent's or ship owner's right of abandonment of the vessel and
earned freight. The most fundamental effect of abandonment is the cessation of the
responsibility of the ship agent/owner. The ship owner's or agent's liability is merely coextensive with his interest in the vessel such that a total loss thereof results in its extinction.
"No vessel, no liability" expresses in a nutshell the limited liability rule. The total
destruction of the vessel extinguishes maritime liens as there is no longer any res to which
it can attach. (Chua Yek Hong vs. Intermediate Appellate Court, G.R. No. 74811, 30
September 1988)
The LIMITED LIABILITY RULE cannot be availed of by the charterers/sub-charterer in order
to escape from their liability. The Code of Commerce is clear on which indemnities may
be confined or restricted to the value of the vessel and these are the indemnities in
favor of third persons which may arise from the conduct of the captain in the care of the
goods which he loaded on the vessel. Thus, what is contemplated is the liability to third
persons who may have dealt with the SHIPOWNER, the AGENT or even the CHARTERER
in case of demise or bareboat charter.
The Charterer cannot use the said Rule because the it does not completely and absolutely
step into the shoes of the shipowner or even the ship agent because there remains
conflicting rights between the former and the real shipowner as derived from their charter
agreement. Therefore, even if the contract is for a bareboat or demise charter where
possession, free administration and even navigation are temporarily surrendered to the
charterer, dominion over the vessel remains with the shipowner. Ergo, the charterer or the
sub-charterer, whose rights cannot rise above that of the former, can never set up the
Limited Liability Rule against the very owner of the vessel. Dela Torre vs. Court of Appeals,
GR No. 160088, July 13, 2011

a. Liability for Acts of Captain


b. Exceptions to Limited Liability

The limited liability rule, however, is not without exceptions, namely: (1) where the injury
or death to a passenger is due either to the fault of the ship owner, or to the concurring
negligence of the ship owner and the captain (Manila Steamship Co., Inc. vs.
Abdulhaman supra); (2) where the vessel is insured; and (3) in workmen's compensation
claims (Abueg vs. San Diego, supra). In this case, there is nothing in the records to show
that the loss of the cargo was due to the fault of the private respondent as shipowners, or
to their concurrent negligence with the captain of the vessel. (Chua Yek Hong vs.
Intermediate Appellate Court, G.R. No. 74811, 30 September 1988)
The international rule is not to the effect that the right of abandonment of vessels, as a
legal limitation of a ship owners liability, does not apply to cases where injury or average
was occasioned by the shipowners fault. Where the ship owner is likewise to be blamed,
Article 587 of the Code of Commerce will not apply, and such situation will be governed
by the provision of the Civil Code on common carriers (Philippine American General
Insurance Co. vs. Court of Appeals, 273 SCRA 262, 1997).
3. Accidents and Damages in Maritime Commerce
a. General Average
b. Collisions
In American jurisprudence that there is a presumption of fault against a moving vessel that
strikes a stationary object such as a dock or navigational aid. In admiralty, this presumption
does more than merely require the ship to go forward and produce some evidence on the
presumptive matter. The moving vessel must show that it was without fault or that the
collision was occasioned by the fault of the stationary object or was the result of inevitable
accident. It has been held that such vessel must exhaust every reasonable possibility which
the circumstances admit and show that in each, they did all that reasonable care
required. In the absence of sufficient proof in rebuttal, the presumption of fault attaches
to a moving vessel which collides with a fixed object and makes a prima facie case of fault
against the vessel. (Far Eastern Shipping Company vs. Court of Appeals, G.R. No. 130068,
October 1, 1998)
4. Carriage of Goods by Sea Act
a. Application
The law of the country to which the goods are to be transported governs the liability of
the common carrier in case of their loss, destruction or deterioration" (Article 1753, Civil
Code). Thus, the rule was specifically laid down that for cargoes transported from Japan
to the Philippines, the liability of the carrier is governed primarily by the Civil Code and in
all matters not regulated by said Code, the rights and obligations of common carrier shall
be governed by the Code of commerce and by laws (Article 1766, Civil Code). Hence, the
Carriage of Goods by Sea Act, a special law, is merely suppletory to the provision of the
Civil Code. (National Development Company vs. The Court of Appeals, G.R. No. L-49469,
August 19, 1988)

Inasmuch as neither the Civil Code nor the Code of Commerce states a specific
prescriptive period on the matter, the Carriage of Goods by Sea Act (COGSA) which
provides for a one-year period of limitation on claims for loss of, or damage to, cargoes
sustained during transit may be applied suppletorily to the case at bar. This one-year
prescriptive period also applies to the insurer of the goods. (Loadstar Shipping Co., Inc., vs.
Court of Appeals, G.R. No. 131621 September 28, 1999)
It is to be noted that the Civil Code does not of itself limit the liability of the common
carrier to a fixed amount per package although the Code expressly permits a stipulation
limiting such liability. Thus, the COGSA which is suppletory to the provisions of the Civil
Code, steps in and supplements the Code by establishing a statutory provision limiting the
carrier's liability in the absence of a declaration of a higher value of the goods by the
shipper in the bill of lading. The provisions of the Carriage of Goods by.Sea Act on limited
liability are as much a part of a bill of lading as though physically in it and as much a part
thereof as though placed therein by agreement of the parties. (Eastern Shipping Lines, Inc.,
vs. Intermediate Appellate Court, G.R. No. L-69044 May 29, 1987)
It is settled in maritime law jurisprudence that cargoes while being unloaded generally
remain under the custody of the carrier. In the instant case, the damage or losses were
incurred during the discharge of the shipment while under the supervision of the carrier.
Consequently, the carrier is liable for the damage or losses caused to the shipment.
Section 2 of the COGSA provides that under every contract of carriage of goods by sea,
the carrier in relation to the loading, handling, stowage, carriage, custody, care, and
discharge of such goods, shall be subject to the responsibilities and liabilities and entitled
to the rights and immunities set forth in the Act. Section 3 (2) thereof which states that
among the carriers responsibilities are to properly and carefully load, handle, stow, carry,
keep, care for, and discharge the goods carried. (Philippine First Insurance Co. Inc., vs.
Wallem Phils. Shipping, Inc., G.R. No. 165647, 26 March 2009)
Carriage of Goods by Sea Act is applicable up to the final port of destination and that the
fact that transshipment was made on an interisland vessel did not remove the contract of
carriage of goods from the operation of said Act. (Sea-Land Service, Inc.,vs. Intermediate
Appellate Court, G.R. No. 75118 August 31, 1987)
As defined in the Civil Code and as applied to Section 3 (6) paragraph 4 of the Carriage of
Goods by Sea Act, "loss" contemplates merely a situation where no delivery at all was
made by the shipper of the goods because the same had perished, gone out of commerce,
or disappeared that their existence is unknown or they cannot be recovered. It does not
include a situation where there was indeed delivery but delivery to the wrong person,
or a misdelivery, as alleged in the complaint in this case. (Domingo Ang vs. American
Steamship Agencies, Inc., G.R. No. L-22491, January 27, 1967)
Loss refers to the deterioration or disappearance of goods. Conformably with this
concept of what constitutes loss or damage,the deterioration of goods due to delay in
their transportation constitutes loss or damage within the meaning of 3(6) of the
Carriage of Goods by the Sea Act, so that as suit was not brought within one year the action
was barred. (Mitsui O.S.K. Lines Ltd. vs. Court of Appeals, G.R. No. 119571, March 11, 1998)

b. Notice of Loss or Damage


COGSA provides that the notice of claim need not be given if the state of the goods, at
the time of their receipt, has been the subject of a joint inspection or survey. As stated
earlier, prior to unloading the cargo, an Inspection Report as to the condition of the goods
was prepared and signed by representatives of both parties. Moreover, failure to file a
notice of claim within three days will not bar recovery if it is nonetheless filed within one
year. This one-year prescriptive period also applies to the shipper, the consignee, the
insurer of the goods or any legal holder of the bill of lading. (Belgian Overseas Chartering
and Shipping N.V. vs. Philippine First Insurance Co., Inc., G.R. No. 143133, June 5, 2002)
Under Section 3 (6) of the COGSA, notice of loss or damages must be filed within three days
of delivery. Under the same provision, however, a failure to file a notice of claim within three
days will not bar recovery if a suit is nonetheless filed within one year from delivery of the
goods or from the date when the goods should have been delivered. The filing of an
amended pleading does not retroact to the date of the filing of the original. It is true that,
as an exception, an amendment which merely supplements and amplifies facts originally
alleged in the complaint relates back to the commencement of the action and is not barred
by the statute of limitations which expired after the service of the original complaint. The
exception, however, would not apply to the party impleaded for the first time after the
service of the amended complaint. In this case, petitioner was not impleaded as a defendant
in the original complaint filed on March 11, 1993. It was only on June 7, 1993 that the
Amended Complaint, impleading petitioner as defendant, was filed. Considering this
circumstances, clearly, the suit against the petitioner was filed beyond the prescriptive
period of the filing of claims as provided in the COGSA. Wallem Philippines Shipping vs SR
Farms, GR No. 161849, July 9, 2010
In any event the carrier and the ship shall be discharged from all liability in respect of loss or
damage unless suit is brought within one year after delivery of the goods or the date when the
goods should have been delivered: Provided, That if a notice of loss or damage, either
apparent or concealed, is not given as provided for in this section, that fact shall not affect or
prejudice the right of the shipper to bring suit within one year after the delivery of the goods
or the date when the goods should have been delivered. Asian Terminals Inc., v. Philam
Insurance Co. G.R. NO. 181262 , July 24, 2013

c. Period of Prescription
The one-year period of limitation is designed to meet the exigencies of maritime hazards.
In a case where the goods shipped were neither lost nor damaged in transit but were, on
the contrary, delivered in port to someone who claimed to be entitled thereto, the
situation is different, and the special need for the short period of limitation in cases of loss
or damage caused by maritime perils does not obtain. (Mitsui O.S.K. Lines Ltd., represented
by Magsaysay Agencies, Inc. vs. Court of Appeals, G.R. No. 119571, March 11, 1998)

The one-year period within which the consignee should sue the carrier is computed from
"the delivery of the goods or the date when the goods should have been delivered". The
sensible and practical interpretation is that delivery within the meaning of section 3(6) of
the Carriage of Goods by Sea Law means delivery to the arrastre operator. That delivery is
evidenced by tally sheets which show whether the goods were landed in good order or in
bad order, a fact which the consignee or shipper can easily ascertain through the customs
broker. To use as basis for computing the one-year period the delivery to the consignee
would be unrealistic and might generate confusion between the loss or damage sustained
by the goods while in the carrier's custody and the loss or damage caused to the goods
while in the arrastre operator's possession. (Union Carbide Philippines, Inc. vs. Manila
Railroad Co., G.R. No. L-27798, June 15, 1977)
An action based on misdelivery of the cargo which should be distinguished
from loss thereof. The one-year period provided for in section 3 (6) of the Carriage of
Goods by Sea Act refers to loss of the cargo. What is applicable in case of misdelivery of
the cargo is the four-year period of prescription for quasi-delicts prescribed in article 1146
(2) of the Civil Code or ten years for violation of a written contract as provided for in article
1144 (1) of the same Code. As Ang filed the action less than three years from the date of
the alleged misdelivery of the cargo, it has not yet prescribed. Ang, as indorsee of the bill
of lading, is a real party in interest with a cause of action for damages. (Domingo Ang vs.
Compania Maritima, Maritime Company of the Philippines)
The one-year prescription period under the COGSA applies to the insurer of the goods.
Otherwise, what the Act intends to prohibit after the lapse of the one-year prescriptive
period can be done indirectly by the shipper or owner of the goods by simply filing a claim
against the insurer even after the lapse of one year. This could not have been the intention
of the law which has also for its purpose the protection of the carrier and the ship from
fraudulent claims by having "matters affecting transportation of goods by sea be decided
in as short a time as possible" and by avoiding incidents which would "unnecessarily extend
the period and permit delays in the settlement of questions affecting the transportation.
(Filipino Merchants Insurance Company, Inc. vs. Honorable Jose Alejandro, Presiding Judge
of Branch XXVI of the Court of First Instance of Manila, G.R. No. L-54140, October 14, 1986)
Section 3(6) of the Carriage of Goods by Sea Act states that the carrier and the ship shall
be discharged from all liability for loss or damage to the goods if no suit is filed within one
year after delivery of the goods or the date when they should have been delivered. Under
this provision, only the carrier's liability is extinguished if no suit is brought within one year.
But the liability of the insurer is not extinguished because the insurer's liability is based not
on the contract of carriage but on the contract of insurance. A close reading of the law
reveals that the Carriage of Goods by Sea Act governs the relationship between the carrier
on the one hand and the shipper, the consignee and/or the insurer on the other hand. It
defines the obligations of the carrier under the contract of carriage. It does not, however,
affect the relationship between the shipper and the insurer. The latter case is governed by
the Insurance Code. The Filipino Merchants case is different from the case at bar. In
Filipino Merchants, it was the insurer which filed a claim against the carrier for
reimbursement of the amount it paid to the shipper. In the case at bar, it was the shipper
which filed a claim against the insurer. The basis of the shipper's claim is the "all risks"
insurance policies issued by private respondents to petitioner Mayer. The ruling in Filipino

Merchants should apply only to suits against the carrier filed either by the shipper, the
consignee or the insurer. When the court said in Filipino Merchants that Section 3(6) of
the Carriage of Goods by Sea Act applies to the insurer, it meant that the insurer, like the
shipper, may no longer file a claim against the carrier beyond the one-year period
provided in the law. But it does not mean that the shipper may no longer file a claim
against the insurer because the basis of the insurer's liability is the insurance contract. An
insurance contract is a contract whereby one party, for a consideration known as the
premium, agrees to indemnify another for loss or damage which he may suffer from a
specified peril. (Mayer Steel Pipe Corporation vs. Court of Appeals, G.R. No. 124050 June
19, 1997)
The general provisions of the new Civil Code (Art. 1155 providing for the interruption of
the prescriptive period) cannot be made to apply in a case under COGSA, as such
application would have the effect of extending the one-year period of prescription fixed
in the law. It is desirable that matters affecting transportation of goods by sea be decided
in as short a time as possible; the application of the provisions of Article 1155 of the new
Civil Code would unnecessarily extend the period and permit delays in the settlement of
questions affecting transportation, contrary to the clear intent and purpose of the law.
(Dole Philippines, Inc. vs. Maritime Company of the Philippines, G.R. No. L-61352 February
27, 1987)
Notwithstanding the fact that the case was filed beyond the one-year prescriptive period
provided under the COGSA, the suit ( against the insurer ) will not be dismissed of the delay
was not due the claimants fault. Had the insurer processed and examined the claim
promptly, the claimant or the insurer itself, as subrogee, could have taken the judicial action
on time. By making an unreasonable demand for an itemized list of damages which caused
delay, the insurer should bear the loss with interest, New World International Development
Corporation vs NYK-FilJapan Shipping Corporation, GR No. 171468, August 24, 2011
The term carriage of goods covers the period from the time when the goods are loaded to
the time when they are discharged from the ship; thus, it can be inferred that the period of
time when the goods have been discharged from the ship and given to the custody of the
arrastre operator is not covered by the COGSA. Under the COGSA, the carrier and the ship
may put up the defense of prescription if the action for damages is not brought within one year
after delivery of the goods or the date when the goods should have been delivered. However,
the COGSA does not mention than an arrastre operator may invoke the prescriptive period;
hence, it does not cover the arrastre operator. The arrastre operators responsibility and
liability for losses and damages are set forth in the contract for cargo handling services
executed between the Philippine Ports Authority and Marina Port Services. Insurance
Company of North America vs. Asian Terminals, Inc. GR No. 180784, February 15, 2012

d. Limitation of Liability
Lastly, as to the liability of the carrier, it was reduced to to US$500 per package as
provided in the Bill of Lading and by Section 4(5) of COGSA. Stipulation in the bill of lading
limiting to a certain sum the common carrier's liability for loss or destruction of a cargo --

unless the shipper or owner declares a greater value -- is sanctioned by law. There are,
however, two conditions to be satisfied: (1) the contract is reasonable and just under the
circumstances, and (2) it has been fairly and freely agreed upon by the parties.The
rationale for this rule is to bind the shippers by their agreement to the value (maximum
valuation) of their goods. (Belgian Overseas Chartering and Shipping N.V. vs. Philippine
First Insurance Co., Inc., G.R. No. 143133, June 5, 2002)
F. The Warsaw Convention
1. Applicability
2. Limitation of Liability
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." The Hague
Protocol amended the Warsaw Convention by removing the provision that if the airline
took all necessary steps to avoid the damage, it could exculpate itself completely, and
declaring the stated limits of liability not applicable "if it is proved that the damage
resulted from an act or omission of the carrier, its servants or agents, done with intent to
cause damage or recklessly and with knowledge that damage would probably result." The
same deletion was effected by the Montreal Agreement of 1966, with the result that a
passenger could recover unlimited damages upon proof of willful misconduct. (Alitalia vs.
Intermediate Appellate Court, G.R. No. 71929, December 4, 1990)
Under Article 28 ( 1 ) of the Warsaw Convention, the plaintiff may bring the action for
damages before: 1) the court where carrier is domiciled; 2 ) the court where the carrier
has its principal place of business; 3 ) the court where the carrier has an establishment by
which the contract has been made; or 4 ) the court of the place of destination. In this case,
it is not disputed that respondent is a British corporation domiciled in London, United
Kingdom with London as its principal place of business. Hence, under the first and second
jurisdictional rules, the petitioner may bring her case before the courts of London in the
United Kingdom. In the passenger ticket and baggage check presented by both the
petitioner and respondent, it appears that the ticket was issued in Rome,
Italy. Consequently, under the third jurisdictional rule, the petitioner has the option to
bring her case before the courts of Rome in Italy. Finally, both the petitioner and
respondent aver that the place of destination is Rome, Italy, which is properly designated
given the routing presented in the said passenger ticket and baggage check. Accordingly,
petitioner may bring her action before the courts of Rome, Italy. Thus, the RTC of Makati
correctly ruled that it does not have jurisdiction over the case filed by the petitioner even
though it was based on tort and not on breach of contract. Lhuillier vs British Airways, G.R.
No. 171092, March 15, 2010.

a. Liability to Passengers

In its ordinary sense, "delay" means to prolong the time of or before; to stop, detain or
hinder for a time, or cause someone or something to be behind in schedule or usual rate
of movement in progress. "Bumping-off," which is the refusal to transport passengers with
confirmed reservation to their planned and contracted destinations, totally forecloses said
passengers' right to be transported, whereas delay merely postpones for a time being the
enforcement of such right. Consequently, Section 2, Article 30 of the Warsaw Convention
which does not contemplate the instance of "bumping-off" but merely of simple delay,
cannot provide a handy excuse for Lufthansa as to exculpate it from any liability to
Antiporda. (Lufthansa German Airlines vs. Court of Appeals, G.R. No. 83612, November 24,
1994)
b. Liability for Checked Baggage
While the Warsaw Convention has the force and effect of law in the Philippines, being a
treaty commitment by the government and as a signatory thereto, the same does not
operate as an exclusive enumeration of the instances when a carrier shall be liable for
breach of contract or as an absolute limit of the extent of liability, nor does it preclude the
operation of the Civil Code or other pertinent laws. The acceptance in due course by PAL
of Mejias cargo as packed and its advice against the need for declaration of its actual
value operated as an assurance to Mejia that in fact there was no need for such a
declaration. Mejia can hardly be faulted for relying on the representations of PALs own
personnel. In other words, Mejia could and would have complied with the conditions
stated in the air waybill, i.e., declaration of a higher value and payment of supplemental
transportation charges, entitling her to recovery of damages beyond the stipulated limit
of US$20 per kilogram of cargo in the event of loss or damage, had she not been
effectively prevented from doing so upon the advice of PALs personnel for reasons best
known to themselves. Even if the claim for damages was conditioned on the timely filing
of a formal claim, under Article 1186 of the Civil Code that condition was deemed fulfilled,
considering that the collective action of PALs personnel in tossing around the claim and
leaving it unresolved for an indefinite period of time was tantamount to voluntarily
preventing its fulfillment. On grounds of equity, the filing of the baggage freight claim,
which sufficiently informed PAL of the damage sustained by private respondents cargo,
constituted substantial compliance with the requirement in the contract for the filing of a
formal claim. (Philippine Airlines Inc. vs. Court of Appeals, G.R. No. 119706, March 14,
1996)
The nature of an airlines contract of carriage partakes of two types, namely: a contract to
deliver a cargo or merchandise to its destination and a contract to transport passengers to
their destination. A business intended to serve the travelling public primarily, it is imbued
with public interest, hence, the law governing common carriers imposes an exacting
standard. Neglect or malfeasance by the carriers employees could predictably furnish
bases for an action for damages. American jurisprudence provides that an air carrier is not

liable for the loss of baggage in an amount in excess of the limits specified in the tariff
which was filed with the proper authorities, such tariff being binding on the passenger
regardless of the passengers lack of knowledge thereof or assent thereto. This doctrine is
recognized in this jurisdiction. (British Airways vs. Court of Appeals, G.R. No. 121824,
January 29, 1998)
Article 19 of the Warsaw Convention provides for liability on the part of a carrier for
damages occasioned by delay in the transportation by air of passengers, baggage or
goods. Article 24 excludes other remedies by further providing that (1) in the cases
covered by articles 18 and 19, any action for damages, however founded, can only be
brought subject to the conditions and limits set out in this convention. Therefore, a claim
covered by the Warsaw Convention can no longer be recovered under local law, if the
statute of limitations of two years has already lapsed. Nevertheless, the Court notes that
jurisprudence in the Philippines and the United States also recognizes that the Warsaw
Convention does not exclusively regulate the relationship between passenger and
carrier on an international flight. The Court finds that the present case is substantially
similar to cases in which the damages sought were considered to be outside the coverage
of the Warsaw Convention. (Philippine Airlines Inc. vs. Hon. Adriano Savillo, et. al., G.R. No.
149547, July 4, 2008)
In United Airlines v. Uy, the Court distinguished between the (1) damage to the
passengers baggage and (2) humiliation he suffered at the hands of the airlines
employees. The first cause of action was covered by the Warsaw Convention which
prescribes in two years, while the second was covered by the provisions of the Civil Code
on torts, which prescribes in four years. Had the present case merely consisted of claims
incidental to the airlines delay in transporting their passengers, Grios Complaint would
have been time-barred under Article 29 of the Warsaw Convention. (Philippine Airlines
Inc. vs. Hon. Adriano Savillo, et. al., G.R. No. 149547, July 4, 2008)
c. Liability for Handcarried Baggage
3. Willful Misconduct
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. Under domestic law
and jurisprudence (the Philippines being the country of destination), the attendance of
gross negligence (given the equivalent of fraud or bad faith) holds the common carrier
liable for all damages which can be reasonably attributed, although unforeseen, to the

non-performance of the obligation, including moral and exemplary damages. (Sabena


World Airlines vs. Court of Appeals, G.R. No. 104685, March 14, 1996)
VI. The Corporation Code
A. Corporation
1. Definition
A corporation is an artificial being created by operation of law, having the right of
succession and the powers, attributes and properties expressly authorized by law or
incident to its existence. (Sec. 2, B.P. 68)
2. Attributes of the Corporation
When the corporation ( BB Sportswear, Inc. ) which the plaintiff erroneously impleaded
in a collection case was not the party to the actionable agreement and turned out to be
not registered with the Securities and Exchange Commission, the judgment may still be
enforced against the corporation ( BB Footwear, Inc. ) which filed the answer and
participated in the proceedings, as well as its controlling shareholder who signed the
actionable agreement in his personal capacity and as a single proprietorship doing
business under the trade name and style of BB Sportswear Enterprises. Benny Hung vs
BPI Finance Corporation . G.R. No. 182398, 20 July 2010
If the title over the land where the Hidden Valley Springs Resort is located is registered
in the name of the corporation, the heirs of a stockholder who occupy houses built at
the expense of the corporation cannot claim ownership over said properties. A
stockholder is not the owner of any part of the capital of the corporation and is not
entitled to the possession of any definite portion of its property or assets. (Rebecca
Boyer-Roxas and Guillermo Roxas vs. Hon. Court of Appeals and Heirs of Eugenia V. Roxas,
Inc., G.R. No. 100866, July 14, 1992)
When negotiations ensued in light of a planned takeover of company and the counsel
of the buyer advised the stockholder through a letter that he may take the machineries
he brought to the corporation out with him for his own use and sale, the stockholder
cannot recover said machineries and equipment because these properties remained
part of the capital property of the corporation. It is settled that the property of a
corporation is not the property of its stockholders or members. (Ryuichi Yamamoto vs.
Nishino Leather Industries, Inc. and Ikuo Nishino, G.R. No. 150283, April 16, 2008)
B. Classes of Corporations
By its failure to submit its by-laws on time, the AIIBP may be considered a de facto
corporation whose right to exercise corporate powers may not be inquired into
collaterally in any private suit to which such corporation may be a party. A corporation
which has failed to file its by-laws within the prescribed period does not ipso facto lose
its powers as such. The SEC Rules on Suspension/Revocation of the Certificate of

Registration of Corporations, details the procedures and remedies that may be availed
of before an order of revocation can be issued. There is no showing that such a
procedure has been initiated in this case. (Sappari K. Sawadjaanvs. the Honorable Court
of Appeals, the Civil Service Commission and Al-amanah Investment Bank of the
Philippines, G.R. No. 141735, June 8, 2005)
Where persons associate themselves together under articles to purchase property to
carry on a business, and their organization is so defective as to come short of creating a
corporation within the statute, they become in legal effect partners inter se, and their
rights as members of the company to the property acquired by the company will be
recognized. However, such a relation does not necessarily exist, for ordinarily persons
cannot be made to assume the relation of partners, as between themselves, when their
purpose is that no partnership shall exist, and it should be implied only when necessary
to do justice between the parties; thus, one who takes no part except to subscribe for
stock in a proposed corporation which is never legally formed does not become a
partner with other subscribers who engage in business under the name of the pretended
corporation, so as to be liable as such in an action for settlement of the alleged
partnership and contribution. (Pioneer Insurance & Surety Corporation vs. the Hon. Court
of Appeals, Border Machinery & Heavy Equipment, Inc., (BORMAHECO), Constancio M.
Maglana and Jacob S. Lim, G.R. No. 84197, July 28, 1989)
The plan of the parties to consolidate their respective jeepney drivers' and operators'
associations into a single common association, if not yet approved by the SEC, neither
had its officers and members submitted their articles of consolidation in accordance
with Sections 78 and 79 of the Corporation Code, is a mere proposal to form a unified
association. Any dispute arising out of the election of officers of said unified association
is therefore not an intra-corporate dispute. (Reynaldo M. Lozano vs. Hon. Eliezer R. De
los Santos, Presiding Judge, RTC, Br. 58, Angeles City; and Antonio Anda, G.R. No. 125221,
June 19, 1997)
Where there is no third person involved and the conflict arises only among those
assuming the form of a corporation, who therefore know that it has not been registered,
there is no corporation by estoppel. (Reynaldo M. Lozano vs. Hon. Eliezer R. De los Santos,
Presiding Judge, RTC, Br. 58, Angeles City; and Antonio Anda, G.R. No. 125221, June 19,
1997)
Under the law on estoppel, those acting on behalf of a corporation and those benefited
by it, knowing it to be without valid existence, are held liable as general partners.
Technically, it is true that petitioner did not directly act on behalf of the corporation.
However, having reaped the benefits of the contract entered into by persons with whom
he previously had an existing relationship, he is deemed to be part of said association
and is covered by the scope of the doctrine of corporation by estoppel. (Lim Tong Lim
vs. Philippine Fishing Gear Industries, Inc., G.R. No. 136448, 3 November 1999)
When the petitioner is not trying to escape liability from the contract but rather the one
claiming from the contract, the doctrine of corporation by estoppel is not applicable.
This doctrine applies to a third party only when he tries to escape liability on a contract
from which he has benefited on the irrelevant ground of defective incorporation.

(International Express Travel & Tour Services, Inc. vs. Hon. Court of Appeals, Henri Kahn,
Philippine Football Federation, G.R. No. 119002, October 19, 2000)
The persons who illegally recruited workers for overseas employment by representing
themselves to be officers of a corporation which they knew had not been incorporated
are liable as general partners for all debts, liabilities and damages incurred or arising as
a result thereof. (People of the Philippines vs. Engr. Carlos Garcia y Pineda, Patricio Botero
y Vales, Luisa Miraples (at large) & Patricio Botero y Vales, G.R. No. 117010, 18 April 1997)
A Local Water District is a GOCC with an original charter and is not a private corporation
because it is not created under the Corporation Code. A law enacted by Congress
creating a private corporation with a special charter is unconstitutional because private
corporations may exist only under a general law. (Engr. Ranulfo C. Feliciano, in his
capacity as General Manager of the Leyte Metropolitan Water District (LMWD), Tacloban
City vs. Commission on Audit, Chairman CELSO D. GANGAN, Commissioners Raul C.
Flores and Emmanuel M. Dalman, and Regional Director of COA Region VIII, G.R. No.
147402, 14 January 2004)
The Philippine National Red Cross (PNRC) can neither be classified as an instrumentality
of the State, so as not to lose its character of neutrality as well as its independence, nor
strictly as a private corporation since it is regulated by international humanitarian law
and is treated as an auxiliary of the State. The PNRC enjoys a special status as an
important ally and auxiliary of the government in the humanitarian field in accordance
with its commitments under international law. (Dante V. Liban, Reynaldo M. Bernardo
and Salvador M. Viari vs. Richard J. Gordon, G. R. No. 175352, January 18, 2011)
It is clear that a corporation is considered a government-owned or -controlled
corporation only when the Government directly or indirectly owns or controls at least a
majority or 51% share of the capital stock. Consequently, RPN was neither a
government-owned nor a controlled corporation because of the Governments total
share in RPNs capital stock being only 32.4%. (Antonio M. Carandang vs. Honorable
Aniano A. Desierto, Office of the Ombudsman, G.R. No. 153161, January 12, 2011)
Corporation by estoppel results when a corporation represented itself to the public as such
despite its not being incorporated. A corporation by estoppel may be impleaded as a party
defendant considering that it possesses attributes of a juridical person, otherwise, it can not
be held liable for damages and injuries it may inflict to other persons. Macasaet vs.
Francisco, GR No. 156759, June 5, 2013
C. Nationality of Corporations
1. Place of Incorporation Test
In times of war, the nationality of a private corporation is determined by the character
or citizenship of its controlling stockholders. The corporation was considered an enemy
because majority of its stockholders were German nationals. (Filipinas Compaia De
Segurosvs. Christern, Huenefeld and Co., Inc.,G.R. No. L-2294, May 25, 1951)

2. Control Test
A corporation organized under the laws of the Philippines of which at least 60% of the
capital stock outstanding and entitled to vote is owned and held by citizens of the
Philippines, is considered a Philippine National. As such, the corporation may acquire
disposable lands in the Philippines. (Marissa R. Unchuan vs. Antonio J.P. Lozada, Anita
Lozada and the Register of Deeds of Cebu City, G.R. No. 172671, April 16, 2009)
The fact that the religious organization has no capital stock does not suffice to escape
the Constitutional inhibition, since it is admitted that its members are of foreign
nationality. The purpose of the sixty per centum requirement is obviously to ensure that
corporations or associations allowed to acquire agricultural land or to exploit natural
resources shall be controlled by Filipinos; and the spirit of the Constitution demands that
in the absence of capital stock, the controlling membership should be composed of
Filipino citizens. (Register of Deeds vs. Ung Sui Si Temple, G.R. No. L-6776, May 21, 1955)
3. Grandfather Rule
D. Corporate Juridical Personality
1. Doctrine of Separate Juridical Personality
FBCIs acquisition of the substantial and controlling shares of stocks of Esses and TriStar does not create a substantial change in the rights or relations of the parties that
would entitle FBCI to possession of the Calatagan Property, a corporate property of
Esses and Tri-Star. Esses and Tri-Star, just like FBCI, are corporations. A corporation has
a personality distinct from that of its stockholders. Properties registered in the name of
the corporation are owned by it as an entity separate and distinct from its members.
(Ricardo S. Silverio, jr., Esses Development Corporation, and Tri-Star Farms, Inc. vs.
Filipino Business Consultants, Inc., G.R. No. 143312, August 12, 2005)
The personality of a corporation is distinct and separate from the personalities of its
stockholders. Hence, its stockholders are not themselves the real parties in interest to
claim and recover compensation for the damages arising from the wrongful attachment
of its assets. Only the corporation is the real party in interest for that purpose.
(Stronghold Insurance Company, Inc. vs. Tomas Cuenca, et. al., G.R. No. 173297, March 6,
2013)
A corporation has its own legal personality separate and distinct from those of its
stockholders, directors or officers. Hence, absent any evidence that they have exceeded
their authority, corporate officers are not personally liable for their official acts.
Corporate directors and officers may be held solidarily liable with the corporation for
the termination of employment only if done with malice or in bad faith.(Rolando DS.
Torres v. Rural Bank of San Juan, Inc. et al., G.R. No. 184520, March 13, 2013)
In order for the Court to hold the officer of the corporation personally liable alone for the
debts of the corporation and thus pierce the veil of corporate fiction, the Court has required

that the bad faith of the officer must first be established clearly and convincingly. Petitioner,
however, has failed to include any submission pertaining to any wrongdoing of the general
manager. Necessarily, it would be unjust to hold the latter personally liable. Moreso, if the
general manager was never impleaded as a party to the case. Mercy Vda. de Roxas,
represented by Arlene C. Roxas-Cruz, in her capacity as substitute appellant-petitioner v. Our
Lady's Foundation, Inc. G.R. No. 182378, March 6, 2013.
Where two banks foreclosed mortgages on certain properties of a mining company and
resumed business operations thereof by organizing a different company to which the banks
transferred the foreclosed assets, the banks are not liable to a contractor which was
engaged by the re-organized mining company even though the latter is wholly-owned by
the two banks and they have interlocking directors, officers and stockholders. While
ownership by one corporation of all or a great majority of stocks of another corporation and
their interlocking directorates may serve as indicia of control, by themselves and without
more, however, these circumstances are insufficient to establish an alter ego relationship or
connection between the two banks and the new mining company on the other hand, that
will justify the puncturing of the latters corporate cover. Mere ownership by a single
stockholder or by another corporation of all or nearly all of the capital stock of a corporation
is not of itself sufficient ground for disregarding the separate corporate personality.
Likewise, the existence of interlocking directors, corporate officers and shareholders is not
enough justification to pierce the veil of corporate fiction in the absence of fraud or other
public policy considerations. Development Bank of the Philippines vs. Hydro Resources
Contractors Corporation, GR. No. 167603, March 13, 2013
The fact that an employee of the corporation was made to resign and not allowed to enter
the workplace does not necessarily indicate bad faith on the part of the employer
corporation if a sufficient ground existed for the latter to actually proceed with the
termination. ABBOT LABORATORIES VS. ALCARAZ, G.R. No. 192571, July 23, 2013
Other than mere ownership of capital stock, circumstances showing that the corporation is
being used to commit fraud or proof of existence of absolute control over the corporation
has to be proven. In short, before the corporate fiction can be disregarded, alter-ego
elements must first be sufficiently established. The mere fact that the same controlling
stockholder/officer signed the loan document on behalf of the corporation does not prove
that he exercised control over the finances of the corporation. Neither is the absence of a
board resolution authorizing him to contract the loan nor the Corporations failure to object
thereto support this conclusion. While he is the signatory of the loan and the money was
delivered to him, the proceeds of the loan were intended for the business plan of the
corporation. That the business plan did not materialize is also not a sufficient proof to justify
a piercing, in the absence of proof that the business plan was a fraudulent scheme geared
to secure funds from the lender. NUCCIO SAVERIOS VS. PUYAT, G.R. No. 186433, November
27, 2013
a. Liability for Torts and Crimes
A corporation is civilly liable in the same manner as natural persons for torts, because
the rules governing the liability of a principal or master for a tort committed by an agent
or servant are the same whether the principal or master be a natural person or a

corporation, and whether the servant or agent be a natural or artificial person. A


corporation is liable, therefore, whenever a tortious act is committed by an 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. (Philippine National
Bank vs. Court of Appeals, et al., G.R. No. L-27155, May 18, 1978)
To the extent that the stockholders are actively engaged in the management or
operation of the business and affairs of a close corporation, the stockholders shall be
held to strict fiduciary duties to each other and among themselves. Said stockholders
shall be personally liable for corporate torts unless the corporation has obtained
reasonably adequate liability insurance. (Sergio F. Naguiat, doing business under the
name and style Sergio F. NaguiatEnt., Inc., & Clark Field Taxi, Inc. vs. National Labor
Relations Commission (Third Division), National Organization Of Workingmen and its
members, Leonardo T. Galang, et al., G.R. No. 116123, March 13, 1997)
The powers to increase capitalization and to offer or give collateral to secure
indebtedness are lodged with the corporations board of directors. However, this does
not mean that the officers of the corporation other than the board of directors cannot
be made criminally liable for their criminal acts if it can be proven that they participated
therein. (Gregorio Singian, Jr. vs. the Honorable Sandiganbayan and the Presidential
Commission on Good Government, G.R. Nos. 160577-94, December 16, 2005)
An employee of a company or corporation engaged in illegal recruitment may be held
liable as principal, together with his employer, if it is shown that he actively and
consciously participated in illegal recruitment, because the existence of the corporate
entity does not shield from prosecution the corporate agent who knowingly and
intentionally causes the corporation to commit a crime. The corporation obviously acts,
and can act, only by and through its human agents, and it is their conduct which the law
must deter. (The Executive Secretary, et al. vs. Court of Appeals, et al., G.R. No. 131719,
May 25, 2004)
The Trust Receipts Law recognizes the impossibility of imposing the penalty of
imprisonment on a corporation. Hence, if the entrustee is a corporation, the law makes
the directors, officers or employees or other persons responsible for the offense liable
to suffer the penalty of imprisonment. (Edward C. Ong, vs. the Court of Appeals and the
People of the Philippines, G.R. No. 119858, April 29, 2003)
Though the entrustee is a corporation, nevertheless, the law specifically makes the
officers, employees or other officers or persons responsible for the offense, without
prejudice to the civil liabilities of such corporation and/or board of directors, officers,
or other officials or employees responsible for the offense. The rationale is that such
officers or employees are vested with the authority and responsibility to devise means
necessary to ensure compliance with the law and, if they fail to do so, are held criminally
accountable; thus, they have a responsible share in the violations of the law. (Alfredo
Ching vs. the Secretary of Justice, et al., G. R. No. 164317, February 6, 2006)
b. Recovery of Moral Damages

A corporation whose checks were dishonored by the drawee bank despite availability of
funds and because of the negligence of the bank employees can recover moral damages
for besmirched reputation. The standing of the corporation was reduced in the business
community because of the banks negligence.(Simex International, Incorporated vs.
Court of Appeals, G.R. No. 88013 March 19, 1990)
Moral damages may be awarded to a corporation whose reputation has been
besmirched. In the instant case, FEMSCO has sufficiently shown that its reputation was
tarnished after it immediately ordered equipment from its suppliers on account of the
urgency of the project, only to be canceled later by the counterparty in the contract.
(Jardine Davies, Inc. vs. Court of Appeals and Far East Mills Supply Corporation, G.R. No.
128066, June 19, 2000)
A juridical person is generally not entitled to moral damages because, unlike a natural
person, it cannot experience physical suffering or such sentiments as wounded feelings,
serious anxiety, mental anguish or moral shock. Nevertheless, AMECs claim for moral
damages falls under item 7 of Article 2219 of the Civil Code which expressly authorizes
the recovery of moral damages in cases of libel, slander or any other form of defamation.
Article 2219(7) does not qualify whether the plaintiff is a natural or juridical person.
Therefore, a juridical person such as a corporation can validly complain for libel or any
other form of defamation and claim for moral damages. [Filipinas Broadcasting Network,
Inc. vs. AGO Medical And Educational Center-Bicol Christian College of Medicine,
(AMEC-BCCM) and Angelita F. Ago, G.R. No. 141994, January 17, 2005]
As a rule, a corporation is not entitled to moral damages because, not being a natural
person, it cannot experience physical suffering or sentiments like wounded feelings,
serious anxiety, mental anguish and moral shock. The only exception to this rule is when
the corporation has a reputation that is debased, resulting in its humiliation in the
business realm. But in such a case, it is essential to prove the existence of the factual
basis of the damage and its causal relation to petitioner's acts. Thus, where the records
are bereft of evidence that the name or reputation of the corporation has been debased
as a result of Meralcos act ( which in this case is the disconnection without written notice
of the disconnection of the electricity supply to the building of the corporation due to
alleged meter tampering ), the corporation is not entitled to moral damages. (Manila
Electric Company vs. T.E.A.M. Electronics Corporation, Technology Electronics Assembly
and Management Pacific Corporation; and Ultra Electronics Instruments, Inc., G.R. No.
131723, December 13, 2007)
While the Court may allow the grant of moral damages to corporations, it is not
automatically granted; there must still be proof of the existence of the factual basis of
the damage and its causal relation to the defendants acts. This is so because moral
damages, though incapable of pecuniary estimation, are in the category of an award
designed to compensate the claimant for actual injury suffered and not to impose a
penalty on the wrongdoer. In this case, there being no wrongful or unjust act on the part
of BPI in demanding payment from the spouses and in seeking the foreclosure of the
chattel and real estate mortgages, there is no lawful basis for award of damages in favor
of the spouses. (Herman C. Crystal, et al. vs. Bank of the Philippine Islands, G.R. No.
172428, November 28, 2008)

2. Doctrine of Piercing the Corporate Veil


The court must first acquire jurisdiction over the corporation or corporations involved
before its or their separate personalities are disregarded; and the doctrine of piercing the
veil of corporate entity can only be raised during a full-blown trial over a cause of action
duly commenced involving parties duly brought under the authority of the court by way of
service of summons or what passes as such service. Kukan International Corporation vs. Hon.
Judge Amor Reyes, G.R. No. 182729, 29 September 2010
However, in another case involving an action for breach of contract of carriage resulting to
the death of one of the passengers , Supreme Court ruled that if the RTC had sufficient
factual basis to conclude that the two corporations are one and the same entity as when
they have the same President and controlling shareholder and it is generally known in the
place where they do business that both transportation companies are one, the third party
claim filed by the other corporation was set aside and the levy on its property held valid
even though the latter was not made a party to the case . The judgment may be enforced
against the other corporation to prevent multiplicity of suits and save the parties
unnecessary expenses and delay. Gold Line Tours vs. Heirs of Maria Concepcion Lacsa, GR
No. 159108, 18 June 2012
The doctrine of piercing the veil of corporate fiction is applicable not only to corporations
but also to a single proprietorship as when the corporation transferred its employees to the
company owned by the controlling stockholder of the corporation and yet despite the
transfer, the employees daily time records, reports, daily income remittances and schedule
of work were all made, performed, filed and kept in the corporation. The corporation is
clearly hiding behind the supposed separate and distinct personality of the company. As
such, the corporation and the company should be solidarily liable for the claims of the
illegally dismissed employees. Prince Transport, Inc. vs. Garcia, GR No. 167291, January 12,
2011
Although the corporate veil between two corporations can not be pierced for lack of legal
basis, it does not necessarily mean that the corporate officers of such corporations are
exempt from liability. Section 31 of the Corporation Code makes a director or officer
personally liable if he is guilty of bad faith or gross negligence in directing the affairs of the
corporation. In this case, the officers of the corporation who maliciously terminated the
employment of certain employees without any valid ground and in order to suppress their
right to self-organization, having acted in bad faith in directing the affairs of the
corporation, are solidarily liable with the corporation for the unlawful dismissal. Park Hotel
vs. Soriano, GR No. 171118, September 10, 2012
Where the court rendered judgment against a stock brokerage firm directing the latter to
return shares of stock which it sold without authority, but the writ of execution was returned
unsatisfied, an alias writ of execution could not be enforced against its parent company
because the court has not acquired jurisdiction over the latter and while the parent
company owns and controls the brokerage firm, there is no showing that the control was
used to violate the rights of the plaintiff. Pacific Rehouse Corporation vs. Court of Appeals,
GR. No. 199687, March 24, 2014

a. Grounds for Application of Doctrine


When an operator of a bus transportation sold his two certificates of public convenience
to another corporation with the condition, among others, that he shall not for a period
of 10 years from the date of the sale, apply for any TPU service identical or competing
with the buyer, the organization of a corporation barely 3 months after the sale with the
wife of operator and his brother and sister-in-law as the incorporators is a clear violation
of the condition. A seller or promisor may not make use of a corporate entity as a means
of evading the obligation of his covenant. Where the Corporation is substantially the
alter ego of the covenantor to the restrictive agreement, it can be enjoined from
competing with the covenantee. (Villa Rey Transit, Inc. vs. Eusebio E. Ferrer, Pangasinan
Transportation Co., Inc. and Public Service Commission, G.R. No. L-23893, October 29,
1968)
Aggravating RANSOM's clear evasion of payment of its financial obligations is the
organization of a "run-away corporation," ROSARIO, in 1969 at the time the unfair labor
practice case was pending before the CIR by the same persons who were the officers
and stockholders of RANSOM, engaged in the same line of business as RANSOM,
producing the same line of products, occupying the same compound, using the same
machineries, buildings, laboratory, bodega and sales and accounts departments used by
RANSOM, and which is still in existence. This is another instance where the fiction of
separate and distinct corporate entities should be disregarded as the second
corporation seeks the protective shield of a corporate fiction whose veil in the present
case could, and should, be pierced as it was deliberately and maliciously designed to
evade its financial obligation to its employees. (A.C. Ransom Labor Union-CCLU vs.
National Labor Relations Commission, et al., G.R. No. L-69494, May 29, 1987)
The fact that the businesses of private respondent and Acrylic are related, that some of
the employees of the private respondent are the same persons manning and providing
for auxilliary services to the units of Acrylic, and that the physical plants, offices and
facilities are situated in the same compound, it is the Courts considered opinion that
these facts are not sufficient to justify the piercing of the corporate veil of Acrylic.
Hence, the Acrylic not being an extension or expansion of private respondent, the rankand-file employees working at Acrylic should not be recognized as part of, and/or within
the scope of the petitioner, as the bargaining representative of private respondent.
(Indophil Textile Mill Workers Union-PTGWO vs. Voluntary Arbitrator Teodorico P.
Calica and Indophil Textile Mills, Inc., G.R. No. 96490, February 3, 1992)
The defense of separateness will be disregarded where the business affairs of a
subsidiary corporation are so controlled by the mother corporation to the extent that it
becomes an instrument or agent of its parent. But even when there is dominance over
the affairs of the subsidiary, the doctrine of piercing the veil of corporate fiction applies
only when such fiction is used to defeat public convenience, justify wrong, protect fraud
or defend crime. (Bibiano O. Reynoso, IV vs. Hon. Court of Appeals and General Credit
Corporation, G.R. Nos. 116124-25, November 22, 2000)

The sale of Times franchise as well as most of its bus units to a company owned by
Rondaris daughter and family members, right in the middle of a labor dispute, is highly
suspicious. It is evident that the transaction was made in order to remove Times
remaining assets from the reach of any judgment that may be rendered in the unfair
labor practice cases filed against it. (Times Transportation Company, Inc. vs. Santos
Sotelo, et al., G.R. No. 163786, February 16, 2005)
Piercing the veil of corporate fiction is warranted when a corporation ceased to exist
only in name as it re-emerged in the person of another corporation, for the purpose of
evading its unfulfilled financial obligation under a compromise agreement. Thus, if the
judgment for money claim could not be enforced against the employer corporation, an
alias writ may be obtained against the other corporation considering the indubitable
link between the closure of the first corporation and incorporation of the other. Livesey
vs. Binswanger Philippines, GR No. 177493, March 19, 2014
b. Test in Determining Applicability
The test in determining the applicability of the doctrine of piercing the veil of corporate
fiction is as follows: 1.) Control, not mere majority or complete stock control, but
complete domination, not only of finances but of policy and business practice in respect
to the transaction attacked so that the corporate entity as to this transaction had at the
time no separate mind, will or existence of its own; 2.) Such control must have been used
by the defendant to commit fraud or wrong, to perpetuate the violation of a statutory
or other positive legal duty, or dishonest and unjust act in contravention of plaintiffs
legal rights; and 3.) The aforesaid control and breach of duty must proximately cause
the injury or unjust loss complained of. (Concept Builders, Inc. vs. the National Labor
Relations Commission, et al., G.R. No. 108734, May 29, 1996)
Concept Builders ceased its business operations in order to evade the payment to
private respondents of backwages and to bar their reinstatement to their former
positions. It is very obvious that the second corporation seeks the protective shield of a
corporate fiction whose veil in the present case could, and should, be pierced as it was
deliberately and maliciously designed to evade its financial obligation to its employees.
(Ibid.)
Under a variation of the doctrine of piercing the veil of corporate fiction, when two
business enterprises are owned, conducted and controlled by the same parties, both law
and equity will, when necessary to protect the rights of third parties, disregard the legal
fiction that two corporations are distinct entities and treat them as identical or one and
the same. While the conditions for the disregard of the juridical entity may vary, the
following are some probative factors of identity that will justify the application of the
doctrine of piercing the corporate veil, as laid down in Concept Builders, Inc. v NLRC:
(1) Stock ownership by one or common ownership of both corporations; (2) Identity of
directors and officers; (3) The manner of keeping corporate books and records, and (4)
Methods of conducting the business. (Heirs of Fe Tan Uy, represented by her heir,
Mauling Uy Lim vs. International Exchange Bank, G.R. No. 166282 & 83, February 13,
2013)

The doctrine of piercing the corporate veil applies only in three (3) basic areas, namely:
1) defeat of public convenience as when the corporate fiction is used as a vehicle for the
evasion of an existing obligation; 2) fraud cases or when the corporate entity is used to
justify a wrong, protect fraud, or defend a crime; or 3) alter ego cases, where a
corporation is merely a farce since it is a mere alter ego or business conduit of a person,
or where the corporation is so organized and controlled and its affairs are so conducted
as to make it merely an instrumentality, agency, conduit or adjunct of another
corporation.
In this connection, case law lays down a three-pronged test to determine the application
of the alter ego theory, which is also known as the instrumentality theory, namely:
1. Control, not mere majority or complete stock control, but complete domination, not only of
finances but of policy and business practice in respect to the transaction attacked so that
the corporate entity as to this transaction had at the time no separate mind, will or existence
of its own
2. Such control must have been used by the defendant to commit fraud or wrong, to
perpetuate the violation of a statutory or other positive legal duty, or dishonest and unjust
act in contravention of plaintiffs legal right; and
3. The aforesaid control and breach of duty must have proximately caused the injury or unjust
loss complained of.
The first prong is the "instrumentality" or "control" test. This test requires that the subsidiary
be completely under the control and domination of the parent. It inquires whether a
subsidiary corporation is so organized and controlled and its affairs are so conducted as to
make it a mere instrumentality or agent of the parent corporation such that its separate
existence as a distinct corporate entity will be ignored. In addition, the control must be
shown to have been exercised at the time the acts complained of took place.
The second prong is the "fraud" test. This test requires that the parent corporations conduct
in using the subsidiary corporation be unjust, fraudulent or wrongful. It examines the
relationship of the plaintiff to the corporation. It recognizes that piercing is appropriate only
if the parent corporation uses the subsidiary in a way that harms the plaintiff creditor. As
such, it requires a showing of "an element of injustice or fundamental unfairness."
The third prong is the "harm" test. This test requires the plaintiff to show that the defendants
control, exerted in a fraudulent, illegal or otherwise unfair manner toward it, caused the
harm suffered. A causal connection between the fraudulent conduct committed through the
instrumentality of the subsidiary and the injury suffered or the damage incurred by the
plaintiff should be established. The plaintiff must prove that, unless the corporate veil is
pierced, it will have been treated unjustly by the defendants exercise of control and
improper use of the corporate form and, thereby, suffer damages. Development Bank of the
Philippines vs. Hydro Resources Contractors Corporation, GR. No. 167603, March 13, 2013
E. Incorporation and Organization

When the President of a non-existent principal entered into a contract and failed to pay
its obligation, he shall be the one liable to the aggrieved party. A person acting as a
representative of a non-existent principal is the real party to the contract sued upon,
being the one who reaped the benefits resulting from it.(Mariano A. Albert vs. University
Publishing Co., Inc., G.R. No. L-19118, January 30, 1965)
Where a national sports association which is not created by a special law or a general
enabling act, through its president, secured airline tickets for the trips of its athletes and
officials to the South East Asian Games and later on failed to pay the obligation, the
president shall be personally liable. It is a settled principle in corporation law that any
person acting or purporting to act on behalf of a corporation which has no valid
existence assumes such privileges and becomes personally liable for contract entered
into or for other acts performed as such agent.(International Express Travel & Tour
Services, Inc. vs. Hon. Court of Appeals, Henri Kahn, Philippine Football Federation, G.R.
No. 119002, October 19, 2000)
A corporation created and organized for the purpose of conducting the business of
selling optical lenses or eyeglasses is not engaged in the practice of optometry because
the determination of the proper lenses to sell to private respondent's clients entails the
employment of optometrists who have been precisely trained for that purpose. Private
respondent's business, rather, is the buying and importing of eyeglasses and lenses and
other similar or allied instruments from suppliers thereof and selling the same to
consumers. (Samahanng Optometrists saPilipinas, Ilocos Sur-Abra Chapter, et al. vs.
Acebedo International Corporation and the Hon. Court of Appeals, G.R. No. 117097, 21
March 1997)
1. Promoter
a. Liability of Promoter
b. Liability of Corporation for Promoters Contracts
As a general rule, a corporation should have a full and complete organization and
existence as an entity before it can enter into any kind of a contract or transact any
business. This is subject to the exception that a contract made by the promoters of a
corporation on its behalf may be adopted, accepted or ratified by the corporation when
organized. (Rizal Light & Ice Co., Inc. vs.the Municipality of Morong, Rizal and the Public
Service Commission,G.R. No. L-20993, September 28, 1968)
2. Number and Qualifications of Incorporators
It is possible for a business to be wholly owned by one individual because the validity of
its incorporation is not affected when such individual gives nominal ownership of only
one share of stock to each of the other four incorporators. As between the corporation
on the one hand, and its shareholders and third persons on the other, the corporation
looks only to its books for the purpose of determining who its shareholders are. (Nautica
Canning Corporation, et al. vs. Roberto C. Yumul,G.R. No. 164588, October 19, 2005)
3. Corporate Name Limitations on Use of Corporate Name

A change in the name of the corporation does not make it a new corporation and does
not affect its properties, right and liabilities. It is the same corporation with a different
name, and its character is in no respect changed. (Republic Planters Bank vs. Court of
Appeals, G.R. No. 93073, December 21, 1992)
The Court cannot impose on a bank that changes its corporate name the obligation to
notify a debtor of such change absent any law, circular or regulation requiring it as such
act would be judicial legislation. Unless there is a law, regulation or circular from the
SEC or BSP requiring the formal notification of all debtors of banks of any change in
corporate name, such notification remains to be a mere internal policy that banks may
or may not adopt. (P.C. Javier & Sons, Inc., et al. vs.Paic Savings & Mortgage Bank, Inc., et
al., G.R. No. 129552, June 29, 2005)
To fall within the prohibition under Section 18 of the Corporation Code, two requisites
must be proven, to wit: 1.) that the complainant corporation acquired a prior right over
the use of such corporate name; and 2.) the proposed name is either: (a) identical, or (b)
deceptively or confusingly similar to that of any existing corporation or to any other
name already protected by law; or (c) patently deceptive, confusing or contrary to
existing law. Petitioners corporate name which is Industrial Refractories Corp. of the
Phils. and respondents corporate name which is Refractories Corp. of the Phils.
obviously contain the identical words Refractories, Corporation and Philippines;
hence, petitioners corporate name clearly falls within the prohibition. (Industrial
Refractories Corporation of the Philippines vs. Court of Appeals, Securities and Exchange
Commission and Refractories Corporation of the Philippines, G.R. No. 122174, October
3, 2002)
It is the SECs duty to prevent confusion in the use of corporate names not only for the
protection of the corporations involved but more so for the protection of the public, and
it has authority to de-register at all times and under all circumstances corporate names
which in its estimation are likely to generate confusion. Clearly therefore, the present
case falls within the ambit of the SECs regulatory powers.(Ibid.)
A change in the corporate name does not make a new corporation, whether effected by
a special act or under a general law. It has no effect on the identity of the corporation,
or on its property, rights, or liabilities because the corporation upon such change in its
name, is in no sense a new corporation, nor the successor of the original
corporation.(P.C. Javier & Sons, Inc., et al. vs.Paic Savings & Mortgage Bank, Inc., et al.,
G.R. No. 129552, June 29, 2005)
The mere change in the corporate name is not considered under the law as the creation
of a new corporation; hence, the renamed corporation remains liable for the illegal
dismissal of its employee separated under that guise. Verily, the amendments of the
articles of incorporation of Zeta to change the corporate name to Zuellig Freight and
Cargo Systems, Inc. did not produce the dissolution of the former as a corporation.
(Zuellig Freight and Cargo Systemsvs. National Labor Relations Commission, et al., G.R.
No. 157900, July 22, 2013)

4. Corporate Term
When the period of corporate life expires, the corporation ceases to be a body
corporate for the purpose of continuing the business for which it was organized, but it
shall nevertheless be continued as a body corporate for three years after the time when
it would have been so dissolved, for the purpose of prosecuting and defending suits by
or against it and enabling it gradually to settle and close its affairs, to dispose of and
convey its property and to divide its assets. There is no need for the institution of a
proceeding for quo warranto to determine the time or date of the dissolution of a
corporation because the period of corporate existence is provided in the articles of
incorporation. (Philippine National Bank vs.the Court of First Instance of Rizal, Pasig, et
al.,G.R. No. 63201, May 27, 1992)
5. Minimum Capital Stock and Subscription Requirements
The submission of the Board that the value of the assets of Asturias Sugar Central, Inc.
transferred to MSCI, as well as the loans or advances made by MTII to MSCI should have
been taken into consideration in computing the paid-up capital of MSCI is
unmeritorious, at best, and betrays the Board's sheer lack of grasp of a basic concept in
Corporation Law, at worst. Not all funds or assets received by the corporation can be
considered paid-up capital, for this term has a technical signification in Corporation Law
which is the portion of the authorized capital stock of the corporation, subscribed and
then actually paid up. (MSCI-NACUSIP Local Chapter vs. National Wages and
Productivity Commission and Monomer Sugar Central, Inc., G.R. No. 125198, March 3,
1997)
In short, the term capital in Section 11, Article XII of the Constitution refers only to
shares of stock that can vote in the election of directors. To construe broadly the term
capital as the total outstanding capital stock, including both common and non-voting
preferred shares, grossly contravenes the intent and letter of the Constitution that the
State shall develop a self-reliant and independent national economy effectively
controlled by Filipinos. A broad definition unjustifiably disregards who owns the allimportant voting stock, which necessarily equates to control of the public utility. (Wilson
P. Gamboa vs. Finance Secretary Margarito B. Teves, et al., G.R. No. 176579, June 28,
2011)
Since the constitutional requirement of at least 60 percent Filipino ownership applies
not only to voting control of the corporation but also to the beneficial ownership of the
corporation, it is therefore imperative that such requirement applies uniformly and
across the board to all classes of shares, regardless of nomenclature and category,
comprising the capital of a corporation. Since a specific class of shares may have rights
and privileges or restrictions different from the rest of the shares in a corporation, the
60-40 ownership requirement in favor of Filipino citizens in Section 11, Article XII of the
Constitution must apply not only to shares with voting rights but also to shares without
voting rights. (Heirs of Wilson P. Gamboa vs. Finance Secretary Margarito B. Teves, et al.,
G.R. No. 176579, October 9, 2012)
6. Articles of Incorporation

a. Nature and Function of Articles


The best proof of the purpose of a corporation is its articles of incorporation and bylaws, and in the case at bar, a perusal of the Articles of Incorporation of Ellice and Margo
shows no sign of the allegedly illegal purposes that petitioners are complaining of. It is
well to note that, if a corporations purpose, as stated in the Articles of Incorporation, is
lawful, then the SEC has no authority to inquire whether the corporation has purposes
other than those stated, and mandamus will lie to compel it to issue the certificate of
incorporation.(Alicia E. Gala, et al.vs. Ellice Agro-Industrial Corporation, et al., G.R. No.
156819, December 11, 2003)
b. Contents
The fact that it maintains branch offices in some parts of the country does not mean that
it can be sued in any of these places because to allow an action to be instituted in any
place where a corporate entity has its branch offices would create confusion and
inconvenience to the corporation. The residence of a corporation is the place where its
principal office is established. (Clavecillia Radio System vs. Hon. Agustin Antillon, as City
Judge of the Municipal Court of Cagayan de Oro City and New Cagayan Grocery, G.R. No.
L-22238, February 18, 1967)
The venue in this case was improperly laid because the principal office of Hyatt as stated
in the Articles of Incorporation is in Makati but the case was filed in Mandaluyong where
Hyatt transferred its operations. Since the principal place of business of a corporation
determines its residence or domicile, then the place indicated in petitioners articles of
incorporation becomes controlling in determining the venue for the filing of a case.
(Hyatt Elevators and Escalators Corporation vs. Goldstar Elevators Phils., Inc., G.R. No.
161026, October 24, 2005)
c. Amendment
The Corporation does not necessarily prohibit the transfer of proprietary shares by its
members when its amended Articles of Incorporation provides that: "No transfer shall
be valid except between the parties, and shall be registered in the Membership Book
unless made in accordance with these Articles and the By-Laws." The authority granted
to a corporation to regulate the transfer of its stock does not empower it to restrict the
right of a stockholder to transfer his shares, but merely authorizes the adoption of
regulations as to the formalities and procedure to be followed in effecting transfer.
(Marsh Thomson vs. Court of Appeals and the American Champer of Commerce of the
Philippines, Inc,, G.R. No. 116631, October 28, 1998)
d. Non-Amendable Items
7. Registration and Issuance of Certificate of Incorporation
8.

Adoption

of

By-Laws

a. Nature and Functions of By-Laws


Every corporation has the inherent power to adopt by-laws 'for its internal government,
and to regulate the conduct and prescribe the rights and duties of its members towards
itself and among themselves in reference to the management of its affairs. Under
section 21 of the Corporation Law, a corporation may prescribe in its by-laws the
qualifications, duties and compensation of directors, officers and employees. (John
Gokongwei, Jr. vs. Securities and Exchange Commission, et al., G.R. No. L-45911, April 11,
1979)
Corporate powers may be directly conferred upon corporate officers or agents by
statute, the articles of incorporation, the by-laws or by resolution or other act of the
board of directors. Since the by-laws are a source of authority for corporate officers and
agents of the corporation, a resolution of the Board of Directors of Citibank appointing
an attorney in fact to represent and bind it during the pre-trial conference of the case
at bar is not necessary because its by-laws allow its officers, the Executing Officer and
the Secretary Pro-Tem - to execute a power of attorney to a designated bank officer,
William W. Ferguson in this case, clothing him with authority to direct and manage
corporate affairs. (Citibank, N.A. vs. Hon. Segundino G. Chua, et al., G.R. No. 102300,
March 17, 1993)
Since the SEC will grant a license only when the foreign corporation has complied with
all the requirements of law, it follows that when it decides to issue such license, it is
satisfied that the applicant's by-laws, among the other documents, meet the legal
requirements. Therefore, petitioner bank's by-laws, though originating from a foreign
jurisdiction, are valid and effective in the Philippines. (Citibank, N.A. vs. Hon. Segundino
G. Chua, et al., G.R. No. 102300, March 17, 1993)
Non-filing of the by-laws will not result in automatic dissolution of the corporation.
Under Section 6(I) of PD 902-A, the SEC is empowered to suspend or revoke, after
proper notice and hearing, the franchise or certificate of registration of a corporation
on the ground inter alia of failure to file by-laws within the required period. (Loyola
Grand Villas Homeowners (South) Association, Inc. vs. Hon. Court of Appeals, Home
Insurance And Guaranty Corporation, Emden Encarnacion and Horatio Aycardo, G.R. No.
117188, August 7, 1997)
Conformably with Section 25 of the Corporation Code, a position must be expressly
mentioned in the By-Laws in order to be considered as a corporate office. Thus, the
creation of an office pursuant to or under a By-Law enabling provision is not enough to
make a position a corporate office. (Matling Industrial and Commercial Corporation, et
al. vs. Ricardo R. Coros, G.R. No. 157802, October 13, 2010)
b. Requisites of Valid By-Laws
A provision in the by-laws of the corporation stating that of the 15 members of its Board
of Directors, only 14 members would be elected while the remaining member would be
the representative of an educational institution located in the village of the
homeowners, is invalid for being contrary to law. The fact that for fifteen years it has not

been questioned or challenged but, on the contrary, appears to have been implemented
by the members of the association cannot forestall a later challenge to its validity
because, if it is contrary to law, it is beyond the power of the members of the association
to waive its invalidity(Grace Christian High Schoolvs.the Court Of Appeals, Grace Village
Association, Inc., Alejandro G. Beltran, and Ernesto L. Go, G.R. No. 108905, 23 October
1997)
The Corporation does not necessarily prohibit the transfer of proprietary shares by its
members when its amended Articles of Incorporation provides that: "No transfer shall
be valid except between the parties, and shall be registered in the Membership Book
unless made in accordance with these Articles and the By-Laws." The authority granted
to a corporation to regulate the transfer of its stock does not empower it to restrict the
right of a stockholder to transfer his shares by means of by-laws provisions, but merely
authorizes the adoption of regulations as to the formalities and procedure to be
followed in effecting transfer. (Marsh Thomson vs. Court of Appeals and the American
Champer of Commerce of the Philippines, Inc,, G.R. No. 116631, October 28, 1998)
c. Binding Effects
CBC is not bound by the provision in the by-laws of the VGCCI granting the VGCCI a
preferred lien over the share of stock of a member for unpaid dues. The by-law
restricting the transfer of shares cannot have any effect on the transferee of the shares
in question as he had no knowledge of such by-law when the shares were assigned to
him. (China Banking Corporation vs. Court of Appeals, and Valley Golf and Country Club,
Inc., G.R. No. 117604, March 26, 1997)
PMI College alleged that the employment contract entered into between the school
and Galvan is invalid because the signatory thereon was not the Chairman of the Board
as required by its by-laws. However, since by-laws operate merely as internal rules
among the stockholders, they cannot affect or prejudice third persons who deal with the
corporation, unless they have knowledge of the same. (PMI Colleges vs. the National
Labor Relations Commission and Alejandro Galvan, G.R. No. 121466, 15 August 1997)
d. Amendment or Revision
When an amendment to a provision in the Amended By-Laws requiring the unanimous
vote of the directors present at a special or regular meeting was not printed on the
application form for proprietory membership, and what was printed thereon was the
original provision which was silent on the required number of votes needed for
admission of an applicant as a proprietary member, the Board of Directors committed
fraud and evident bad faith in disapproving respondents application under Article 31
of the Corporation Code. The explanation given by the petitioner that the amendment
was not printed on the application form due to economic reasons is flimsy and
unconvincing because such amendment, aside from being extremely significant, was
introduced way back in 1978 or almost twenty (20) years before respondent filed his
application. (Cebu Country Club, Inc., et al. vs. Ricardo F. Elizagaque, G.R. No. 160273,
January 18, 2008)

F. Corporate Powers
1. General Powers, Theory of General Capacity
The stevedoring services which involve the unloading of the coal shipments into the NPC
pier for its eventual conveyance to the power plant are incidental and indispensable to
the operation of the plant. A corporation is not restricted to the exercise of powers
expressly conferred upon it by its charter, but has the power to do what is reasonably
necessary or proper to promote the interest or welfare of the corporation. (National
Power Corporation vs. Honorable Abraham P. Vera, Presiding Judge, Regional Trial Court,
National Capital Judicial Region, Branch 90, Quezon City and Sea Lion International Port
Terminal Services, Inc., G.R. No. 83558, February 27, 1989)
It would seem that under Philippine law, a joint venture is a form of partnership and
should thus be governed by the law of partnerships. The Supreme Court has however
recognized a distinction between these two business forms, and has held that although
a corporation cannot enter into a partnership contract, it may however engage in a joint
venture with others. (WolrgangAurbach, John Griffin, David P. Whittinghamand Charles
Chamsay vs. Sanitary Wares Manufacturing Corporatoin, Ernesto V. Lagdameo, Ernesto R.
Lagdameo, Jr., Enrique R. Lagdameo, George F. Lee, Raul A. Boncan, Baldwin Young and
Avelino V. Cruz, G.R. No. 75875, December 15, 1989)
Providing gratuity pay is one of the express powers of the corporation under the
Corporation Code and therefore, resolutions passed by the board approving the grant
of gratuity pay to the employees of the corporation during a meeting where one of the
directors was not notified thereof are not ultra vires. The grant of gratuity pay does not
require shareholders approval as it is not tantamount to the sale, lease, exchange or
disposition of all or substantially all of the corporation's assets.(Lopez Realty, Inc., and
Asuncion Lopez Gonzales vs. FlorentinaFontecha, et al., and the National Labor Relations
Commission, G.R. No. 76801 August 11, 1995)
Lideco Corporation had no personality to intervene since it had not been duly
registered as a corporation. If petitioner Laureano Investment & Development
Corporation legally and truly wanted to intervene, it should have used its corporate
name as the law requires and not another name which it had not registered.(Laureano
Investment & Development Corporation vs. the Honorable Court of Appeals and
BORMAHECO, Inc., G.R. No. 100468, May 6, 1997)
The power of a corporation to sue and be sued is exercised by the board of directors.
The physical acts of the corporation, like the signing of documents, can be performed
only by natural persons duly authorized for the purpose by corporate bylaws or by a
specific act of the board. Absent the said board resolution, a petition may not be given
due course.(LigayaEsguerra, et al. vs. Holcim Philippines, Inc., G.R. No. 182571,
September 2, 2013)
The lawyer who signed the pleading, verification and certification against non-forum
shopping must be specifically authorized by the Board of Directors of the Corporation to

make his actions binding on his principal. Maranaw Hotels and Resort Corporation v. Court
of Appeals, 576 SCRA 463 (2009)
If the real party in interest is a corporate body, an officer of the corporation can sign the
certification against forum shopping so long as he has been duly authorized by a resolution
of its board of directors. The court did not commit grave abuse of discretion in dismissing
the petition for lack of authority of authority of the officer who signed the certification of
non-forum shopping in representation of petitioner corporation. San Miguel Bukid
Homeowners Association, Inc. vs City of Mandaluyong, et al, GR no.153653, October 2, 2009;
Republic of the Philippines vs. Coalbrine International Philippines, et al GR No. 161838, April
7, 2010
The following officers may sign the verification and certification against non-forum
shopping on behalf of the corporation even in the absence of board resolution,
a)Chairperson
of
b)President,
c)General
d)
e)
Employment

the
Personnel
Specialist

Board

of

in

Directors;

labor

Manager,
Officer,
case.

These officers are in the position to verify the truthfulness and correctness of the allegations
in the petition. Mid Pasig Land and Development Corporation v. Tablante, G.R. No. 162924,
February 4, 2010; PNCC Skyway Traffic Management and Security Division Workers
Organization vs PNCC Skyway Corporation, GR No. 171231, February 17, 2010
The general rule is that a corporation can only exercise its powers and transact its business
through its board of directors and through its officers and agents when authorized by a
board resolution or its bylaws. The power of a corporation to sue and be sued is exercised
by the board of directors. The physical acts of the corporation, like the signing of
documents, can be performed only by natural persons duly authorized for the purpose by
corporate bylaws or by a specific act of the board. Absent the said board resolution, a
petition may not be given due course. Esguerra vs. Holcim Philippines G.R. No. 182571,
September 2, 2013
In a complaint for nullification of mortgage and foreclosure with damages against the
mortgagee-bank, the plaintiff can not compel the officers of the bank to appear and testify
as plaintiffs initial witnesses unless written interrogatories are first served upon the bank
officers. This is in line with the Rules of Court provision that calling the adverse party to the
witness stand is not allowed unless written interrogatories are first served upon the latter.
This is because the officers of a corporation are considered adverse parties as well in a case
against the corporation itself based on the principle that corporations act only through their
officers and duly authorized agents. Spouses Afulugencia vs. Metropolitan Bank and Trust
Co. G.R. No. 185145, February 05, 2014
2. Specific Powers, Theory of Specific Capacity
a. Power to Extend or Shorten Corporate Term

Section 11 of Corporation Code provides that a corporation shall exist for a period not
exceeding fifty (50) years from the date of incorporation unless sooner dissolved or
unless said period is extended. Upon the expiration of the period fixed in the articles of
incorporation in the absence of compliance with the legal requisites for the extension
of the period, the corporation ceases to exist and is dissolved ipso facto.(Philippine
National Bank vs. the Court of First Instance of Rizal, Pasig, et al.,G.R. No. 63201, May 27,
1992)
b. Power to Increase or Decrease Capital Stock or Incur, Create, Increase Bonded
Indebtedness
Prior to the approval by the Securities and Exchange Commission of the increase in the
authorized capital stock, such payments cannot as yet be deemed part of a corporations
paid-up capital, technically speaking, because its capital stock has not yet been legally
increased. Such payments constitute deposits on future subscriptions, money which the
corporation will hold in trust for the subscribers until it files a petition to increase its
capitalization and a certificate of filing of increase of capital stock is approved and
issued by the SEC. (Central Textile Mills, Inc.vs. National Wages and Productivity
Commission, et al., G.R. No. 104102, August 7, 1996)
c. Power to Deny Pre-Emptive Rights
d. Power to Sell or Dispose of Corporate Assets
The sale or disposition of all or substantially all properties of the corporation requires,
in addition to a proper board resolution, the affirmative votes of the stockholders
holding at least two-thirds (2/3) of the voting power in the corporation in a meeting
duly called for that purpose. No doubt, the questioned resolution was not confirmed at
a subsequent stockholders meeting duly called for the purpose by the affirmative votes
of the stockholders holding at least two-thirds (2/3) of the voting power in the
corporation. (Rosita Pea vs. the Court of Appeals, Spouses Rising T. Yap and Catalina
Yap, Pampanga Bus Co., Inc., Jesus Domingo, Joaquin Briones, Salvador Bernardez,
Marcelino Enriquez and Edgardo A. Zabat, G.R. No. 91478, February 7, 1991)
Where an asset constitutes the only property of the corporation, its sale to a third-party
is a sale or disposition of all the corporate property and assets of said corporation falling
squarely within the contemplation of Section 40 of the Corporation Code. Hence, for
the sale to be valid, the majority vote of the legitimate Board of Trustees, concurred in
by the vote of at least 2/3 of the bona fide members of the corporation should have been
obtained.(Islamic Directorate of the Philippines, Manuel F. Perea and Securities &
Exchange Commission,vs. Court of Appeals And Iglesia Ni Cristo, G.R. No. 117897, May
14, 1997)
e. Power to Acquire Own Shares
The requirement of unrestricted retained earnings to cover the shares is based on the
trust fund doctrine which means that the capital stock, property and other assets of a
corporation are regarded as equity in trust for the payment of corporate creditors. The

reason is that creditors of a corporation are preferred over the stockholders in the
distribution of corporate assets. (Boman Environmental Development Corporation vs.
Hon. Court of Appeals and Nilcar Y. Fajilan, G.R. No. 77860, November 22, 1988)
f. Power to Invest Corporate Funds in Another Corporation or Business
A corporation, under the Corporation Code, has only such powers as are expressly
granted to it by law and by its articles of incorporation, those which may be incidental
to such conferred powers, those reasonably necessary to accomplish its purposes and
those which may be incident to its existence. In the case at bar, a company engaged in
the practice of lending money is categorically prohibited from engaging in
pawnbroking as defined under PD 114.(Pilipinas Loan Company, Inc. vs. Hon. Securites
and Exchange Commission and Filipinas Pawnshop, Inc., G.R. No. 104720, April 4, 2001)
A mining corporation cannot engage in the highly speculative business of urban real
estate development, and could not have validly acquired real estate property. ((Heirs of
Antonio Pael and Andrea Alcantara and CrisantoPael vs. Court of Appeals, Jorge H. Chin
and Renato B. Mallari, G.R. No. 133547, February 10, 2000)
g. Power to Declare Dividends
The dividends received by a corporation from corporate investments in other companies
are corporate earnings. As such shareholder, the dividends paid to it were its own
money, which may then be available for wage increments. (Madrigal & Company, Inc. vs.
Hon. Ronaldo B. Zamora, et al., G.R. NO. L-48237, June 30, 1987)
Dividends cannot be declared for preferred shares which were guaranteed a quarterly
dividend if there are no unrestricted retained earnings. "Interest bearing stocks", on
which the corporation agrees absolutely to pay interest before dividends are paid to
common stockholders, is legal only when construed as requiring payment of interest as
dividends from net earnings or surplus only. (Republic Planters Bank vs. Hon. Enrique A.
Agana, Sr., as Presiding Judge, Court of First Instance of Rizal, Branch XXVIII, Pasay City,
Robes-Francisco Realty & Development Corporation and Adalia F. Robes, G.R. No. 51765,
March 3, 1997)
h. Power to Enter Into Management Contract
i. Ultra Vires Acts
i. Applicability of Ultra Vires Doctrine
ii. Consequences of Ultra Vires Acts
While as a rule an ultra vires act is one committed outside the object for which a
corporation is created as defined by the law of its organization and therefore beyond
the powers conferred upon it by law, there are however certain corporate acts that may
be performed outside of the scope of the powers expressly conferred if they are
necessary to promote the interest or welfare of the corporation such as the
establishment of the local post office which is a vital improvement in the living condition
of the employees and laborers who came to settle in a mining camp which is far removed

from the postal facilities. The term ultra vires should be distinguished from an illegal act
for the former is merely voidable which may be enforced by performance, ratification,
or estoppel, while the latter is void and cannot be validated. (Republic of the Philippines
vs. Acoje Mining Company, Inc., G.R. No. L-18062, February 28, 1963)
The act of issuing the checks was well within the ambit of a valid corporate act, for it was
for securing a loan to finance the activities of the corporation, hence, not an ultra vires
act. (Atrium Management Corporation vs. Court of Appeals, et al., G.R. No. 109491,
February 28, 2001)
Unlike illegal acts which contemplate the doing of an act that is contrary to law, morals,
or public policy or public duty, and are void, ultra vires acts are those which are not
illegal but are merely not within the scope of the articles of incorporation and by-laws.
They are merely voidable and may become binding and enforceable when ratified by
the stockholders. (Maria Clara Pirovana, et al.vs.the De La Rama Steamship Co., G.R. No.
L-5377, December 29, 1954)
3. How Exercised
a. By the Shareholders
b. By the Board of Directors
The general rule is that a corporation, through its board of directors, should act in the
manner and within the formalities, if any, prescribed by its charter or by the general law.
Directors must act as a body in a meeting called pursuant to the law or the corporation's
by-laws, otherwise, any action taken therein may be questioned by any objecting
director or shareholder; but an action of the board of directors during a meeting, which
was illegal for lack of notice, may be ratified either expressly, by the action of the
directors in subsequent legal meeting, or impliedly, by the corporation's subsequent
course of conduct.(Lopez Realty, Inc., and Asuncion Lopez Gonzales vs.
FlorentinaFontecha, et al., and the National Labor Relations Commission, G.R. No. 76801
August 11, 1995)
By the express mandate of the Corporation Code (Section 26), all corporations duly
organized pursuant thereto are required to submit within the period therein stated (30
days) to the Securities and Exchange Commission the names, nationalities and
residences of the directors, trustees and officers elected. In determining whether the
filing of a suit was authorized by the board of directors, the list of directors in the latest
general information sheet filed with the Securities and Exchange Commission is
controlling.(Premium Marble Resources, Inc.vs. the Court of Appeals, G.R. No. 96551.
November 4, 1996)
Under Section 36 of the Corporation Code, read in relation to Section 23,it is clear that
where a corporation is an injured party, its power to sue is lodged with its board of
directors or trustees. In this case, the petitioner failed to show any proof that he was
authorized or deputized or granted specific powers by the corporations board of
director to sue Victor AngSiong for and on behalf of the firm, and therefore he had no

such power or authority to sue on Concords behalf.(Tam Wing Takvs. Hon. Ramon P.
Makasiar, G.R. No. 122452, January 29, 2001)
c. By the Officers
When the practice of the corporation has been to allow its general manager to
negotiate and execute contracts in its copra trading activities for and in behalf of the
corporation without prior board approval, the board itself, by its acts and through
acquiescence, practically laid aside the by-law requirement of prior approval. Settled
jurisprudence has it that where similar acts have been approved by the directors as a
matter of general practice, custom, and policy, the general manager may bind the
company without formal authorization of the board of directors. (The Board of
Liquidators, representing the Government of the Republic of the Philippines vs.Heirs of
Maximo M. Kalaw, Juan Bocar, Estate of the deceased Casimiro Garcia, and Leonor
Moll,G.R. No. L-18805, August 14, 1967)
When a bank, by its acts and failure to act, has clearly clothed its manager with apparent
authority to sell an acquired asset in the normal course of business, it is legally obliged
to confirm the transaction by issuing a board resolution to enable the buyers to register
the property in their names. It has a duty to perform necessary and lawful acts to enable
the other parties to enjoy all benefits of the contract which it had authorized. (Rural Bank
Of Milaor (Camarines Sur) vs. Francisca Ocfemia, Rowena Barrogo, Marife O. Nio,
FelicisimoOcfemia, Renato Ocfemia Jr., and Winston Ocfemia, G.R. No. 137686, February
8, 2000)
If a corporation consciously lets one of its officers, or any other agent, to act within the
scope of an apparent authority, it will be estopped from denying such officers authority.
Since the records show that Calo, who was an Account Officer, was the one assigned to
transact on petitioners behalf respecting the loan transactions and arrangements of
Inland as well as those of Hanil-Gonzales and Abrantes, it is presumed that he had
authority to sign for the bank in the Deed of Assignment.(Westmont Bank (formerly
Associated Citizens Bank and now United Overseas Bank, Phils.) And The Provincial Sheriff
of Rizal vs. Inland Construction and Development Corp., G.R. No. 123650, March 23,
2009)
Accordingly, the authority to act for and to bind a corporation may be presumed from
acts of recognition in other instances, wherein the power was exercised without any
objection from its board or shareholders. Undoubtedly, petitioner had previously
allowed Atty. Soluta to enter into the first agreement without a board resolution
expressly authorizing him; thus, it had clothed him with apparent authority to modify
the same via the second letter-agreement. It is not the quantity of similar acts which
establishes apparent authority, but the vesting of a corporate officer with the power to
bind the corporation. (Associated Bank vs. Spouses Rafael and MonalizaPronstroller, G.R.
No. 148444, 14 July 2008)
Although a branch manager, within his field and as to third persons, is the general agent
and is in general charge of the corporation, with apparent authority commensurate with

the ordinary business entrusted him and the usual course and conduct thereof, yet the
power to modify or nullify corporate contracts remains generally in the board of
directors. Being a mere branch manager alone is insufficient to support the conclusion
that he has been clothed with apparent authority to verbally alter terms of written
contracts, especially when viewed against the telling circumstances of this case: the
unequivocal provision in the mortgage contract; the corporations vigorous denial that
any agreement to release the mortgage was ever entered into by it; and, the fact that
the purported agreement was not even reduced into writing considering its legal effects
on the parties interests. Banate vs. Philippine Countryside Rural Bank (Liloan, Cebu),
Inc., G.R. No. 163825, July 13, 2010
A corporation can not deny the authority of lawyer when they clothed him with
apparent authority to act in their behalf such as when he entered his appearance
accompanied by the corporations general manager and the corporation never
questioned his acts and even took time and effort to forward all the court documents to
him. The lawyer may not have been armed with a board resolution but the doctrine of
apparent authority imposes liability not as a result of contractual relationship but rather
because of the actions of the principal or an employer in somehow misleading the public
that the relationship or the authority exists. Megan Sugar Corporation vs. RTC of Ilo-ilo
Br. 68, GR no. 170352, June 1, 2011
The doctrine of apparent authority provides that a corporation will be estopped from
denying the agents authority if it knowingly permits one of its officers or any other
agent to act within the scope of an apparent authority, and it holds him out to the public
as possessing the power to do those acts.
Apparent authority is derived not merely from practice. Its existence may be ascertained
through (1) the general manner in which the corporation holds out an officer or agent
as having the power to act or, in other words the apparent authority to act in general,
with which it clothes him; or (2) the acquiescence in his acts of a particular nature, with
actual or constructive knowledge thereof, within or beyond the scope of his ordinary
powers. It is not the quantity of similar acts which establishes apparent authority, but
the vesting of a corporate officer with the power to bind the corporation. When the sole
management of the corporation was entrusted to two of its officers/incorporators with
the other officers never had dealings with the corporation for 14 years and that the
board and the stockholders never had its meeting, the corporation is now estopped from
denying the officers authority to obtain loan from the lender on behalf of the
corporation under the doctrine of apparent authority. Advance Paper Corporation vs
Arma Traders Corporation , G.R. No 176897, December 11, 2013.
4. Trust Fund Doctrine
In the instant case, the rescission of the Pre-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. The Trust Fund Doctrine
provides that subscriptions to the capital stock of a corporation constitute a fund to

which the creditors have a right to look for the satisfaction of their claims.(Ong Yong, et
al. vs. David S. Tiu, et al., G.R. No. 144476 & G.R. No. 144629, 8 April 2003)
When negotiations ensued in light of a planned takeover of company and the counsel
of the buyer advised the stockholder through a letter that he may take the machineries
he brought to the corporation out with him for his own use and sale, the previous
stockholder cannot recover said machineries and equipment because these properties
remained part of the capital property of the corporation. Under the trust fund doctrine,
the capital stock, property, and other assets of a corporation are regarded as equity in
trust for the payment of corporate creditors which are preferred over the stockholders
in the distribution of corporate assets. (Ryuichi Yamamoto vs. Nishino Leather Industries,
Inc. and Ikuo Nishino, G.R. No. 150283, April 16, 2008)
G. Board of Directors and Trustees
1. Doctrine of Centralized Management
2. Business Judgment Rule
The determination of the necessity for additional offices and/or positions in a
corporation is a management prerogative which courts are not wont to review in the
absence of any proof that such prerogative was exercised in bad faith or with
malice.Indeed, it would be an improper judicial intrusion into the internal affairs of
Filport for the Court to determine the propriety or impropriety of the creation of offices
therein and the grant of salary increases to officers thereof. (Filipinas Port Services, Inc.,
represented by stockholders, Eliodoro C. Cruz and Mindanao Terminal and Brokerage
Services, Inc. vs. Victoriano S. Go, et al., G.R. No. 161886, March 16, 2007)
The Board of Directors of Matling could not validly delegate the power to create a
corporate office to the President, in light of Section 25 of the Corporation Code
requiring the Board of Directors itself to elect the corporate officers. Verily, the power
to elect the corporate officers was a discretionary power that the law exclusively vested
in the Board of Directors, and could not be delegated to subordinate officers or agents.
(Matling Industrial and Commercial Corporation, et al. vs. RICARDO R. COROS, G.R. No.
157802, October 13, 2010)
Under section 21 of the Corporation Law, a corporation may prescribe in its by-laws the
qualifications, duties and compensation of directors, officers and employees. A
provision in the by-laws of the corporation that no person shall qualify or be eligible for
nomination for elections to the board of directors if he is engaged in any business which
competes with that of the Corporation is valid, as long as due process is observed. (John
Gokongwei, Jr. vs. Securities and Exchange Commission, et al., G.R. No. L-45911, April 11,
1979)
3. Tenure, Qualifications and Disqualifications of Directors or Trustees
The board of directors of corporations must be elected from among the stockholders or
members. Thus, a provision in the by-laws of the corporation stating that of the fifteen

members of its Board of Directors, only 14 members would be elected while the
remaining member would be the representative of an educational institution located in
the village of the homeowners, is invalid for being contrary to law as it violates the oneyear term limit of the directors. (Grace Christian High Schoolvs.the Court Of Appeals,
Grace Village Association, Inc., Alejandro G. Beltran, and Ernesto L. Go, G.R. No. 108905,
23 October 1997)
Both under the old and the new Corporation Codes there is no dispute as to the most
immediate effect of a voting trust agreement on the status of a stockholder who is a
party to its execution from legal titleholder or owner of the shares subject of the
voting trust agreement, he becomes the equitable or beneficial owner. Any director who
executes a voting trust agreement over all his shares ceases to be a stockholder of record
in the books of the corporation and therefore ceases to be a director.(Ramon C. Lee and
Antonio DM. Lacdao vs. the Hon. Court of Appeals, Sacoba Manufacturing Corp., Pablo
Gonzales, Jr. and Thomas Gonzales, G.R. No. 93695, 4 February 1992)
4. Elections
a. Cumulative Voting/Straight Voting
b. Quorum
5. Removal
6. Filling of Vacancies
When an incumbent member of the board of directors continues to serve in a holdover
capacity, it implies that the office has a fixed term, which has expired, and the
incumbent is holding the succeeding term. A vacancy resulting from the resignation of
an officer in a hold-over capacity, by the terms of Section 29 of the Corporation Code,
must be filled by the stockholders in a regular or special meeting called for the
purpose.(Valle Verde Country Club, Inc., et al. vs. Victor Africa, G.R. No. 151969, 4
September 2009)
7. Compensation
The proscription against granting compensation to directors/trustees of a corporation
is not a sweeping rule as worthy of note is the clear phraseology of Section 30 which
states: xxx [T]he directors shall not receive any compensation, as such directors, xxx.
The unambiguous implication is that members of the board may receive compensation,
in addition to reasonable per diems, when they render services to the corporation in a
capacity other than as directors/trustees. (Western Institute of Technology, Inc., et al.
vs.Ricardo T. Salas, et al., G.R. No. 113032, 21 August 1997)
8. Fiduciary Duties and Liability Rules
Before a director or officer of a corporation can be held personally liable for corporate
obligations, the following requisites must concur: (1) the complainant must allege in the
complaint that the director or officer assented to patently unlawful acts of the

corporation, or that the officer was guilty of gross negligence or bad faith; and (2) the
complainant must clearly and convincingly prove such unlawful acts, negligence or bad
faith. In this case, petitioners are correct to argue that it was not alleged, much less
proven, that Uy committed an act as an officer of Hammer that would permit the
piercing of the corporate veil as what the complaint simply stated is that she, together
with her errant husband Chua, acted as surety of Hammer, as evidenced by her signature
on the Surety Agreement which was later found by the RTC to have been forged.(Heirs
of Fe Tan Uy, represented by her heir, Mauling Uy Lim vs. International Exchange Bank,
G.R. No. 166282 & 83, February 13, 2013)
Article 212(e) of the Labor Code, by itself, does not make a corporate officer personally
liable for the debts of the corporation. The governing law on personal liability of
directors for debts of the corporation is still Section 31 of the Corporation Code.(Alert
Security and Investigation Agency, Inc. and/or Manuel D. Dasig vs. SaidaliPasawilan,
WilfredoVercelesand MelchorBulusan, G.R. No. 182397, September 14, 2011)
The rule is still that the doctrine of piercing the corporate veil applies only when the
corporate fiction is used to defeat public convenience, justify wrong, protect fraud, or
defend crime. Neither Article 212[e] nor Article 273 (now 272) of the Labor Code
expressly makes any corporate officer personally liable for the debts of the
corporation.(Antonio C. Carag vs. National Labor Relations Commission, et al., G.R. No.
147590, April 2, 2007)
The execution of a document by a bank manager called pagares which guaranteed
purchases on credit by a client is contrary to the General Banking law which prohibits
bank officers from guaranteeing loans of bank clients. In this case, it is plain from the
guarantee Grey executed that he was acting for himself, not in representation of UCPB;
hence, UCPB cannot be bound by Greys above undertaking since he appears to have
made it in his personal capacity. (United Coconut Planters Bank vs. Planters Products,
Inc., Janet Layson and Gregory Grey, G.R. No. 179015, June 13, 2012)
To hold the general manager personally liable alone for the debts of the corporation
and thus pierce the veil of corporate fiction, it is required that the bad faith of the officer
be established clearly and convincingly. Petitioner, however, has failed to include any
submission pertaining to any wrongdoing of the general manager. Necessarily, it would
be unjust to hold the latter personally liable. (Mercy Vda. de Roxas vs. Our Lady's
Foundation, Inc., G.R. No. 182378, March 6, 2013)
A corporation has its own legal personality separate and distinct from those of its
stockholders, directors or officers. Hence, absent any evidence that they have exceeded
their authority, corporate officers are not personally liable for their official acts.
Corporate directors and officers may be held solidarily liable with the corporation for
the termination of employment only if done with malice or in bad faith.(Rolando DS.
Torres v. Rural Bank of San Juan, Inc. et al., G.R. No. 184520, March 13, 2013)
Obligations incurred as a result of the directors and officers acts as corporate agents, are
not their personal liability but the direct responsibility of the corporation they represent. As

a rule, they are only solidarily liable with the corporation for the illegal termination of
services of employees if they acted with malice or bad faith.
To hold a director or officer personally liable for corporate obligations, two requisites must
concur: (1) it must be alleged in the complaint that the director or officer assented to
patently unlawful acts of the corporation or that the officer was guilty of gross negligence
or bad faith; and (2) there must be proof that the officer acted in bad faith. The fact that the
corporation ceased its operations the day after the promulgation of the SC resolution
finding the corporation liable does not prove bad faith on the part of the incorporator of
the corporation. Polymer Rubber Corporation vs. Ang, G.R. No. 185160. July 24, 2013
Although joint and solidary liability for money claims and damages against a corporation
attaches to its corporate directors and officers under R.A. 8042, it is not automatic. To
make them jointly and solidarily liable, there must be a finding that they were remiss in
directing the affairs of the corporation, resulting in the conduct of illegal activities.
Absent any findings regarding the same, the corporate directors and officers cannot be
held liable for the obligation of the corporation against the judgment debtor.(Elizabeth
M. Gaguivs. Simeon Dejeroand TeodoroPermejo, G.R. No. 196036, October 23, 2013)
9. Responsibility for Crimes
The Trust Receipts Law recognizes the impossibility of imposing the penalty of
imprisonment on a corporation. Hence, if the entrustee is a corporation, the law makes
the officers or employees or other persons responsible for the offense liable to suffer
the penalty of imprisonment. (Edward C. Ong, vs. the Court of Appeals and the People of
the Philippines, G.R. No. 119858, April 29, 2003)
Though the entrustee is a corporation, nevertheless, the law specifically makes the
officers, employees or other officers or persons responsible for the offense, without
prejudice to the civil liabilities of such corporation and/or board of directors, officers,
or other officials or employees responsible for the offense. The rationale is that such
officers or employees are vested with the authority and responsibility to devise means
necessary to ensure compliance with the law and, if they fail to do so, are held criminally
accountable; thus, they have a responsible share in the violations of the law. (Alfredo
Ching vs. the Secretary of Justice, et al., G. R. No. 164317, February 6, 2006)
10. Inside Information
11. Contracts
a. By Self-Dealing Directors with the Corporation
b. Between Corporations with Interlocking Directors
When a mortgagee bank foreclosed the mortgage on the real and personal property of
the debtor and thereafter assigned the properties to a corporation it formed to manage
the foreclosed assets, the unpaid seller of the debtor cannot complain that the
assignment is invalid simply because the mortgagee and the assignee have interlocking
directors.There is no bad faith on the part of DBP by its creation of Nonoc Mining,

Maricalum and Island Cement as the creation of these three corporations was necessary
to manage and operate the assets acquired in the foreclosure sale lest they deteriorate
from non-use and lose their value.(Development Bank of the Philippines vs. Honorable
Court of Appeals and Remington Industrial Sales Corporation , G.R. No. 126200, August
16, 2001)
c. Management Contracts
12. Executive Committee
13. Meetings
The non-signing by the majority of the members of the GSIS Board of Trustees of the
minutes of the meeting does not necessarily mean that the supposed resolution was not
approved by the board. The signing of the minutes by all the members of the board is
not required because it is the signature of the corporate secretary gives the minutes of
the meeting probative value and credibility.(People of the Philippines vs. Hermenegildo
Dumlao y Castiliano and Emilio La'o y Gonzales, G.R. No. 168918, March 2, 2009)
a. Regular or Special
i. When and Where
ii. Notice
b. Who Presides
c. Quorum
Under Section 25 of the Corporation Code of the Philippines, the articles of
incorporation or by-laws of the corporation may fix a greater number than the majority
of the number of board members to constitute the quorum necessary for the valid
transaction of business. When only three (3) out of five (5) members of the board of
directors of PAMBUSCO convened on November 19, 1974 by virtue of a prior notice of
a special meeting,there was no quorum to validly transact business since, under Section
4 of the amended by-laws hereinabove reproduced, at least four (4) members must be
present to constitute a quorum in a special meeting of the board of directors of
PAMBUSCO.(Rosita Pea vs. the Court of Appeals, Spouses Rising T. Yap and Catalina
Yap, Pampanga Bus Co., Inc., Jesus Domingo, Joaquin Briones, Salvador Bernardez,
Marcelino Enriquez and Edgardo A. Zabat, G.R. No. 91478, February 7, 1991)
d. Rule on Abstention
H. Stockholders and Members
1. Rights of a Stockholder and Members
a. Doctrine of Equality of Shares
2. Participation in Management
a. Proxy

When proxies are solicited in relation to the election of corporate directors, the
resulting controversy, even if it ostensibly raised the violation of the SEC rules on proxy
solicitation, should be properly seen as an election controversy within the original and
exclusive jurisdiction of the trial courts by virtue of Section 5.2 of the SRC in relation to
Section 5(c) of Presidential Decree No. 902-A. From the language of Section 5(c) of
Presidential Decree No. 902-A, it is indubitable that controversies as to the qualification
of voting shares, or the validity of votes cast in favor of a candidate for election to the
board of directors are properly cognizable and adjudicable by the regular courts
exercising original and exclusive jurisdiction over election cases. (Government Service
Insurance System vs. the Hon. Court of Appeals, G.R. No. 183905, April 16, 2009)
b. Voting Trust
c. Cases When Stockholders Action is Required
i. By a Majority Vote
ii. By a Two-Thirds Vote
iii. By Cumulative Voting
3. Proprietary Rights
a. Right to Dividends
b. Right of Appraisal
In order to give rise to any obligation to pay on the part of the corporation, the dissenting
stockholder should first make a valid demand that the corporation refused to pay despite
having unrestricted retained earnings. Otherwise, the corporation could not be said to be
guilty of any actionable omission that could sustain the action to collect. The collection suit
filed by the dissenting stockholder to enforce payment of the fair value of his shares is
premature if at the time of demand for payment, the corporation had no surplus profit. The
fact that the Corporation subsequent to the demand for payment and during the pendency
of the collection case posted surplus profit did not cure the prematurity of the cause of
action. Turner vs. Lorenzo Shipping Corporation, G.R. No. 157479, November 24, 2010
c. Right to Inspect
Considering that the foreign subsidiary is wholly owned by the corporation and,
therefore, under its control, it would be more in accord with equity, good faith and fair
dealing to construe the statutory right of a stockholder to inspect the books and records
of the corporation as extending to books and records of such wholly subsidiary which
are in the corporation's possession and control.(John Gokongwei, Jr. vs. Securities and
Exchange Commission, et al., G.R. No. L-45911, April 11, 1979)
The stockholder's right of inspection of the corporation's books and records is based
upon their ownership of the assets and property of the corporation. It is, therefore, an
incident of ownership of the corporate property, whether this ownership or interest be

termed an equitable ownership, a beneficial ownership, or a ownership.(John


Gokongwei, Jr. vs. Securities and Exchange Commission, et al., G.R. No. L-45911, April 11,
1979)
The only express limitation on the right of inspection, according to the Court, is that (1)
the right of inspection should be exercised at reasonable hours on business days; (2) the
person demanding the right to examine and copy excerpts from the corporate records
and minutes has not improperly used any information secured through any previous
examination of the records of such corporation; and (3) the demand is made in good
faith or for a legitimate purpose. (Victor Africa vs. Presidential Commission on Good
Government, et al., G.R. No. 83831, January 9, 1992)
d. Pre-Emptive Right
Even if pre-emptive right does not exist either because the issue comes within the
exceptions in Section 39 of the Corporation Code or because it is denied in the articles
of incorporation, an issue of shares may still be objectionable if the directors acted in
breach of trust and their primary purpose is to perpetuate or shift control of the
corporation or to freeze out the minority interest. The issuance of unissued shares out
of the original authorized capital stock pursuant to a rehabilitation plan the propriety
and validity of which was on question by the minority stockholders and subsequently
disapproved by the court amounts to unlawful dilution of the minority shareholdings.
Majority of Stockholders of Ruby Industrial Corporation vs Lim, GR No. 165887, June 6,
2011
e. Right to Vote
f. Right to Dividends
Stock dividends cannot be issued to one who is not a stockholder of a corporation for
payment of services rendered.(Nielson & Company, Inc. vs.Lepanto Consolidated Mining
Company, G.R. No. L-21601, December 17, 1966)
Dividends are distributed to stockholders pursuant to their right to share in corporate
profits. When a dividend is declared, it belongs to the person who is the substantial and
beneficial owner of the stock at the time regardless of when the distribution profit was
earned. (Nora A. Bitongvs. Court of Appeals, et al., G.R. No. 123553, July 13, 1998)
g. Right of First Refusal
A joint venture agreement giving to the shareholders the right to purchase the shares of
their co-shareholders before they are offered to a third party does not violate the
provision of the Constitution limiting land ownership to Filipinos and Filipino
corporations. If the corporation still owns the land, the right of first refusal can be validly
assigned to a qualified Filipino entity in order to maintain the 60% - 40% ratio.(J.G.
Summit Holdings, Inc. vs. Court of Appeals, et al. G.R. No. 124293, January 31, 2005)
4. Remedial Rights

a. Individual Suit
b. Representative Suit
c. Derivative Suit
A suit to enforce pre-emptive right in a corporation is not a derivative suit because it
was not filed for the benefit of the coporation. The petitioner was suing on her own
behalf, and was merely praying that she be allowed to subscribe to the additional
issuances of stocks in proportion to her shareholdings to enable her to preserve her
percentage of ownership in the corporation. (Gilda C. Lim, Wilhelmina V. Joven and Ditas
A. Lerios, vs. Patricia Lim-Yu, in her capacity as a minority stockholder of Limpan
Investment Corporation, G.R. No. 138343, February 19, 2001)
The personal injury suffered by the spouses cannot disqualify them from filing a
derivative suit on behalf of the corporation. It merely gives rise to an additional cause
of action for damages against the erring directors.(Virginia O. Gochan, et al. vs. Richard
G. Young, et al., G.R. No. 131889, March 12, 2001)
For a derivative suit to prosper, it is required that the minority stockholder suing for and
on behalf of the corporation must allege in his complaint that he is suing on a derivative
cause of action on behalf of the corporation and all other stockholders similarly situated
who may wish to join him in the suit. A public prosecutor, by the nature of his office, is
under no compulsion to file a criminal information where no clear legal justification has
been shown, and no sufficient evidence of guilt nor prima facie case has been presented
by the petitioner. (Tam Wing Tak vs. Hon. Ramon P. Makasiar, G.R. No. 122452, January
29, 2001)
The bare claim that the complaint is a derivative suit will not suffice to confer jurisdiction
on the RTC (as a special commercial court) if he cannot comply with the requisites for
the existence of a derivative suit. These requisites are: a.) the party bringing suit should
be a shareholder during the time of the act or transaction complained of, the number of
shares not being material; b.) the party has tried to exhaust intra-corporate remedies,
i.e., has made a demand on the board of directors for the appropriate relief, but the
latter has failed or refused to heed his plea; andc.) the cause of action actually devolves
on the corporation; the wrongdoing or harm having been or being caused to the
corporation and not to the particular stockholder bringing the suit.(Oscar C. Reyes vs.
Hon. Regional Trial Court of Makati, Branch 142, Zenith Insurance Corporation, and
Rodrigo C. Reyes, G.R. No. 165744, 11 August 2008)
The stockholder filing a derivative suit should have exerted all reasonable efforts to exhaust
all remedies available under the articles of incorporation, by-laws, laws or rules governing
the corporation to obtain the relief he desires and to allege such fact with particularity in
the complaint. The allegation that the suing stockholder talked to the other stockholder
regarding the dispute hardly constitutes all reasonable efforts to exhaust all remedies
available . The complaint should also allege the fact that there was no appraisal right
available under for the acts complained of and that the suit was not a nuisance or
harassment suit. The fact that the corporation involved is a family corporation should not in
any way exempt the suing stockholder from the requirements and formalities for filing a
derivative suit. Yu vs. Yukayguan, 588 SCRA 589 ( 2009 )

Petitioners seek the nullification of the election of the Board of Directors composed
of herein respondents, who pushed through with the election even if petitioners had
adjourned the meeting allegedly due to lack of quorum. Petitioners are the injured party,
whose rights to vote and to be voted upon were directly affected by the election of the new
set of board of directors. The party-in-interest are the petitioners as stockholders, who wield
such right to vote. The cause of action devolves on petitioners, not the condominium
corporation, which did not have the right to vote. Hence, the complaint for nullification of
the election is a direct action by petitioners, who were the members of the Board of
Directors of the corporation before the election, against respondents, who are the newlyelected Board of Directors. Under the circumstances, the derivative suit filed by petitioners
in behalf of the condominium corporation is improper. Legaspi Towers 300, Inc., vs. Muer
G.R. No. 170783, June 18, 2012.
A derivative suit is an action brought by a stockholder on behalf of the corporation to
enforce corporate rights against the corporations directors, officers or other insiders.
Under Sections 23 and 36 of the Corporation Code, the directors or officers, as provided
under the by-laws, have the right to decide whether or not a corporation should sue. Since
these directors or officers will never be willing to sue themselves or impugn their wrongful
and fraudulent decisions, stockholders are permitted by law to bring an action in the name
of the corporation to hold these directors and officers accountable. In derivative suits, the
real party in interest is the corporation while the stockholder is only a nominal party.
Section 1, Rule 8 of the Interim Rules imposes the following requirements for derivative
suits:
(1) The person filing the suit must be a stockholder or member at the time the acts or
transactions subject of the action occurred and the time the action was filed;
(2) He must have exerted all reasonable efforts, and alleges the same with particularity in
the complaint, to exhaust all remedies available under the articles of incorporation, by-laws,
laws or rules governing the corporation or partnership to obtain the relief he desires;
(3) No appraisal rights are available for the act or acts complained of; and
(4) The suit is not a nuisance or harassment suit.
The complaint filed by a stockholder to compel another stockholder to settle his share of the loan
because this will affect the financial viability of the corporation can not be considered as a
derivative suit because the loan was not a corporate obligation but a personal debt of the
stockholders. The fact that the stockholders attempted to constitute a mortgage over their share
in a corporate asset can not affect the corporation where the wordings of the mortgage agreement
reveal that it was signed by the stockholders in their personal capacity as the owners of the proindiviso share in the corporate property and not on behalf of the corporation. ANG, FOR AND IN BEHALF
OF SUNRISE MARKETING (BACOLOD), INC. V. SPS. ANG.G.R. No. 201675, June 19, 2013

5. Obligation of a Stockholder
6. Meetings
a. Regular or Special
i. When and Where
ii. Notice
b. Who Calls the Meetings
c. Quorum
Quorum is based on the totality of the shares which have been subscribed and issued,
whether it be founders shares or common shares. There is no gainsaying that the
contents of the articles of incorporation are binding, not only on the corporation, but
also on its shareholders. (Jesus V. Lanuza, et al.vs. Court of Appeals, et al., G.R. No.
131394, March 28, 2005)
d. Minutes of the Meetings
I. Capital Structure
1. Subscription Agreements
A subscription 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. Hence, a stockholder cannot, by himself, rescind a pre-subscription
contract. (Ong Yong, et al. vs. David S. Tiu, et al., G.R. No. 144476 & G.R. No. 144629,
April 8, 2003)
2. Consideration for Stocks
3. Shares of Stock
a. Nature of Stock
Upon the death of a shareholder, the heirs do not automatically become stockholders
of the corporation and acquire the rights and privileges of the deceased as shareholder
of the corporation. The stocks must be distributed first to the heirs in estate
proceedings, and the transfer of the stocks must be recorded in the books of the
corporation.(JoselitoMusni Puno vs. Puno Enterprises, Inc., represented by Jesusa Puno,
G.R. No. 177066, September 11, 2009)
The authority granted to a corporation to regulate the transfer of its stock does not
empower it to restrict the right of a stockholder to transfer his shares, but merely
authorizes the adoption of regulations as to the formalities and procedure to be
followed in effecting transfer. (Marsh Thomson vs. Court of Appeals and the American
Champer of Commerce of the Philippines, Inc,, G.R. No. 116631, October 28, 1998)

The registered owner of the shares of a corporation, even if they are sequestered by the
government through the PCGG, exercises the right and the privilege of voting on them.
The PCGG as a mere conservator cannot, as a rule, exercise acts of dominion by voting
these shares. The registered owner of sequestered shares may only be deprived of these
voting rights, and the PCGG authorized to exercise the same, only if it is able to establish
that (1) there is prima facie evidence showing that the said shares are ill-gotten and thus
belong to the State; and (2) there is an imminent danger of dissipation, thus
necessitating the continued sequestration of the shares and authority to vote thereupon
by the PCGG while the main issue is pending before the Sandiganbayan. (Trans Middle
East (Phils.) vs.Sandiganbayan, G.R. No. 172556, June 9, 2006)
The arrangement provided for in the by-laws of the Corporation whereby a lien is constituted
on the membership share to answer for dues, assessments and subsequent obligations to the
corporation cannot be upheld unless coupled by a corresponding pledge or chattel
mortgage agreement . Valley Golf and Country Club, Inc. v. Vda. De Caram, 585 SCRA 218
(2009)
A stock corporation is expressly granted the power to issue or sell stocks. The power to issue
stocks is lodged with the Board of Directors and no stockholders meeting is required to
consider it because additional issuances of stock ( unlike increase in capital stock ) does not
need approval of the stockholders. What is only required is the board resolution approving
the additional issuance of shares. The corporation shall also file the necessary application
with the SEC to exempt these from the registration requirements under the SRC. Majority of
Stockholders of Ruby Industrial Corporation vs Lim, GR No. 165887, June 6, 2011
Under the two-tiered test, the government, thru PCGG, may vote sequestered shares if there
is a prima facie evidence that the shares are ill-gotten and there is imminent danger of
dissipation of assets while the case is pending. However, the two- tiered test contemplates a
situation where the registered stockholders were in control and had been dissipating
company assets and the PCGG wanted to vote the sequestered shares to save the company.
It does not apply when the PCGG had voted the shares and is in control of the sequestered
corporation . Africa vs. Hon. Sandiganbayan , G.R. Nos. 172222/G.R. No. 174493/ G.R. No.
184636, November 11, 2013
Since the law does not prescribe a period for registration of shares in the books of the
corporation, the action to enforce the right to have it done does not begin until a demand
for it had been made and was refused. Africa vs. Hon. Sandiganbayan, ibid.
b. Subscription Agreements
A corporation has no power to release an original subscriber to its capital stock from the
obligation of paying for his shares, without a valuable consideration for such release;
and as against creditors a reduction of the capital stock can take place only in the
manner and under the conditions prescribed by the statute or the charter or the articles
of incorporation. Subscriptions to the capital of a corporation constitute a fund to which
creditors have a right to look for satisfaction of their claims and that the assignee in

insolvency can maintain an action upon any unpaid stock subscription in order to realize
assets for the payment of its debt. (Philippine National Bank vs.Bitulok Sawmill, Inc., et
al., G.R. Nos. L-24177-85, June 29, 1968)
c. Consideration for Shares of Stock
d. Watered Stock
i. Definition
ii. Liability of Directors for Watered Stocks
iii. Trust Fund Doctrine for Liability for Watered Stocks
e. Situs of the Shares of Stock
f. Classes of Shares of Stock
"Interest bearing stocks", on which the corporation agrees absolutely to pay interest
before dividends are paid to common stockholders, is legal only when construed as
requiring payment of interest as dividends from net earnings or surplus only. Clearly, the
respondent judge, in compelling the petitioner to redeem the shares in question and to
pay the corresponding dividends, committed grave abuse of discretion amounting to
lack or excess of jurisdiction in ignoring both the terms and conditions specified in the
stock certificate, as well as the clear mandate of the law.(Republic Planters Bank vs. Hon.
Enrique A. Agana, Sr., as Presiding Judge, Court of First Instance of Rizal, Branch XXVIII,
Pasay City, Robes-Francisco Realty & Development Corporation and Adalia F. Robes, G.R.
No. 51765, March 3, 1997)
4. Payment of Balance of Subscription
a. Call by Board of Directors
b. Notice Requirement
c. Sale of Delinquent Shares
i. Effect of Delinquency
At the root of the sale of delinquent stock is the non-payment of the subscription price
for the share of stock itself. The stockholder or subscriber has yet to fully pay for the
value of the share or shares subscribed. In this case, Clemente had already fully paid for
the share in Calatagan and no longer had any outstanding obligation to deprive him of
full title to his share. (Calatagan Golf Club, Inc. vs. Sixto Clemente, Jr., G.R. No. 165443,
April 16, 2009)
ii. Call by Resolution of the Board of Directors
iii. Notice of Sale
iv. Auction Sale and the Highest Bidder
5. Certificate of Stock
a. Nature of the Certificate

While shares of stock constitute personal property, they do not represent property of
the corporation. A share of stock only typifies an aliquot part of the corporation's
property, or the right to share in its proceeds to that extent when distributed according
to law and equity, but its holder is not the owner of any part of the capital of the
corporation.(Stockholders of F. Guanzon and Sons, Inc. vs.Register of Deeds of Manila,
G.R. No. L-18216, October 30, 1962)
A certificate of stock is the paper representative or tangible evidence of the stock itself
and of the various interests therein. The certificate is not stock in the corporation but is
merely evidence of the holder's interest and status in the corporation, his ownership of
the share represented thereby, but is not in law the equivalent of such ownership. It
expresses the contract between the corporation and the stockholder, but is not essential
to the existence of a share in stock or the nation of the relation of shareholder to the
corporation. (Alfonso S. Tan vs. Securities And Exchange Commission, G.R. No. 95696
March 3, 1992)
The certificate of stock itself once issued is a continuing affirmation or representation
that the stock described therein is valid and genuine and is at least prima facie evidence
that it was legally issued in the absence of evidence to the contrary. A mere typewritten
statement advising a stockholder of the extent of his ownership in a corporation without
qualification and/or authentication cannot be considered as a formal certificate of
stock.(Nora A. Bitongvs. Court of Appeals, et al., G.R. No. 123553, July 13, 1998)
b. Uncertificated Shares
c. Negotiability
i. Requirements for Valid Transfer of Stocks
The law is clear that in order for a transfer of stock certificate to be effective, the
certificate must be properly indorsed and that title to such certificate of stock is vested
in the transferee by the delivery of the duly indorsed certificate of stock. Since the
certificate of stock covering the questioned 1,500 shares of stock registered in the name
of the late Juan Chuidian was never indorsed to the petitioner, the inevitable conclusion
is that the questioned shares of stock belong to Chuidian. (Enrique Razon vs.
Intermediate Appellate Court and Vicente B. Chuidian, in his capacity as Administrator of
the Estate of the Deceased Juan T. Chuidian, G.R. No. 74306, 16 March 1992)
Where a stockholder executed a Special Power of Attorney in favor of his wife who, by
virtue of said SPA, sold the shares, the corporation cannot refuse to register the shares
in favor of the assignee on the ground that upon the death of the stockholder, the shares
of stock became the property of his estate which should be settled and liquidated first
before any distribution could be made. For the petitioner Rural Bank of Salinas to refuse
registration of the transferred shares in its stock and transfer book, which duty is
ministerial on its part, is to render nugatory and ineffectual the spirit and intent of
Section 63 of the Corporation Code. (Rural Bank of Salinas, Inc. vs. Securities and
Exchange Commission, et al., G.R. No. 96674, June 26, 1992)
Section 63 of the Corporation Code which provides that "no shares of stock against
which the corporation holds any unpaid claim shall be transferable in the books of the

corporation" does not include monthly dues. The term "unpaid claim" refers to "any
unpaid claim arising from unpaid subscription, and not to any indebtedness which a
subscriber or stockholder may owe the corporation arising from any other
transaction."(China Banking Corporation vs. Court of Appeals, and Valley Golf and
Country Club, Inc., G.R. No. 117604, March 26, 1997)
Section 63 of the Corporation Code strictly requires the recording of the transfer in the
books of the corporation, and not elsewhere, to be valid as against third parties. Thus,
the transfer of the subject certificate made by Dico to petitioner was not valid as to the
spouses Atinon, the judgment creditors, as the same still stood in the name of Dico, the
judgment debtor, at the time of the levy on execution. (Nemesio Garcia vs. Nicolas
Jomouad, Ex-Officio Provincial Sheriff of Cebu, and Spouses Jose Atinon& Sally Atinon,
G.R. No. 133969, 26 January 2000)
For a valid transfer of stocks, there must be strict compliance with the mode of transfer
prescribed by law. The requirements are: (a) There must be delivery of the stock
certificate; (b) The certificate must be endorsed by the owner or his attorney-in-fact or
other persons legally authorized to make the transfer; and (c) To be valid against third
parties, the transfer must be recorded in the books of the corporation. A deed of
assignment of shares without endorsement and delivery is binding only on the parties
and does not necessarily make the transfer effective as against the corporation.(The
Rural Bank of Lipa City, Inc., et al.vs. Honorable Court of Appeals, G.R. No. 124535,
September 28, 2001)
Without such recording, the transferee may not be regarded by the corporation as one
among its stockholders and the corporation may legally refuse the issuance of stock
certificates in the name of the transferee even when there has been compliance with
the requirements of Section 64 of the Corporation Code. The situation would be
different if the petitioner was himself the registered owner of the stock which he sought
to transfer to a third party, for then he would be entitled to the remedy of
mandamus.(Vicente C. Ponce vs. Alsons Cement Corporation, and Francisco M. Giron, Jr.,
G.R. No. 139802, December 10, 2002)
Section 63 of the Corporation Code provides that shares of stock so issued are personal
property and may be transferred by delivery of the certificate or certificates indorsed by
the owner or his attorney-in-fact or other person legally authorized to make the
transfer. The failure of the stockholder to deliver the stock certificate to the buyer within
a reasonable time the shares covered by the stock certificate should have been delivered
is a substantial breach that entitles the buyer to rescind the sale under Article 1191 of
the Corporation Code . It is not entirely correct to say the sale had already been
consummated as the buyer already enjoyed the rights a shareholder can exercise. The
enjoyment of these rights will not suffice where the law, by its express terms, requires a
specific form to transfer ownership. Fil-Estate Golf and Development vs. Vertex Sales and
Trading Inc., G.R. No. 202079, June 10, 2013
The Corporation whose shares of stock are the subject of a transfer transaction (through
sale, assignment, donation, or any other mode of conveyance) need not be a party to the

transaction, as may be inferred from the terms of Section 63 of the Corporation Code.
However, to bind the corporation as well as third parties, it is necessary that the transfer is
recorded in the books of the corporation. In a share purchase transaction, the parties are
the seller and buyer of the shares. Not being a party to the sale, the Corporation is in no
position to appeal the ruling rescinding the sale of the shares. If the Seller of the shares
filed no appeal against the court decision declaring the rescission of the sale, then the
rescission is deemed final despite any appeal by the corporation whose shares of stock are
the subject of the transfer transaction. Forest Hills Golf & Country Club vs. Vertex Sales
and Trading Inc.G.R. No. 202205, March 6, 2013.
d. Issuance
i. Full Payment
When a stockholder in a stock corporation subscribes to a certain number of shares but
does not pay the full amount for such shares, a certificate of stock shall still be issued to
him and he shall be entitled to vote the shares even though they are not fully paid. (Irineo
S. Baltazar vs. Lingayen Gulf Electric Power, Co., Inc., G.R. No. L-16236, June 30, 1965)
ii. Payment Pro-Rata
e. Lost or Destroyed Certificates
6. Stock and Transfer Book
a. Contents
A stock and transfer book is necessary as a measure of precaution, expediency and
convenience since it provides the only certain and accurate method of establishing the
various corporate acts and transactions and of showing the ownership of stock and like
matters. However, a stock and transfer book, like other corporate books and records, is
not in any sense a public record, and thus is not exclusive evidence of the matters and
things which ordinarily are or should be written therein. (Jesus V. Lanuza, et al.vs. Court
of Appeals, et al., G.R. No. 131394, March 28, 2005)
b. Who May Make Valid Entries
In the absence of any provision to the contrary, the corporate secretary is the custodian
of corporate records. The transferor, even though he may be the controlling stockholder
cannot take the law into his hands and cause himself the recording of the transfers of
the qualifying shares to his nominee-directors in the stock and transfer book of the
corporation.(Manuel A. Torres, Jr., (Deceased), et al. vs. Court of Appeals, et al., G.R. No.
120138, September 5, 1997)
7. Disposition and Encumbrance of Shares
a. Allowable Restrictions on the Sale of Shares
b. Sale of Partially Paid Shares

c. Sale of a Portion of Shares Not Fully Paid


d. Sale of All of Shares Not Fully Paid
e. Sale of Fully Paid Shares
f. Requisites of a Valid Transfer
g. Involuntary Dealings with Shares
J. Dissolution and Liquidation
An action to correct entries in the General Information Sheet of the Corporation; to be
recognized as a stockholder and to inspect corporate documents is an intra-corporate dispute
which does not constitute a continuation of corporate business. As such, pursuant to Section
145 of the Corporation Code, this action is not affected by the subsequent dissolution of the
corporation. The dissolution of the corporation simply prohibits it from continuing its business.
However, despite such dissolution, the parties involved in the litigation are still corporate
actors. The dissolution does not automatically convert the parties into total strangers or change
their intra-corporate relationships. Neither does it change or terminate existing causes of
action, which arose because of the corporate ties between the parties. Thus, a cause of action
involving an intra-corporate controversy remains and must be filed as an intra-corporate
dispute despite the subsequent dissolution of the corporation. Aguirre vs. FQB +7, Inc, GR No.
170770, January 9 2013.
1. Modes of Dissolution
a. Voluntary
i. Where No Creditors Are Affected
A resolution approved by the Board of Directors is not sufficient to dissolve a
corporation. The Corporation Code establishes the procedure and other formal
requirements a corporation needs to follow in case it elects to dissolve and terminate its
structure voluntarily and where no rights of creditors may possibly be prejudiced under
Section 118 which should have been strictly complied with by the members of the club.
(Teodoro B. Vesagas and Wilfred D. Asis vs. the Honorable Court of Appeals and
DelfinoRaniel and HelendaRaniel, G.R. No. 142924, December 5, 2001)
ii. Where Creditors Are Affected
iii. By Shortening of Corporate Term
b. Involuntary
i. By Expiration of Corporate Term
Upon the expiration of the period fixed in the articles of incorporation in the absence
of compliance with the legal requisites for the extension of the period, the corporation
ceases to exist and is dissolved ipso facto. There is no need for the institution of a
proceeding for quo warranto to determine the time or date of the dissolution of a
corporation because the period of corporate existence is provided in the articles of

incorporation. (Philippine National Bank vs.the Court of First Instance of Rizal, Pasig, et
al.,G.R. No. 63201, May 27, 1992)
ii. Failure to Organize and Commence Business Within 2 Years from Incorporation
iii. Legislative Dissolution
iv. Dissolution by the SEC on Grounds under Existing Laws
2. Methods of Liquidation
a. By the Corporation Itself
b. Conveyance to a Trustee within a Three-Year Period
The word "trustee" as used in the corporation statute must be understood in its general
concept which could include the counsel to whom was entrusted in the instant case, the
prosecution of the suit filed by the corporation. The purpose in the transfer of the assets
of the corporation to a trustee upon its dissolution is more for the protection of its
creditor and stockholders. (Carlos Gelano and Guillermina Mendoza De Gelano vs. the
Honorable Court of Appeals and Insular Sawmill, Inc., G.R. No. L-39050 February 24,
1981)
The trustee (of a dissolved corporation) may commence a suit which can proceed to final
judgment even beyond the three-year period of liquidation. No reason can be
conceived why a suit already commenced by the corporation itself during its existence,
not by a mere trustee who, by fiction, merely continues the legal personality of the
dissolved corporation, should not be accorded similar treatment to proceed to final
judgment and execution thereof. Indeed, the rights of a corporation that has been
dissolved pending litigation are accorded protection by Section 145 of the Corporation
Code which provides no right or remedy in favor of or against any corporation, its
stockholders, members, directors, trustees, or officers, nor any liability incurred by any
such corporation, stockholders, members, directors, trustees, or officers, shall be
removed or impaired either by the subsequent dissolution of said corporation or by any
subsequent amendment or repeal of this Code or of any part thereof. (Rene Knecht and
Knecht, Inc. vs. United Cigarette Corp., represented by Encarnacion Gonzales Wong, and
Eduardo Bolima, Sheriff, Regional Trial Court, Branch 151, Pasig City, G.R. No. 139370,
July 4, 2002)
c. By Management Committee or Rehabilitation Receiver
During rehabilitation receivership, the assets are held in trust for the equal benefit of all
creditors to preclude one from obtaining an advantage or preference over another by
the expediency of an attachment, execution or otherwise. For what would prevent an
alert creditor, upon learning of the receivership, from rushing posthaste to the courts to
secure judgments for the satisfaction of its claims to the prejudice of the less alert
creditors. (Alemar'sSibal& Sons, Inc. vs. Honorable Jesus M. Elbinias, in his capacity as the
Presiding Judge of Regional Trial Court, National Capital Region, Branch CXLI (141),
Makati, and G.A. Yupangco& Co., Inc., G.R. No. 75414 June 4, 1990)

The appointment of a receiver operates to suspend the authority of a corporation and


its directors and officers over its property and effects, such authority being reposed in
the receiver. Thus, a corporate officer had no authority to condone a debt. (Victor Yam
&Yek Sun Lent, doing business under the name and style of Philippine Printing Works vs.
the Court of Appeals and Manphil Investment Corporation, G.R. No. 104726, February 11,
1999)
d. Liquidation after Three Years
Although the cancellation of a corporations certificate of registration puts an end to its
juridical personality, Sec. 122 of the Corporation Code, however provides that a
corporation whose corporate existence is terminated in any manner continues to be a
body corporate for three years after its dissolution for purposes of prosecuting and
defending suits by and against it and to enable it to settle and close its affairs. Thus,
corporations whose certificate of registration was revoked by the SEC may still maintain
actions in court for the protection of its rights which includes the right to appeal.
(Paramount Insurance Corp. vs. A.C. Ordoez Corporation and Franklin Suspine, G.R. No.
175109, August 6, 2008)
To allow a creditors case to proceed independently of the liquidation case, a possibility
of favorable judgment and execution thereof against the assets of the distressed
corporation would not only prejudice the other creditors and depositors but would
defeat the very purpose for which a liquidation court was constituted as well. The
requirement that all claims against the bank be pursued in the liquidation proceedings
filed by the Central Bank is intended to prevent multiplicity of actions against the
insolvent bank and designed to establish due process and orderliness in the liquidation
of the bank, to obviate the proliferation of litigations and to avoid injustice and
arbitrariness. (Lucia Barramedavda. de Ballesteros vs. Rural Bank of Canaman,
Inc., represented by its liquidator, the Philippine Deposit Insurance Corporation, G.R.
No. 176260, November 24, 2010)
The executed releases, waivers and quitclaims are valid and binding upon the parties
notwithstanding the fact that these documents were signed six years after the
Corporations revocation of the Certificate of Incorporation. These documents are thus
proof that the employees had received their claims from their employer-corporation in
whose favor the release and quitclaim were issued. The revocation of the corporation
does not mean the termination of its liabilities to these employees. Section 122 of the
Corporation Code provides for a three-year winding up period for a corporation whose
charter is annulled by forfeiture or otherwise to continue as a body corporate for the
purpose, among others, of settling and closing its affairs As such, these liabilities are
obligations of the dissolved corporation and not of the corporation who contracted the
services of the dissolved corporation. Vigilla vs. Philippine College of Criminology, GR
No. 200094, June 10, 2013
K. Other Corporations
1. Close Corporations

a. Characteristics of a Close Corporation


A corporation does not become a close corporation just because a man and his wife own
98.86% of its subscribed capital stock; So too, a narrow distribution of ownership does
not, by itself, make a close corporation. The features of a close corporation under the
Corporation Code must be embodied in the Articles of Incorporation.(San Juan
Structural and Steel Fabricators, Inc. vs. Court of Appeals, Motorich Sales Corporation,
Nenita Lee Gruenberg, ACL Development Corp. and JNM Realty and Development Corp.,
G.R. No. 129459, September 29, 1998)
To the extent that the stockholders are actively engaged in the management or
operation of the business and affairs of a close corporation, the stockholders shall be
held to strict fiduciary duties to each other and among themselves. Said stockholders
shall be personally liable for corporate torts unless the corporation has obtained
reasonably adequate liability insurance. (Sergio F. Naguiat, doing business under the
name and style Sergio F. NaguiatEnt., Inc., & Clark Field Taxi, Inc. vs. National Labor
Relations Commission (Third Division), National Organization Of Workingmen and its
members, Leonardo T. Galang, et al., G.R. No. 116123, 13 March 1997)
b. Validity of Restrictions on Transfer of Shares
c. Issuance or Transfer of Stock in Breach of Qualifying Conditions
d. When Board Meeting is Unnecessary or Improperly Held
When a corporation is classified as a close corporation, a board resolution authorizing
the sale or mortgage of the subject property is not necessary to bind the corporation for
the action of its president. At any rate, corporate action taken at a board meeting
without proper call or notice in a close corporation is deemed ratified by the absent
director unless the latter promptly files his written objection with the secretary of the
corporation after having knowledge of the meeting which, in this case, petitioner failed
to do. (Manuel R.Dulay Enterprises, Inc., VirgilioE. Dulay AndNepomucenoRedovanvs. the
Honorable Court of Appeals, G.R. No. 91889 August 27, 1993)
e. Pre-Emptive Right
f. Amendment of Articles of Incorporation
g. Deadlocks
2. Non-Stock Corporations
a. Definition
b. Purposes
c. Treatment of Profits
d. Distribution of Assets upon Dissolution
The second paragraph of Section 108 of the Corporation Code, although setting the
term of the members of the Board of Trustees at five years, contains a proviso expressly
subjecting the duration to what is otherwise provided in the articles of incorporation or
by-laws of the educational corporation. In AUPs case, its amended By-Laws provided
that members of the Board of Trustees were to serve a term of office of only two years;

and the officers, who included the President, were to be elected from among the
members of the Board of Trustees during their organizational meeting, which was held
during the election of the Board of Trustees every two years. Naturally, the officers,
including the President, were to exercise the powers vested by Section 2 of the amended
By-Laws for a term of only two years, not five years. (PetroniloJ. Barayuga vs. Adventist
University of the Philippines, through its Board of Trustees, represented by its Chairman,
Nestor D. Dayson, G.R. No. 168008, August 17, 2011)
Section 89 of the Corporation Code pertaining to non-stock corporations which
provides that "the right of the members of any class or classes (of a non-stock
corporation) to vote may be limited, broadened or denied to the extent specified in the
articles of incorporation or the by-laws," is an exception to Section 6 of the same code
where it is provided that "no share may be deprived of voting rights except those
classified and issued as preferred or redeemable shares, unless otherwise provided in
this Code." The stipulation in the By-Laws providing for the election of the Board of
Directors by districts is a form of limitation on the voting rights of the members of a nonstock corporation as recognized under the aforesaid Section 89. (Rev. Luis Ao-as, et al.
vs. Hon. Court of Appeals, G.R. No. 128464, June 20, 2006)
3. Religious Corporations - Exclude
4. Foreign Corporations
a. Bases of Authority over Foreign Corporations
i. Consent
ii. Doctrine of Doing Business (related to definition under the Foreign Investments
Act, R.A. No. 7042)
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. Since the contract between petitioner and NMC involved the purchase of
molasses by petitioner from NMC, it was NMC, the domestic corporation, which derived
income from the transaction and not petitioner. To constitute doing business, the
activity undertaken in the Philippines should involve profit-making.(Cargill, Inc. vs. Intra
Strata Assurance Corporation, G.R. No. 168266, March 15, 2010)
Participating in the bidding process constitutes doing business because it shows the
foreign corporations intention to engage in business in the Philippines. The bidding for
the concession contract is but an exercise of the corporations reason for creation or
existence. (Hutchison Ports Philippines Limitedvs.Subic Bay Metropolitan Authority,
International Container Terminal Services Inc., Royal Port Services, Inc. and the Executive
Secretary, G.R. No. 131367, August 31, 2000)
A contract entered into by a foreign corporation not licensed to do business in the
Philippines is not void even as against the erring foreign corporation. The lack of
capacity at the time of the execution of the contracts was cured by the subsequent
registration. (The Home Insurance Company vs.Eastern Shipping Lines, G.R. No. L-34382
July 20, 1983)

The appointment of a distributor in the Philippines is not sufficient to constitute doing


business unless it is under the full control of the foreign corporation. 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. (Steelcase, Inc. vs. Design
International Selections, Inc., G.R. No. 171995, April 18, 2012)
b. Necessity of a License to Do Business
The primary purpose of the license requirement is to compel a foreign corporation
desiring to do business within the Philippines to submit itself to the jurisdiction of the
courts of the state and to enable the government to exercise jurisdiction over them for
the regulation of their activities in this country. If a foreign corporation operates a
business in the Philippines without a license, and thus does not submit itself to Philippine
laws, it is only just that said foreign corporation be not allowed to invoke them in our
courts when the need arises. (Ibid.)
i. Requisites for Issuance of a License
ii. Resident Agent
c. Personality to Sue
The following principles governing a foreign corporations right to sue in local courts
have long been settled, to wit: a) if a foreign corporation does business in the Philippines
without a license, it cannot sue before the Philippine courts; b) if a foreign corporation
is not doing business in the Philippines, it needs no license to sue before Philippine
courts on an isolated transaction or on a cause of action entirely independent of any
business transaction; and c) if a foreign corporation does business in the Philippines with
the required license, it can sue before Philippine courts on any transaction. Apparently,
it is not the absence of the prescribed license but the doing (of) business in the
Philippines without such license which debars the foreign corporation from access to
our courts. (MR Holdings, Ltd.vs. Sheriff Carlos P. Bajar, Sheriff Ferdinand M. Jandusay,
Solidbank Corporation, and Marcopper Mining Corporation, G.R. No. 138104, April 11,
2002)
A party is estopped from challenging the personality of a corporation after having
acknowledged the same by entering into a contract with it. The principle is applied to
prevent a person contracting with a foreign corporation from later taking advantage of
its noncompliance with the statutes, chiefly in cases where such person has received the
benefits of the contract. (Global Business Holdings, Inc. vs. Surecomp Software, B.V., G.R.
No. 173463, October 13, 2010)
d. Suability of Foreign Corporations
e. Instances When Unlicensed Foreign Corporations May Be Allowed to Sue Isolated
Transactions

A foreign corporation doing business in the Philippines may sue in Philippine Courts
although not authorized to do business in the Philippines against a Philippine citizen or
entity who had contracted with and benefited by said corporation. (Steelcase, Inc. vs.
Design International Selections, Inc., G.R. No. 171995, April 18, 2012)
f. Grounds for Revocation of License
L. Mergers and Consolidations
1. Definition and Concept
In the merger of two or more existing corporations, one of the combining corporations
survives and continues the combined business, while the rest are dissolved and all their
rights, properties and liabilities are acquired by the surviving corporation. (Associated
Bank vs. Court of Appeals and Lorenzo Sarmiento, Jr., G.R. No. 123793, June 29, 1998)
There are two types of corporate acquisitions: asset sales and stock sales. In asset sales, the
corporate entity sells all or substantially all of its assets to another entity. In stock sales, the
individual or corporate shareholders sell a controlling block of stock to new or existing
shareholders.
In asset sales, the rule is that the seller in good faith is authorized to dismiss the affected
employees, but is liable for the payment of separation pay under the law. The buyer in good
faith, on the other hand, is not obliged to absorb the employees affected by the sale, nor is
it liable for the payment of their claims. The most that it may do, for reasons of public policy
and social justice, is to give preference to the qualified separated personnel of the selling
firm.
In contrast with asset sales, in which the assets of the selling corporation are transferred to
another entity, the transaction in stock sales takes place at the shareholder level. Because
the corporation possesses a personality separate and distinct from that of its shareholders,
a shift in the composition of its shareholders will not affect its existence and continuity.
Thus, notwithstanding the stock sale, the corporation continues to be the employer of its
people and continues to be liable for the payment of their just claims. Furthermore, the
corporation or its new majority shareholders are not entitled to lawfully dismiss corporate
employees absent a just or authorized cause.
The fact that there was a change in the composition of its shareholders did not affect the
employer-employee relationship between the employees and the corporation, because an
equity transfer affects neither the existence nor the liabilities of a corporation. Thus, the
corporation continued to be the employer of the corporations employees notwithstanding
the equity change in the corporation. This outcome is in line with the rule that a corporation
has a personality separate and distinct from that of its individual shareholders or members,
such that a change in the composition of its shareholders or members would not affect its
corporate liabilities.

In this case, the corporate officers and directors who induced the employees to resign with
the assurance that they would be rehired by the new management are personally liable to
the employees who were not actually rehired. However, the officer who did not participate
in the termination of employment and persons who participated in the unlawful termination
of employment but are not directors and officers of the corporation are not personally
liable. SME BANK INC, vs. GASPAR, G.R. No. 186641, October 8, 2013
Where the purchase and sale of identified assets between two companies under a Purchase
and Sale Agreement does not constitute a merger, the seller and the purchaser are
considered entities different from one another. Thus, the purchaser company can not be
held liable for the payment of deficiency documentary stamp tax against the seller
company. Commission of Internal Revenue vs, Bank of Commerce, GR No. 180529, November
25, 2013
2. Constituent vs. Consolidated Corporation
In consolidation, all the constituents are dissolved and absorbed by the new
consolidated enterprise, while in merger, all constituents, except the surviving
corporation, are dissolved. The surviving or consolidated corporation assumes
automatically the liabilities of the dissolved corporations, regardless of whether the
creditors have consented or not to such merger or consolidation. (John F. McLeod
vs.National Labor Relations Commission (First Division), et al., G.R. No. 146667, January
23, 2007)
3. Plan of Merger or Consolidation
4. Articles of Merger or Consolidation
5. Procedure
6. Effectivity
A merger is not effective unless it has been approved by the Securities and Exchange
Commission. (Philippine National Bank & National Sugar Development Corporation vs.
Andrada Electric & Engineering Company, G.R. No. 142936, April 17, 2002)
The issuance of the certificate of merger is crucial because not only does it bear out
SECs approval but it also marks the moment when the consequences of a merger take
place. By operation of law, upon the effectivity of the merger, the absorbed corporation
ceases to exist but its rights and properties, as well as liabilities, shall be taken and
deemed transferred to and vested in the surviving corporation.(Mindanao Savings and
Loan Association, Inc., represented by its Liquidator, the Philippine Deposit Insurance
Corporation vs. Edward Willkom; Gilda Go; RemediosUy; MalayoBantuas, in his capacity
as the Deputy Sheriff of Regional Trial Court, Branch 3, Iligan City; and the Register of
Deeds of Cagayan de Oro City, G.R. No. 178618, October 11, 2010)
7. Limitations

8. Effects
Although there is a dissolution of the absorbed corporations, there is no winding up of
their affairs or liquidation of their assets, because the surviving corporation
automatically acquires all their rights, privileges and powers, as well as their liabilities.
The fact that the promissory note was executed after the effectivity date of the merger
does not militate against petitioner because the agreement itself clearly provides that
all contracts -- irrespective of the date of execution -- entered into in the name of the
absorbed corporation shall be understood as pertaining to the surviving bank, herein
petitioner. (Associated Bank vs. Court of Appeals and Lorenzo Sarmiento, Jr.,G.R. No.
123793, June 29, 1998)
It is more in keeping with the dictates of social justice and the State policy of according
full protection to labor to deem employment contracts as automatically assumed by the
surviving corporation in a merger, even in the absence of an express stipulation in the
articles of merger or the merger plan. By upholding the automatic assumption of the
non-surviving corporations existing employment contracts by the surviving corporation
in a merger, the Court strengthens judicial protection of the right to security of tenure
of employees affected by a merger and avoids confusion regarding the status of their
various benefits which were among the chief objections of our dissenting colleagues.
(Bank of the Philippine Islands vs. BPI Employees Union-Davao Chapter-Federation Of
Unions In Bpi Unibank, G.R. No. 164301, October 19, 2011)
Citytrust, therefore, upon service of the notice of garnishment and its acknowledgment
that it was in possession of defendants' deposit accounts became a "virtual party" to or
a "forced intervenor" in the civil case. As such, it became bound by the orders and
processes issued by the trial court despite not having been properly impleaded therein.
Consequently, by virtue of its merger with BPI , the latter, as the surviving corporation,
effectively became the garnishee, thus the "virtual party" to the civil case. Bank of
Philippine Islands v. Lee, G.R. No. 190144, August 1, 2012
VII. Securities Regulation Code (R.A. No. 8799)
A. State Policy, Purpose
The rise and fall of stock market indices reflect to a considerable degree the state of the
economy. Securities transactions are impressed with public interest, and are thus subject
to public regulation; in particular, the laws and regulations requiring payment of traded
shares within specified periods are meant to protect the economy from excessive stock
market speculations, and are thus mandatory. (Abacus Securities Corporation vs. Ruben
Ampil, G.R. No. 160016, February 27, 2006)
B. Securities Required to be Registered
The issuance of checks for the purpose of securing a loan to finance the activities of the
corporation is well within the ambit of a valid corporate act. It is one thing for a
corporation to issue checks to satisfy isolated individual obligations, and another for a
corporation to execute an elaborate scheme where it would comport itself to the public

as a pseudo-investment house and issue postdated checks instead of stocks or


traditional securities to evidence the investments of its patrons. (Betty Gabionza and
Isabelita Tan vs. Court of Appeals, G.R. No. 161057, September 12, 2008)
Corporate registration is just one of the several requirements before a corporation may
deal with timeshares. Prior to fulfillment of all the other requirements under the
Securities Regulation Code, a corporation is absolutely proscribed from dealing with
unregistered timeshares. (Timeshare Realty vs. Cesar Lao, G.R. No. 158941, February 11,
2008)
For an investment contract to exist, the following elements, referred to as the Howey
test must concur: (1)a contract, transaction, or scheme; (2)an investment of money;
(3)investment is made in a common enterprise; (4) expectation of profits; and (5)profits
arising primarily from the efforts of others. Network marketing, a scheme adopted by
companies for getting people to buy their products where the buyer can become a
down-line seller, who earns commissions from purchases made by new buyers whom he
refers to the person who sold the product to him, is not an investment contract.
(Securities and Exchange Commission vs. Prosperity.Com, Inc., G.R. No. 164197, January
25, 2012)
A person is liable for violation of Section 28 of the SRC where, acting as a broker, dealer
or salesman is in the employ of a corporation which sold or offered for sale unregistered
securities in the Philippines. The transaction initiated by the investment consultant of a
corporation is an investment contract or participation in a profit sharing agreement that
falls within the definition of lawan investment in a common venture premised on a
reasonable expectation of profits to be derived from the entrepreneurial or managerial
efforts of others. (Securities and Exchange Commission vs. Oudine Santos, G.R. No.
195542, March 19, 2014)
1. Exempt Securities
The exemption from registration of the securities issued by banking or financial
institutions provided under the law does not imply that petitioner as a listed
corporation, is also exempt from complying with the reportorial requirements. (Union
Bank of the Philippines vs. Securities and Exchange Commission, G.R. No. 138949, June 6,
2001)
2. Exempt Transactions
Under the ruling issued by the SEC, an issuance of previously authorized but still
unissued capital stock may, in a particular instance, be held to be an exempt transaction
by the SEC under Section 6(b) so long as the SEC finds that the requirements of
registration under the Revised Securities Act are "not necessary in the public interest
and for the protection of the investors" by reason, inter alia, of the small amount of stock
that is proposed to be issued or because the potential buyers are very limited in number
and are in a position to protect themselves. (Nestle Philippines, Inc. vs. Court of Appeals,
G.R. No. 86738, November 13, 1991)

C. Procedure for Registration of Securities


D. Prohibitions of Fraud, Manipulation and Insider Trading
The trading contract signed by the parties is a contract for the sale of products for future
delivery, in which either seller or buyer may elect to make or demand delivery of goods
agreed to be bought and sold, but where no such delivery is actually made. The written
trading contract in question is not illegal but the transaction between the parties
purportedly to implement the contract is in the nature of a gambling agreement; it is
not buying and selling and is illegal as against public policy. (Onapal Philippines
Commodities, Inc. vs. Court of Appeals, G.R. No. 90707, February 1, 1993)
1. Manipulation of Security Prices
2. Short Sales
3. Fraudulent Transactions
4. Insider Trading
The term insiders now includes persons whose relationship or former relationship to
the issuer gives or gave them access to a fact of special significance about the issuer or
the security that is not generally available, and one who learns such a fact from an insider
knowing that the person from whom he learns the fact is such an insider. Insiders have
the duty to disclose material facts which are known to them by virtue of their position
but which are not known to persons with whom they deal and which, if known, would
affect their investment judgment. (Securities and Exchange Commission vs. Interport
Resources Corporation, et. al., G.R. No. 135808, October 6, 2008)
E. Protection of Investors
A public company, as contemplated by the SRC is not limited to a company whose
shares of stock are publicly listed; even companies whose shares are offered only to a
specific group of people, are considered a public company, provided they fall under
Subsec. 17.2 of the SRC, which provides: any corporation with a class of equity securities
listed on an Exchange or with assets of atleast 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. Philippine
Veterans Bank meets the requirements and as such, is subject to the reportorial
requirements for the benefit of its shareholders. (Philippine Veterans Bank v. Callangan,
in her capacity Director of the Corporation Finance Department of the Securities and
Exchange Commission and/or the Securities and Ex-change Commission, G.R. No.
191995, August 3, 2011)
1. Tender Offer Rule
A tender offer is an offer by the acquiring person to stockholders of a public company
for them to tender their shares; it gives the minority shareholders the chance to exit the

company under reasonable terms, giving them the opportunity to sell their shares at the
same price as those of the majority shareholders. The mandatory tender offer is still
applicable even if the acquisition, direct or indirect, is less than 35% when the purchase
would result in ownership of over 51% of the total outstanding equity securities of the
public company. (Cemco Holdings, Inc. vs. National Life Insurance Company of the
Philippines, G.R. No. 171815, August 7, 2007)
2. Rules on Proxy Solicitation
The right of stockholder to vote by proxy is generally established by the
Corporation Code, but it is the SRC which specifically regulates the form and use of
proxies, more particularly proxy solicitation, a procedure that antecedes proxy
validation. When proxies are solicited in relation to the election of corporate directors,
the resulting controversy, even if it ostensibly raised the violation of the SEC rules on
proxy solicitation, should be properly seen as an election controversy within the original
and exclusive jurisdiction of the trial courts. (GSIS vs. Court of Appeals, G.R. No. 183905,
April 16, 2009)
3. Disclosure Rule
Section 27 (SRC) penalizes an insiders misuse of material and non-public information
about the issuer, for the purpose of protecting public investors; Section 26 widens the
coverage of punishable acts, which intend to defraud public investors through various
devices, misinformation and omissions. Section 23 imposes upon (1) a beneficial owner
of more than ten percent of any class of any equity security or (2) a director or any officer
of the issuer of such security, the obligation to submit a statement indicating his or her
ownership of the issuers securities and such changes in his or her ownership thereof.
(Securities and Exchange Commission vs. Interport Resources Corporation, et. al., G.R. No.
135808, October 6, 2008)
Under the law, what is required to be disclosed is a fact of special significance which
may be (a) a material fact which would be likely, on being made generally available, to
affect the market price of a security to a significant extent, or (b) one which a reasonable
person would consider especially important in determining his course of action with
regard to the shares of stock. (Securities and Exchange Commission vs. Interport
Resources Corporation, et. al., G.R. No. 135808, October 6, 2008)
F. Civil Liability
Under Section 62 of the SRC, no action shall be maintained to enforce any liability
created under Section 56 of the SRC ( False registration statement ) and Section 57 (
sale of unregistered security and liabilities arising in connection with prospectus,
communication and other reports ) unless brought within two ( 2 ) years after discovery
of the untrue statement or omission or after the viola-tion upon which it is based but not
more than five ( 5 ) years after the security was bona fide offered to the public or more
than 5 years after the sale, respectively. The prescriptive periods under the mentioned
sections pertain only to the civil liability in cases of violations of the SRC and not to

criminal liability under the same violations. (Citibank N.A. vs. Tanco-Gabaldon, et al. G.R.
No. 198444, September 4, 2013)
Civil suits falling under the SRC (like liability for selling unregistered securities ) are
under the exclusive original jurisdiction of the RTC and hence, need not be first filed
before the SEC, unlike criminal cases wherein the latter body exercises primary
jurisdiction. (Jose U. Pua vs. Citibank, N. A. G.R. No. 180064, September 16, 2013)
VIII. Banking Laws
A. The New Central Bank Act (R.A. No. 7653)
1. State Policies
2. Creation of the Bangko Sentral ng Pilipinas (BSP)
3. Responsibility and Primary Objective
The BSP, through the Monetary Board, is the government agency charged with the
responsibility of administering the monetary, banking and credit system of the country
and is granted the power of supervision and examination over banks and non-bank
financial institutions performing quasi-banking functions, including savings and loan
associations. It is empowered to conduct investigations and examine the records of
savings and loan associations where, upon discovery of any irregularity, the Monetary
Board may impose appropriate sanctions. (Romeo Busuego vs. Court of Appeals, G.R. No.
95326, March 11, 1999)
The Bangko Sentral shall have supervision over, and conduct periodic or special
examinations of, banking institutions and quasi-banks, including their subsidiaries and
affiliates engaged in allied activities. When the complaint filed by a stockholder of the
bank pertains to the banks alleged engaging in unsafe, unsound, and fraudulent
banking practices, more particularly, acts that violate the prohibition on self-dealing, it
is clear that the acts complained of pertain to the conduct of banking business, hence,
jurisdiction lies with the BSP (Monetary Board). (Ana Maria Koruga vs. Teodoro Arcenas,
Jr., G.R. No. 168332/ G.R. No. 169053, June 19, 2009)
4. Monetary BoardPowers and Functions
The Monetary Board, is vested with exclusive authority to assess, evaluate and
determine the condition of any bank, and finding such condition to be one of insolvency,
or that its continuance in business would involve a probable loss to its depositors or
creditors, forbid bank or non-bank financial institution to do business in the Philippines;
and shall designate an official of the BSP or other competent person as receiver to
immediately take charge of its assets and liabilities. When the complaint filed by a
stockholder of the bank pertains to the alleged unsafe and unsound banking practices,
the authority to determine the existence of such is with the Monetary Board. (Ana Maria
Koruga vs. Teodoro Arcenas, Jr., G.R. No. 168332/ G.R. No. 169053, June 19, 2009)

The actions of the Monetary Board under Sec. 29 and 30 of RA 7653, which pertain to
the power to appoint a conservator or a receiver for a bank, 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. Hence, the issuance by the RTC of writs of preliminary
injunction is an unwarranted interference with the powers of the Monetary Board. (BSP
Monetary Board vs. Hon. Antonio-Valenzuela, G.R. No. 184778, October 2, 2009)
5. How the BSP handles Banks in Distress
a. Conservatorship
The Monetary Board, upon finding that the bank failed to put up the required capital to
restore its solvency, prohibited a bank from doing business and instructed the Acting
Superintendent of Banks to take charge of the assets of the bank. When by reason of
this prohibition, only a portion of the loan approved by the bank was released to its
debtor, it also follows that the bank, in exercising its right to foreclose the real estate
mortgage, can only foreclose up to the extent of the amount it released. (Central Bank
of the Philippines vs. Court of Appeals, G.R. No. L-45710 October 3, 1985)
The following requisites must be present before the order of conservatorship may be set
aside by a court: 1) The appropriate pleading must be filed by the stockholders of record
representing the majority of the capital stock of the bank in the proper court; 2) Said
pleading must be filed within ten (10) days from receipt of notice by said majority
stockholders of the order placing the bank under conservatorship; and 3) There must be
convincing proof, after hearing, that the action is plainly arbitrary and made in bad faith.
(Central Bank of the Philippines vs. Court of Appeals, G.R. No. 88353, May 8, 1992)
The authority of the conservator under the Central Bank Law is limited to acts of
administration; the conservator merely takes the place of the banks board of directors
and as such, the former cannot perform acts the latter cannot do. Hence, the
conservator cannot revoke a contract of sale of a property acquired by the bank entered
into by a bank officer even though the price agreed upon is no longer reflective of the
fair market value of the property by reason of its appreciation of value over time. (First
Philippine International Bank vs. Court of Appeals, G.R. No. 115849, January 24, 1996)
b. Closure
The express representations made by the Central Bank that it would support the bank
and avoid its liquidation if the latters stockholders would execute a voting trust
agreement turning over the management of the bank to the CB and mortgage or assign
their properties to CB should not be disregarded. Under the rule of promissory estoppel,
the Central Bank cannot thereafter refuse to comply with its representations after the
undertaking has been complied with by the bank. (Emerito Ramos vs. Central Bank of the
Philippines, G.R. No. L-29352, October 4, 1971)
The closure and liquidation of a bank may be considered an exercise of police power.
Nonetheless, the validity of such exercise of police power is subject to judicial inquiry

and could be set aside if it is either capricious, discriminatory, whimsical, arbitrary,


unjust, or a denial of due process and equal protection clauses of the
Constitution. (Central Bank vs. Court of Appeals, G.R. L-50031-32, July 27, 1981)
The claim that the Central Bank, by suspending the banking operations, had made it
impossible for the bank to pay its debts, or the further claim that it had fallen into a
"distressed financial situation," cannot in any sense excuse it from its obligation to remit
the time deposits of its depositors which matured before the banks closure. (Overseas
Bank of Manila vs. Court of Appeals, G.R. No. L-45866, April 19, 1989)
The Central Bank Act vests authority upon the Central Bank and Monetary Board to take
charge and administer the monetary and banking system of the country and this
authority includes the power to examine and determine the financial condition of banks
for purposes provided for by law, such as for the purpose of closure on the ground of
insolvency stated in Section 29 of the Central Bank Act. Nonetheless, the authority given
must not be exercised arbitrarily such as to prematurely conclude that a bank is insolvent
if the basis for such conclusion is lacking and insufficient. (Banco Filipino Savings and
Mortgage Bank vs. Central Bank, G.R. No. 70054, December 11, 1991)
Under R.A. No. 265, an examination is required to be made before the Monetary Board
could issue a closure order; however, under R.A. No. 7653, prior notice and hearing are
no longer required and a report made by the head of the supervising and examining
department suffices for a bank to be closed and placed under receivership. The purpose
of the law is to make the closure of the bank summary and expeditious for the protection
of the public interest. (Rural Bank of San Miguel vs. Monetary Board, G.R. No. 150886,
February 16, 2007)
Under the close now, hear later principle, the BSP can impose the sanction of closure
upon a bank even without prior notice and hearing, which is grounded on practical and
legal considerations to prevent unwarranted dissipation of the banks assets and as a
valid exercise of police power to protect the depositors, creditors, stockholders, and the
general public. The remedy of the closed bank is a subsequent one, which will
determine whether the closure of the bank was attended by grave abuse of discretion.
(BSP Monetary Board vs. Hon. Antonio-Valenzuela, G.R. No. 184778, October 2, 2009)
c. Receivership
The Monetary Board, upon finding that the bank failed to put up the required capital to
restore its solvency, prohibited a bank from doing business and instructed the Acting
Superintendent of Banks to take charge of the assets of the bank. When by reason of
this prohibition, only a portion of the loan approved by the bank was released to its
debtor, it also follows that the bank, in exercising its right to foreclose the real estate
mortgage, can only foreclose up to the extent of the amount it released. (Central Bank
of the Philippines vs. Court of Appeals, G.R. No. L-45710, October 3, 1985)
As a rule, the execution of a judgment cannot be stayed. However, in the present case,
the respondent bank was placed under receivership and to execute the judgment would
unduly deplete the assets of respondent bank; moreover, the assets of the insolvent

banking institution are held in trust for the equal benefit of all creditors, and after its
insolvency, one cannot obtain an advantage or a preference over another by an
attachment, execution or otherwise. (Spouses Romeo Lipana and Milagros Lipana vs.
Development Bank of Rizal, G.R. No. 73884, September 24, 1987)
When a bank is placed under receivership, the appointed receiver is tasked to take
charge of the banks assets and properties and the scope of the receivers power is
limited to acts of administration. The receivers act of approving the exclusive option to
purchase granted by the banks president is beyond the authority of the former and as
such, it cannot be considered a valid approval. (Abacus Real Estate Development Center,
Inc. vs. Manila Banking Corp., G.R. No. 162270, April 06, 2005)
The Monetary Board may forbid a bank from doing business and place it under
receivership without prior notice and hearing it the MB finds that a bank: (a) is unable
to pay its liabilities as they become due in the ordinary course of business; (b) has
insufficient realizable assets to meet liabilities; (c) cannot continue in business without
involving probable losses to its depositors and creditors; and (d) has willfully violated a
cease and desist order of the Monetary Board for acts or transactions which are
considered unsafe and unsound banking practices and other acts or transactions
constituting fraud or dissipation of the assets of the institution. (Alfeo D. Vivas, vs.
Monetary Board and PDIC, G.R. No. 191424, August 7, 2013)
d. Liquidation
Resolutions of the Monetary Board with regard to handling banks in distress such as
appointing a receiver to take charge of the bank's assets and liabilities; or determining
whether the banking institutions may be rehabilitated, or should be liquidated and
appointing a liquidator towards this end are by law final and executory. Nonetheless,
the same may be set aside by the court upon proof that the action is plainly arbitrary and
made in bad faith, which may be asserted as an affirmative defense or a counterclaim in
the proceeding for assistance in liquidation. (Apollo M. Salud vs. Central Bank of the
Philippines, G.R. No. L-17620, August 19, 1986)
The pendency of the case questioning the validity of foreclosure did not diminish
thepowers and authority of the designated liquidator to effectuate and carry on the
administration of the bank. As such, the liquidator has the authority to resist or defend
suits instituted against the bank by its debtors and creditors; it likewise has the authority
to bring actions for foreclosure of mortgages executed by debtors in favor of the bank.
(Banco Filipino Savings and Mortgage Bank vs. Central Bank, G.R. No. 70054, December
11, 1991)
The court shall have jurisdiction in the same proceedings to adjudicate disputed claims
against the bank and enforce individual liabilities of the stockholders and do all that is
necessary to preserve the assets of such institution and to implement the liquidation
plan approved by the Monetary Board. Hence, all claims against the insolvent bank
should be filed in the liquidation proceeding and it is not necessary that a claim be
initially disputed in a court or agency before it is filed with the liquidation court. (Jerry
Ong vs. Court of Appeals, G.R. No. 112830, February 1, 1996)

The rule that all claims against a bank must be filed in the liquidation proceedings does
not apply to actions filed by the bank itself for the preservation of its assets and
protection of its property, such as a petition for the issuance of a Writ of Possession
instituted by the bank itself. Moreover, a bank ordered closed by the Monetary Board
retains its personality which can sue and be sued through its liquidator. (Domingo
Manalo vs. Court of Appeals, G.R. No. 141297, October 8, 2001)
A bank, which is previously declared in default for failing to file an answer in a case filed
by another bank cannot rely on the rule that a bank placed under receivership is not
liable to pay interest and penalty on its loan accounts with another bank. By not
bothering to file a motion for reconsideration, the bank is now precluded from relying
on the rule with regard to payment of interests when a bank has been placed under
receivership because to do so would render nugatory the order of default issued by the
court. (Rural Bank of Sta. Catalina vs. Land Bank of the Philippines, G.R. No. 148019, July
26, 2004)
As a rule, bank deposits are not preferred credits. However, when the deposits covered
by a cashiers check were purchased from a bank at the time when it was already
insolvent, the purchase is entitled to preference in the assets of the bank upon its
liquidation by reason of the fraud in the transaction. (Leticia G. Miranda vs. Philippine
Deposit Insurance Corporation, G.R. No. 169334, September 8, 2006)
6. How the BSP Handles Exchange Crisis
a. Legal Tender Power
b. Rate of Exchange
B. Law on Secrecy of Bank Deposits (R.A. No. 1405, as amended)
1. Purpose
R.A. No. 1405 hopes to discourage private hoarding and at the same time encourages
the people to deposit their money in banking institutions, so that it may be utilized by
way of authorized loans and thereby assist in economic development. The absolute
confidentiality rule in R.A. No. 1405 actually aims to give protection from unwarranted
inquiry or investigation if the purpose of such inquiry or investigation is merely to
determine the existence and nature, as well as the amount of the deposit in any given
bank account. (BSB Group, Inc. vs. Sally Go, G.R. No. 168644, February 16, 2010)
2. Prohibited Acts
In a case where the money paid by an insurance company for treasury bills was deposited
in a bank account, the examination of the said bank account is prohibited under R.A. No.
1405 by reason of the fact that the subject matter of the action filed by the insurance
company against the seller of the treasury bills is the failure to deliver the treasury bills,
not the money deposited. (Oate vs. Abrogar, G.R. No. 107303, February 23, 1995)

When a collecting bank sued the drawee bank because the latter had erroneously
undercoded the amount of the check it presented for clearing, the collecting bank
cannot be allowed to examine the account of the drawer of the check absent any
showing that the money in the said account is the subject matter of litigation. The action
filed by the collecting bank is not for the recovery of the money contained in the deposit
but for the recovery of the money from the drawee bank as a result of the latters alleged
failure to inform the former of the discrepancy. (Union Bank of the Philippines vs. Court
of Appeals, G.R. No. 134699, December 23, 1999)
3. Deposits Covered
When the account subject of the complaint is in the foreign currency, such complaint
filed for violation of R.A. No. 1405 did not toll the running of the prescriptive period to
file the appropriate complaint for violation of R.A. No. 6426. The Law on Secrecy of
Bank Deposits (R.A. No. 1405) covers deposits under the Philippine Currency; a separate
and distinct law governs deposits under the foreign currency (R.A. No. 6426). (Intengan
vs. Court of Appeals, G.R. No. 128996, February 15, 2002)
The deposits covered by the law on secrecy of bank deposits should not be limited to
those creating a creditor-debtor relationship; the law must be broad enough to include
deposits of whatever nature which banks may use for authorized loans to third persons.
R.A. No. 1405 extends to funds invested such as those placed in a trust account which
the bank may use for loans and similar transactions. (Ejercito vs. Sandiganbayan, G.R.
Nos. 157294-95, November 30, 2006)
4. Exceptions
When pursuant to a court order garnishing the depositors funds, a bank complied by
delivering in check the amount garnished to the sheriff, the bank cannot be held liable
to its depositor. There is no violation of the law on secrecy of bank deposits when the
bank had no choice but to comply with the court order for delivery of the garnished
amount. (RCBC vs. De Castro, G.R. No. L-34548, November 29, 1988)
One of the exceptions under R.A. No. 1405 is when a court order is issued for the
disclosure of bank deposits in a case where the money deposited is the subject matter
of litigation. When the subject matter is the money the bank transmitted by mistake,
an inquiry to the whereabouts of the amount extends to whatever concealed by being
held or recorded in the name of the persons other than the one responsible for the
illegal acquisition. (Mellon Bank, N.A. vs. Magsino, G.R. No. 71479, October 18, 1990)
The law on secrecy of bank deposits cannot be used to preclude the bank deposits from
being garnished for the satisfaction of a judgment. There is no violation of R.A. No. 1405
because the disclosure is purely incidental to the execution process and it was not the
intention of the legislature to place bank deposits beyond the reach of the judgment
creditor. (PCIB vs. Court of Appeals, G.R. No. 84526, January 28, 1991)
In a case for violation of the Anti-Graft and Corrupt Practices Act, the Ombudsman can
only examine bank accounts upon compliance with the following requisites: there is a

pending case before a court of competent jurisdiction; the account must be clearly
identified, and the inspection must be limited to the subject matter of the pending case;
the bank personnel and the account holder must be informed of the examination; and
such examination must be limited to the account identified in the pending case. If there
is no pending case yet but only an investigation by the Ombudsman, any order for the
examination of the bank account is premature. (Marquez vs. Desierto, G.R. No. 135882,
June 27, 2001; Office of the Ombudsman vs. Ibay, G. R. No. 137538, September 3, 2001)
One of the exceptions under R.A. 1405 is when the inquiry into the bank deposits is
premised on the fact that the money deposited in the account is itself the subject of the
action. Such is not the case when the respondent was charged with qualified theft and
when the attempt of inquiry serves no other purpose but to establish the existence of
such account, its nature and the amount kept in it. (BSB Group, Inc. vs. Sally Go, G.R. No.
168644, February 16, 2010)
In case the bank complies with the provisions of the law and the unclaimed balances are
eventually escheated to the Republic, the bank shall not thereafter be liable to any
person for the same. However, when the managers check was never negotiated or
presented for payment to the bank, the procurer of the check retained ownership of the
funds; hence, proper notice should have been given to the latter for compliance with
the law. (Rizal Commercial Banking Corporation vs. Hi-Tri Development Corporation, 672
SCRA 514 (2012))
5. Garnishment of Deposits, Including Foreign Deposits
The law on secrecy of bank deposits cannot be used to preclude the bank deposits from
being garnished for the satisfaction of a judgment. There is no violation of R.A. No. 1405
because the disclosure is purely incidental to the execution process and it was not the
intention of the legislature to place bank deposits beyond the reach of the judgment
creditor. (PCIB vs. Court of Appeals, G.R. No. 84526, January 28, 1991)
A foreign transient who raped a minor, escaped and was made liable for damages to the
victim cannot invoke the exemption from court process of foreign currency deposits
under R.A. No. 6426. The garnishment of his foreign currency deposit should be allowed
by reason of equity and to prevent injustice; moreover, the purpose of the law is to
encourage foreign currency deposits and not to benefit a wrongdoer. (Salvacion vs.
Central Bank of the Philippines, G.R. No. 94723, August 21, 1997)
C. General Banking Law of 2000 (R.A. No. 8791)
1. Definition and Classification of Banks
When a corporation loans out the money obtained from almost 60,000 savings account
deposits opened by the public with the said corporation, it is clear that these
transactions partake the nature of banking, as defined by the law. Accordingly, the
corporation has violated the law by engaging in banking without securing the
administrative authority required in R.A. No. 337. (Republic of the Philippines vs. Security
Credit and Acceptance Corporation, G.R. No. L-20583, January 23, 1967)

2. Distinction of Banks from Quasi-Banks and Trust Entities


Transactions involving purchase of receivables at a discount, well within the purview of
investing, reinvesting or trading in securities, which as investment company is
authorized to perform, does not constitute a violation of the General Banking Act. In
this case, the funds supposedly lent have not been shown to have been obtained from
the public by way of deposits, hence, it cannot be said that the investment company was
engaged in banking. (Teodoro Baas vs. Asia Pacific Finance Corporation, G.R. No.
128703, October 18, 2000)
R.A. No. 8791 or the General Banking Law of 2000 provided that banks shall refer to entities
engaged in the lending of funds obtained in the form of deposits. Financial intermediaries, on the
other hand, are defined as persons or entities whose principal functions include the lending,
investing or placement of funds or evidences of indebtedness or equity deposited with them,
acquired by them, or otherwise coursed through them, either for their own account or for the
account of others; pawnshops fall under this category. (First Planters Pawnshop, Inc. vs.
Commissioner of Internal Revenue, G.R. No. 174134, July 30, 2008)
3. Bank Powers and Liabilities
a. Corporate Powers
An alien-owned commercial bank is allowed to purchase and hold real estate conveyed
to it in satisfaction of debts previously contracted in the course of its dealings such as
loans and other similar transactions. The civil liability arising from the criminal offense
committed by the banks former employee is not a debt contracted in the course of a
banks dealings and thus, the transfer made by the employee is not allowed. (Register of
Deeds of Manila vs. China Banking Corporation, 4 SCRA 1145 (1962))
Banks are entities engaged in the lending of funds obtained through deposits from the
public and it is for this reason that their viability depends largely on their ability to return
those deposits on demand. In this case, when the borrower is proven to have committed
fraud by altering and falsifying its financial statements in order to obtain its credit
facilities, the bank has the right to annul any credit accommodation or loan, and demand
the immediate payment thereof. (Banco de Oro-EPCI, Inc. vs. JAPRL Development
Corporation, G.R. No. 179901, April 14, 2008)
b. Banking and Incidental Powers
An investment management agreement, which created a principal-agent relationship
between petitioners as principals and respondent as agent for investment purposes, is
not a trust or an ordinary bank deposit; hence, no trustor-trustee-beneficiary or even
borrower-lender relationship existed.
Banks may legally exercise investment
management activities but the Monetary Board may regulate such operations to insure
that said operations do not endanger the interests of the depositors and other creditors
of the banks. (Spouses Raul and Amalia Panlilio vs. Citibank, N.A., G.R. No. 156335,
November 28, 2007)

4. Diligence Required of BanksRelevant Jurisprudence


In every case, the depositor expects the bank to treat his account with the utmost
fidelity, whether such account consists only of a few hundred pesos or of millions; the
bank must record every single transaction accurately, down to the last centavo, and as
promptly as possible. When the banks negligence caused the dishonor of the checks
issued by its client, which eventually resulted to the latters embarrassment and financial
loss, the bank should be held liable for damages. (Simex International (Manila) Inc. vs.
Court of Appeals, 183 SCRA 360 (1990))
In the absence of any stipulation, the depositarys responsibility for the safekeeping of
the objects deposited would require the diligence of a good father of a family; hence,
any stipulation exempting the depositary from any liability arising from the loss of the
things deposited on account of fraud, negligence or delay would be void for being
contrary to law and public policy. The banks negligence in failing to notify the depositor
aggravated the injury or damage to the stamp collection which was inundated by
floodwaters, thus, the bank should be held liable. (Luzan Sia vs. Court of Appeals, G.R.
No. 102970, May 13, 1993)
The degree of diligence required of banks, which should be more than that of a good
father of a family is grounded on the fiduciary nature of the relationship between the
bank and its depositors on account of the banks obligation as a depositary of its clients
deposits. Nevertheless, in a sale and issuance of foreign exchange demand draft, the
same degree of diligence is not required because the nature of the transaction does not
involve the banks fiduciary relationship with its depositors. (Gregorio Reyes vs. Court of
Appeals, G.R. No. 118492, August 15, 2001)
When the bank teller has failed to return the passbook to its owner or to the authorized
representative of the depositor, the bank is presumed to have failed to exercise and
observe a higher degree of diligence required of it, which makes it liable for the damage
done to the depositor. However, the banks liability can be mitigated by the depositors
contributory negligence when the latter allowed a signed withdrawal slip to fall into the
hands of an unauthorized person. (Consolidated Bank and Trust Corporation vs. Court of
Appeals, G.R. No. 138569, September 11, 2003)
Allowing the pretermination of the account despite noticing discrepancies in the
signature and photograph of the person claiming to be the depositor, accompanied by
the failure to surrender the original certificate of time deposit, amounted to negligence
on the part of the bank. A bank that fails to exercise the degree of diligence required
of it becomes liable for damages. (Citibank, N.A. vs. Spouses Luis & Carmelita
Cabamongan, G.R. No. 146918, May 2, 2006)
No less than the highest degree of diligence is required of banks by reason of the fact
that the banking business is impressed with public interest. Banks are expected to treat
the accounts of its depositors with meticulous care, hence, when checks are encashed
by the employees of the bank without the necessary documents, any loss resulting from

the transactions should be borne by the bank by reason of its negligence. (Philippine
Savings Bank vs. Chowking Food Corporation, G.R. No. 177526, July 4, 2008)
A bank that regularly processes checks that are neither payable to the customer nor duly
indorsed by the payee is apparently grossly negligent in its operations. The degree of
responsibility, care and trustworthiness expected of the banks employees and officials
is far greater than those of ordinary clerks and employees; thus, the banks are expected
to exercise the highest degree of diligence in the selection and supervision of their
employees. (Philippine National Bank vs. Erlando T. Rodriguez, et. al., G.R. No. 170325,
September 26, 2008)
The fiduciary relationship between the bank and the depositor means that the banks
obligation to observe high standards of integrity and performance is deemed written
into every deposit agreement between a bank and its depositor. When the bank failed
to perform a routine verification of the signature affixed in the cash transfer slip, the
bank should be held liable for a withdrawal made by an unauthorized agent of the
depositor. (Central Bank of the Philippines vs. Citytrust Banking Corporation, G.R. No.
141835, February 4, 2009)
When the drawee bank pays a person other than the payee named on the check, it does
not comply with the terms of the check and violates its duty to charge the drawers
accounts only for properly payable items. In disregarding established banking rules and
regulations, the bank was clearly negligent, thus, should be made liable. (Bank of
America, NT and SA vs. Associated Citizens Bank, G.R. No. 141018, May 21, 2009)
The premature debiting of the postdated check by the bank which resulted to
insufficiency of funds that brought about the dishonor of two checks, which caused the
electric supply to be cut-off and affected business operations, indicates the negligence
of the bank. For its failure to exercise extra-ordinary diligence, which is required of
banks, it should be made liable. (Equitable PCI Bank vs. Arcelito B. Tan, G.R. No. 165339,
August 23, 2010)
A banking institution serving as an originating bank for the Unified Home Lending
Program (UHLP) of the Government owes a duty to observe the highest degree of
diligence and a high standard of integrity and performance in all its transactions with its
clients because its business is imbued with public interest. (Comsavings Bank vs. Spouses
Danilo and Estrella Capistrano, G.R. No. 170942, August 28, 2013)
As a business affected with public interest and by reason of the nature of its functions,
the bank is under obligation to treat the accounts of its depositors with meticulous care,
always having in mind the fiduciary nature of their relationship. A bank that mismanages
the trust accounts of its client cannot benefit from the inaccuracies of the reports
resulting therefrom; it cannot impute the consequence of its negligence to the client
which resulted to miscrediting of funds. (Land Bank of the Philippines vs. Emmanuel
Oate, G.R. No. 192371, January 15, 2014)
The mortgagee, as a banking institution, owed it to Guaria Corporation to exercise the
highest degree of diligence, as well as to observe the high standards of integrity and

performance in all its transactions because its business was imbued with public interest.
The bank failed in its duty by prematurely foreclosing the mortgages and unwarrantedly
causing the foreclosure sale of the mortgaged properties despite the mortgagor not
being yet in default. (Development Bank of the Philippines vs. Guaria Agricultural and
Realty Development Corporation, G.R. No. 160758, January 15, 2014)
5. Nature of Bank Funds and Bank Deposits
The fiduciary nature of a bank-depositor relationship does not convert the contract
between the bank and its depositors from a simple loan to a trust agreement, whether
express or implied; hence, failure by the bank to pay the depositor is failure to pay a
simple loan, and not a breach of trust. The law simply imposes on the bank a higher
standard of integrity and performance in complying with its obligations under the
contract of simple loan, beyond those required of non-bank debtors under a similar
contract of simple loan. (Consolidated Bank and Trust Corporation vs. Court of Appeals,
G.R. No. 138569, September 11, 2003)
6. Stipulation on Interests
A banking institution which has been declared insolvent and subsequently ordered
closed by the Central Bank of the Philippines cannot be held liable to pay interest on
bank deposits which accrued during the period when the bank is actually closed and
non-operational. However, the bank is still liable for the interest on bank deposits which
accrued up to the date of its closure. (Fidelity Savings and Mortgage Bank vs. Hon. Pedro
Cenzon, G.R. No. L-46208, April 5, 1990)
When the stipulation on the interest rate is void, it is as if there was no express contract
thereon; hence, courts may reduce the interest rate as reason and equity demand, which
would depend on the circumstances of each case. In the present case, the fact that
petitioner made partial payments makes the stipulated penalty charge of 3% per month
or 36% per annum, in addition to regular interests, iniquitous and unconscionable.
(Ileana Macalinao vs. Bank of the Philippine Islands, G.R. No. 175490, September 17,
2009)
Section 78 of the General Banking Act requires payment of the amount fixed by the
court in the order of execution, with interest thereon at the rate specified in the
mortgage contract, which shall be applied for the one-year period reckoned from the
date of registration of the certificate of sale. Nonetheless, when the period to exercise
the right of redemption was effectively extended beyond one year, it is only fair and just
to require the payment of 12% interest per annum beyond the one-year period up to
the date of consignment of the redemption price with the RTC. (Heirs of Estelita BurgosLipat namely: Alan B. Lipat and Alfredo B. Lipat, Jr. vs. Heirs of Eugenio D. Trinidad namely:
Asuncion R. Trinidad, et. al., G.R. No. 185644, March 2, 2010)
The General Banking Act applies insofar as the redemption price is concerned, when the
mortgagee is a bank and the latter cannot dictate or alter the terms of redemption by
imposing additional charges and including other loans. The foreclosure and sale of the
mortgaged property extinguishes the mortgage indebtedness; hence, the bank can no

longer invoke its provisions or even refer to the 18% annual interest charged in the
promissory note, an obligation allegedly covered by the terms of the Contract. (Asia
Trust Development Bank vs. Carmelo H. Tuble, G.R. No. 183987, July 25, 2012)
The CB Circular No. 905 merely suspended the effectivity of the Usury Law, thereby
allowing the parties to freely stipulate on the rate of interest. Nonetheless, the lifting of
the ceilings for interest rates does not authorize stipulations charging excessive,
unconscionable, and iniquitous interest. (Advocates for Truth in Lending vs. BSP, G.R. No.
192986, January 15, 2013)
7. Grant of Loans and Security Requirements
a. Ratio of Net Worth to Total Risk Assets
b. Single Borrowers Limit
c. Restrictions on Bank Exposure to DOSRI (Directors, Officers, Stockholders and their
Related Interests
Under the law on DOSRI transactions, the following elements must be present to
constitute a violation: 1) the offender is a director or officer of any banking institution;
2) the offender, either directly or indirectly, for himself or as representative or agent of
another, borrows from the bank, becomes a guarantor, indorser, or surety or becomes
in any manner an obligor for money borrowed from bank or loaned by it; 3) the offender
has performed any of such acts without the written approval of the majority of the
directors of the bank, excluding the offender, as the director concerned. The language
of the law is broad enough to encompass either the act of borrowing or guaranteeing,
or both. (Jose C. Go vs. BSP, G.R. No. 178429, October 23, 2009)
The law on DOSRI transactions imposes three restrictions: a) the approval requirement,
which refers to the written approval of the majority of the banks board of directors,
excluding the director concerned; b) the reportorial requirement, which mandates that
the approval should be entered upon the records of the corporation, and a copy of the
entry be transmitted to the appropriate supervising department; and c) the ceiling
requirement, which limits the amount of credit accommodations to an amount
equivalent to the respective outstanding deposits and book value of the paid-in capital
contribution in the bank. Failure to observe the three requirements constitutes
commission of three separate and different offenses. (Jose C. Go vs. BSP, G.R. No.
178429, October 23, 2009)
The rule on DOSRI transactions covers loans by a bank director or officer which are made
either: (1) directly, (2) indirectly, (3) for himself, (4) or as the representative or agent of
others. The bank officers act of indirectly securing a fraudulent loan application by
using the name of an unsuspecting person and without prior compliance with the
requirements of the law would make the officer liable not only for violation of the law
on DOSRI transactions but also for estafa through falsification of commercial
documents. (Hilario P. Soriano vs. People of the Philippines, et. al., G.R. No. 162336,
February 1, 2010)

There must be competent evidence to establish that the loans granted were in the
nature of DOSRI or were issued in violation of the Single Borrowers Limit; nonetheless,
even assuming that they were of such nature, the loans would not be void for that reason.
Instead, the bank or the officers responsible for the approval and grant of the DOSRI
loan would be subject to sanctions under the law. (Republic of the Philippines vs.
Sandiganbayan, et. al., G.R. No. 166859/G.R. No. 169203/G.R. No. 180702, April 12,
2011)
IX. Intellectual Property Code (Exclude Implementing Rules & Regulations)
A. Intellectual Property Rights in General
1. Intellectual Property Rights
2. Differences between Copyrights, Trademarks and Patent
A trademark is any visible sign capable of distinguishing the goods (trademark) or
services (service mark) of an enterprise and shall include a stamped or marked container
of goods; a trade name refers to the name or designation identifying or distinguishing
an enterprise. Copyright is confined to literary and artistic works which are original
intellectual creations in the literary and artistic domain protected from the moment of
their creation. On the other hand, 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. (Pearl & Dean (Phil.), Inc. vs. Shoemart, Inc., G.R. No. 148222,
August 15, 2003)
3. Technology Transfer Arrangements
B. Patents
1. Patentable Inventions
A utility model is a technical solution to a problem in any field of human activity which
is new and industrially applicable; it may be, or may relate to, a product, or process, or
an improvement of any of the aforesaid. Being plain automotive spare parts that must
conform to the original structural design of the components they seek to replace, the
Leaf Spring Eye Bushing and Vehicle Bearing Cushion are not ornamental; they lack the
decorative quality or value that must characterize authentic works of applied art and in
actuality, they are utility models, useful articles, albeit with no artistic design or value.
(Jessie Ching vs. William Salinas, et. al., G.R. No. 161295, June 29, 2005)
2. Non-Patentable Inventions
3. Ownership of a Patent
a. Right to a Patent

When petitioner never secured a patent for the light boxes, it therefore acquired no
patent rights which could have protected its invention. The ultimate goal of a patent
system is to bring new designs and technologies into the public through disclosure;
hence, ideas, once disclosed to the public without protection of a valid patent, are
subject to appropriation without significant restraint. (Pearl & Dean (Phil.), Inc. vs.
Shoemart, Inc., G.R. No. 148222, August 15, 2003)
b. First-to-File Rule
c. Inventions Created Pursuant to a Commission
d. Right of Priority
4. Grounds for Cancellation of a Patent
5. Remedy of the True and Actual Inventor
6. Rights Conferred by a Patent
The tiles produced from respondents process are suitable for construction and
ornamentation, which previously had not been achieved by tiles made out of the old
process of tile making; therefore, the said invention having brought about a new and
useful kind of tile, the patent is legally issued. With this, the act of making, using and
selling tiles embodying said patented invention constitute infringement. (Domiciano
Aguas vs. Conrado De Leon, G.R. No. L-32160, January 30, 1982)
The validity of the patent issued by the Philippine Patent Office and the question over
the inventiveness, novelty and usefulness of the improved model of the LPG burner are
matters which are better determined by the Patent Office. There is a presumption that
the Philippine Patent Office has correctly determined the patentability of the model
and such action must not be interfered with in the absence of competent evidence to
the contrary. (Manzano vs. Court of Appeals, G.R. No. 113388, September 5, 1997)
There can be no infringement of a patent until a patent has been issued, since whatever
right one has to the invention covered by the patent arises alone from the grant of
patent. A patent gives the inventor the right to exclude all others from making, using or
selling his invention. (Creser Precision Systems, Inc. vs. Court of Appeals, G.R. No. 118708,
February 2, 1998)
When the language of its claims is clear and distinct, the patentee is bound thereby and
may not claim anything beyond them. the language of Letter Patent No. 14561 fails to
yield anything at all regarding Albendazole and no extrinsic evidence had been adduced
to prove that Albendazole inheres in petitioners patent in spite of its omission
therefrom or that the meaning of the claims of the patent embraces the same. (Smith
Kline Beckman Corporation vs. Court of Appeals, G.R. No. 126627, August 14, 2003)
The patent law has a three-fold purpose: first, it seeks to foster and reward invention;
second, it promotes disclosure of inventions to stimulate further innovation and to
permit the public to practice the invention once the patent expires; and 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 and it is only after an exhaustive
examination by the patent office that patent is issued. Not having gone through the
arduous examination for patents, petitioner cannot exclude others from the
manufacture, sale or commercial use of the light boxes on the sole basis of its copyright
certificate over the technical drawings. (Pearl & Dean (Phil.), Inc. vs. Shoemart, Inc., G.R.
No. 148222, August 15, 2003)
A patentee shall have the exclusive right to make, use and sell the patented machine,
article or product, and to use the patented process for the purpose of industry or
commerce, throughout the territory of the Philippines for the term of the patent; and
such making, using, or selling by any person without the authorization of the patentee
constitutes infringement of the patent. The patentees exclusive rights exist only during
the term of the patent, hence, after the cut-off date, the exclusive rights no longer exist
and the temporary restraining order can no longer be issued in its favor. (Phil.
Pharmawealth, Inc. vs. Pfizer, Inc., G.R. No. 167715, November 17, 2010)
7. Limitations of Patent Rights
a. Prior User
b. Use by the Government
8. Patent Infringement
a. Tests in Patent Infringement
i.

Literal Infringement

To determine whether the particular item falls within the literal meaning of the patent
claims, the court must juxtapose the claims of the patent and the accused product within
the overall context of the claims and specifications, to determine whether there is exact
identity of all material elements. Viewed from any perspective or angle, the power tiller
of the defendant is identical and similar to that of the turtle power tiller of plaintiff in
form, configuration, design, appearance, and even in the manner of operation. (Pascual
Godines vs. Court of Appeals, G.R. No. 97343, September 13, 1993)
ii. Doctrine of Equivalents
Under the doctrine of equivalents, there is infringement if two devices do the same work
in substantially the same way, and accomplish substantially the same result, even though
they differ in name, form, or shape. The reason for the doctrine of equivalents is that to
permit the imitation of a patented invention which does not copy any literal detail would
be to convert the protection of the patent grant into a hollow and useless thing. (Pascual
Godines vs. Court of Appeals, G.R. No. 97343, September 13, 1993)
The doctrine of equivalents provides that an infringement takes place when a device
appropriates a prior invention by incorporating its innovative concept and, although
with some modification and change, performs substantially the same function in
substantially the same way to achieve substantially the same result; it requires

satisfaction of the function-means-and-result test. In this case, while both compounds


have the effect of neutralizing parasites in animals, identity of result does not amount
to infringement of patent unless Albendazole operates in substantially the same way or
by substantially the same means as the patented compound, even though it performs
the same function and achieves the same result. (Smith Kline Beckman Corporation vs.
Court of Appeals, G.R. No. 126627, August 14, 2003)
b. Defenses in Action for Infringement
An invention must possess the essential elements of novelty, originality and precedence
and for the patentee to be entitled to protection, the invention must be new to the
world. When a patent is sought to be enforced, the questions of invention, novelty or
prior use, and each of them, are open to judicial examination; in cases of infringement
of patent no preliminary injunction will be granted unless the patent is valid and
infringed beyond question and the record conclusively proves the defense is sham.
(Rosario Maguan vs. Court of Appeals, G.R. L-45101, November 28, 1986)
9. Licensing
a. Voluntary
b. Compulsory
10. Assignment and Transmission of Rights
C. Trademarks
A "trademark" is any word, name, symbol, emblem, sign or device or any combination
thereof adopted and used by a manufacturer or merchant to identify his goods and
distinguish them from those manufactured, sold or dealt in by others; it is any visible sign
capable of distinguishing goods. The trademark is not merely a symbol of origin and
goodwill; it is often the most effective agent for the actual creation and protection of
goodwill. (Pribhdas J. Mirpuri vs. Court of Appeals, G.R. No. 114508, November 19, 1999)
1. Definition of Marks, Collective Marks, Trade Names
2. Acquisition of Ownership of Mark
The name and container of a beauty cream product are proper subjects of a trademark
inasmuch as the same falls squarely within its definition. In order to be entitled to
exclusively use the same in the sale of the beauty cream product, the user must
sufficiently prove that she registered or used it before anybody else did. The petitioners
copyright and patent registration of the name and container would not guarantee her
the right to the exclusive use of the same for the reason that they are not appropriate
subjects of the said intellectual rights. (Elidad C. Kho, doing business under the name and
style of KEC Cosmetics Laboratory vs. Court of Appeals, et. al., G.R. No. 115758, March
19, 2002)

Even if the registration of a mark is prevented with the filing of an earlier application for
registration, this must not, however, be interpreted to mean that ownership should be
based upon an earlier filing date. While RA 8293 removed the previous requirement of
proof of actual use prior to the filing of an application for registration of a mark, proof
of prior and continuous use is necessary to establish ownership of a mark, which
constitutes sufficient evidence to oppose the registration of a mark. (E.Y. Industrial Sales
vs. Shien Dar Electricity and Machinery Co. , G.R. No. 184850, 20 October 2010)
The cancellation of registration of a trademark has the effect of depriving the registrant
of protection from infringement from the moment the judgment or order of
cancellation has become final. Accordingly, a distributor has no right to the registration
of the disputed trademarks since the right to register a trademark is based on ownership.
An exclusive distributor who employs the trademark of the manufacturer does not
acquire proprietary rights of the manufacturer, and a registration of the trademark by
the distributor as such belongs to the manufacturer, provided the fiduciary relationship
does not terminate before application for registration is filed. (Superior Commercial
Enterprises, Inc. vs. Kunnan Enterprises Ltd. and Sports Concept & Distributor, Inc., G.R.
No. 169974, April 20, 2010)
It is not the application or registration of a trademark that vests ownership thereof, but
it is the ownership of a trademark that confers the right to register the same.
Registration merely creates a prima facie presumption of the validity of the registration,
of the registrants ownership of the trademark, and of the exclusive right to the use
thereof; it is rebuttable, thus, it must give way to evidence to the contrary. (Birkenstock
Orthopaedie Gmbh and Co. Kg vs. Philippine Shoe Expo Marketing Corporation, G.R. No.
194307, November 20, 2013)
3. Acquisition of Ownership of Trade Name
4. Non-Registrable Marks
5. Prior Use of Mark as a Requirement
6. Tests to Determine Confusing Similarity between Marks
Both Berris (D-10 80 WP) and Abyadangs mark (NS D-10 PLUS) have D-10 as a
common component, which also happened to be the dominant feature of Berris mark.
In applying both the dominancy test and holistic test, the likelihood of confusion is
present considering the fact that both marks pertain to the same type of goods; both
products use the same type of material for the packaging and have identical color
schemes. Considering these striking similarities, the buyers of both products, mainly
farmers, may be misled into thinking that NS D-10 PLUS could be an upgraded
formulation of the D-10 80 WP; hence, Berris properly opposed Abyadangs
application for registration. (Berris Agricultural Co., Inc. vs. Norvy Abyadang, G.R. No.
183404, October 13, 2010)
A resort to either the Dominancy Test or the Holistic Test shows that colorable imitation
exists between respondent's "Gold Toe" and petitioner's "Gold Top." An examination of

the products in question shows that their dominant features are gold checkered lines
against a predominantly black background and a representation of a sock with a
magnifying glass; in addition, both products use the same type of lettering; both also
include a representation of a man's foot wearing a sock and the word "linenized" with
arrows printed on the label; lastly, the names of the brands are similar -- "Gold Top" and
"Gold Toe." (Amigo Manufacturing, Inc. vs. Cluett Peabody Co., Inc., G.R. No. 139300,
March 14, 2001)
a. Dominancy Test
The word MASTER, the dominant feature of the opposers mark, is neither generic nor
descriptive and as such, it cannot be invalidated as a trademark. When the term
MASTER has acquired a certain connotation to mean the coffee products MASTER
ROAST and MASTER BLEND produced by Nestle, the use by the CFC of the term
MASTER in the trademark for its coffee product FLAVOR MASTER is likely to cause
confusion or mistake or even deception of the ordinary purchasers. (Societe Des Produits
Nestle, S.A. vs. Court of Appeals and CFC Corporation, G.R. No. 112012, April 4, 2001)
Respondents have adopted in "Big Mak" not only the dominant but also almost all the
features of "Big Mac." Applied to the same food product of hamburgers, with both marks
aurally and visually the same, it will likely result in confusion in the public mind.
(McDonalds Corporation vs. L.C. Big Mak Burger, Inc., G.R. No. 143993, August 18, 2004)
With the predominance of the letter "M," and prefixes "Mac/Mc" found in both marks,
the inevitable conclusion is there is confusing similarity between the trademarks Mc
Donalds marks and "MACJOY AND DEVICE" especially considering the fact that both
marks are being used on almost the same products falling under Classes 29 and 30 of
the International Classification of Goods i.e. Food and ingredients of food. In this case,
the common awareness or perception of customers that the trademarks McDonalds
mark and MACJOY & DEVICE are one and the same, or an affiliate, or under the
sponsorship of the other is not far-fetched. (McDonalds Corporation vs. Macjoy Fastfood
Corporation, G.R. No. 166115, February 2, 2007)
Both the words PYCNOGENOL and PCO-GENOLS have the same suffix GENOL which
appears to be merely descriptive and furnish no indication of the origin of the article
and hence, open for trademark registration by the plaintiff thru combination with
another word or phrase such as PYCNOGENOL. Although there were dissimilarities in
the trademark due to the type of letters used as well as the size, color and design
employed on their individual packages/bottles, still the close relationship of the
competing products name in sounds as they were pronounced, clearly indicates that
purchasers could be misled into believing that they are the same and/or originates from
a common source and manufacturer. (Prosource International, Inc. vs. Horphag Research
Management SA, G.R. No. 180073, November 25, 2009)
In applying the dominancy test, both confusion of goods and confusion of business were
apparent in both trademarks as the mark Dermaline Dermaline, Inc. is confusingly
similar with the registered trademark Dermalin. Dermalines stance that its product
belongs to a separate and different classification from Myras products with the

registered trademark does not eradicate the possibility of mistake on the part of the
purchasing public to associate the former with the latter, especially considering that
both classifications pertain to treatments for the skin. (Dermaline, Inc. Vs. Myra
Phamaceuticals, Inc., G.R. No. 190065, August 1, 2010)
NANNY is confusingly similar to NAN, the prevalent feature of Nestles line of infant
powdered milk products which is is written in bold letters and used in all products. The
first three letters of NANNY are exactly the same as the letters of NAN and when
NAN and NANNY are pronounced, the aural effect is confusingly similar. (Soceite
Des Produits Nestle, S.A. vs. Dy, Jr., G.R. No. 172276, August 8, 2010)
The Dominancy Test focuses on the similarity of the prevalent or dominant features of
the competing trademarks that might cause confusion, mistake, and deception in the
mind of the purchasing public. Respondents use of the stylized S in its Strong rubber
shoes infringes on the mark of the petitioner as it is the dominant feature of the latters
trademark; the likelihood of confusion is present as purchasers may associate the
respondents product as connected with petitioners business. (Sketchers USA vs. Inter
Pacific Industrial Trading Corporation, GR No. 164321, March 28, 2011)
b. Holistic Test
The similarities of the competing trademarks in this case are completely lost in the
substantial differences in the design and general appearance of their respective hang
tags. The trademarks FRUIT OF THE LOOM and FRUIT FOR EVE do not resemble each
other as to confuse or deceive an ordinary purchaser, who must be thought of as having,
and credited with, at least a modicum of intelligence to be able to see the obvious
differences between the two trademarks in question. (Fruit of the Loom, Inc. vs. Court of
Appeals, G.R. No. L-32747, November 29, 1984)
In applying the holistic test, petitioners trademark, STYLISTIC MR. LEE, which pertains
to jeans, should be considered as a whole. The test of fraudulent simulation is to be
found in the likelihood of the deception of some persons in some measure acquainted
with an established design and desirous of purchasing the commodity with which that
design has been associated. When the casual buyer is predisposed to be more cautious
in his purchase, as in this case where the products concerned are not inexpensive, the
likelihood of confusion is absent. (Emerald Garment Manufacturing Corporation vs.
Court of Appeals, G.R. No. 100098, December 29, 1995)
The application of the holistic test entails a consideration of the entirety of the marks
as applied to the products, including the labels and packaging, in determining confusing
similarity. Although the perceived offending word MARK is itself prominent in
petitioners trademarks MARK VII and MARK TEN, the entire marking system should
be considered as a whole and not dissected, because a discerning eye would focus not
only on the predominant word but also on the other features appearing in the labels;
only then would such discerning observer draw his conclusion whether one mark would
be confusingly similar to the other and whether or not sufficient differences existed
between the marks. (Philip Morris, Inc. vs. Fortune Tobacco Corporation, G.R. No.
158589, June 27, 2006)

The gravamen of the offense of infringement of a registered trademark is the likelihood


of confusion. In applying the Holistic Test, confusion was remote because the jeans
made and sold by Levis Philippines were not only very popular but also quite expensive,
as opposed to Diazs tailored jeans which were acquired on a made-to-order basis;
moreover, since the jeans are expensive, the casual buyer is predisposed to be more
cautious and discriminating in and would prefer to mull over his purchase. (Victorio Diaz
vs. People of the Philippines, G.R. No. 180677, February 18, 2013)
7. Well-Known Marks
Respondents BARBIZON as well as its BARBIZON and Bee Design and BARBIZON and
Representation of a Woman trademarks qualify as well-known trademarks entitled to
protection. Hence, Barbizon cannot be registered as a trademark for ladies
underwear. (Pribhdas J. Mirpuri vs. Court of Appeals, G.R. No. 114508, November 19,
1999)
The Paris Convention for the Protection of Industrial Property does not automatically
exclude all countries of the world which have signed it from using a tradename which
happens to be used in one country. GALLO cannot be considered a well-known mark
within the contemplation and protection of the Paris Convention in this case since
GALLO wines and GALLO cigarettes are neither the same, identical, similar nor related
goods. (Mighty Corporation and La Campana Fabrica De Tabaco, Inc. vs. E. & J. Gallo
Winery and the Andresons Group, Inc., G.R. No. 154342, July 14, 2004)
The scope of protection under Article 6bis of the Paris Convention, wherein both the
United States and the Philippines are signatories, extends to a well-known mark, which
should be protected in a country even if the mark is neither registered nor used in that
country. Respondent, the owner of a well-known mark, has the legal capacity to sue
petitioners for the latters use of the IN-N-OUT Burger trademark for the name of their
restaurant and for the identical or confusingly similar mark for their hamburger
wrappers and french-fries receptacles, which effectively misrepresent the source of the
goods and services. (Sehwani, Inc. vs. In-N-Out Burger, Inc., G.R. No. 171053, October
15, 2007)
The essential requirement under the Paris Convention (and the Intellectual Property
Code) is that the trademark to be protected must be well-known in the country where
protection is sought and the power to determine whether a trademark is well-known
lies in the competent authority of the country of registration or use. Harvard is a wellknown name and mark not only in the United States but also internationally, including
the Philippines; as such, even before Harvard University applied for registration of the
mark Harvard in the Philippines, the mark was already protected under the Paris
Convention. (Fredco Manufacturing Corporation vs. President and Fellows of Harvard
College, GR No. 185917, June 1, 2011)
8. Rights Conferred by Registration

Emphasis should be on the similarity of the products involved and not on the arbitrary
classification or general description of their properties or characteristics. The mere fact
that one person has adopted and used a trademark on his goods does not prevent the
adoption and use of the same trademark by others on unrelated articles of a different
kind. (Hickok Manufacturing, Co., Inc. vs. Court of Appeals, G.R. No. L-44707, August 31,
1982)
The adoption and use of a trademark on ones goods does not prevent the adoption and
use of the same trademark by others for products which are of different description. The
registered owner of the trademark Brut for toilet articles such as after shave lotion and
deodorant cannot oppose the registration of the trademark Brute for briefs, since the
two products are unrelated, notwithstanding the formers pending application for
registration. (Faberge, Inc. vs. Intermediate Appellate Court, G.R. No. 71189, November
4, 1992)
One who has adopted and used a trademark on his goods does not prevent the adoption
and use of the same trademark by others for products which are of a different
description. The GALLO trademark registration certificates in the Philippines and in
other countries expressly state that they cover wines only, without any evidence or
indication that registrant Gallo Winery expanded or intended to expand its business to
cigarettes. (Mighty Corporation and La Campana Fabrica De Tabaco, Inc. vs. E. & J. Gallo
Winery and the Andresons Group, Inc., G.R. No. 154342, July 14, 2004)
Section 147 of R.A. No. 8293 provides for the exclusive right of the owner of a registered
mark to prevent third parties not having the owners consent from using in the course of
trade identical or similar signs or containers for goods or services which are identical or
similar to those in respect of which the trademark is registered where such use would
result in a likelihood of confusion. Berris, as a prior user and prior registrant, is the owner
of the mark D-10 80 WP; hence, it has acquired the rights conferred under the law.
(Berris Agricultural Co., Inc. vs. Norvy Abyadang, G.R. No. 183404, October 13, 2010)
9. Use by Third Parties of Names, etc. Similar to Registered Mark
10. Infringement and Remedies
In upholding the right of the petitioner to maintain a suit for unfair competition or
infringement of trademarks of a foreign corporation before the Philippine courts, the
duties and rights of foreign states under the Paris Convention for the Protection of
Industrial Property to which the Philippines and France are parties are upheld.
(Melbarose R. Sasot and Allandale R. Sasot vs. People of the Philippines, G.R. No. 143193,
June 29, 2005)
It is not evident whether the single registration of the trademark Dockers and Design
confers on the owner the right to prevent the use of a fraction thereof in the course of
trade and it is also unclear whether the use without the owners consent of a portion of
a trademark registered in its entirety constitutes material or substantial invasion of the
owners right. Injunction will not lie when the petitioners right to injunctive relief has
not been clearly and unmistakably demonstrated and when the right has yet to be

determined. (Levi Strauss & Co., Levi Strauss (Phils.), Inc. vs. Clinton Apparelle, Inc., G.R.
No. 138900, September 20, 2005)
San Miguel claims that it has invested hundreds of millions over a period of 170 years to
establish goodwill and reputation now being enjoyed by the Ginebra San Miguel mark
such that the full extent of the damage cannot be measured with reasonable accuracy.
Nonetheless, a writ of preliminary injunction cannot be issued in favor of San Miguel
when it failed to prove the probability of irreparable injury which it will stand to suffer
if the sale of Ginebra Kapitan is not enjoined. Moreover, the right to the exclusive use
of the word Ginebra has yet to be determined in the main case. (Tanduay Distillers, Inc.
vs. Ginebra San Miguel, Inc., G.R. No. 164324, August 14, 2009)
a. Trademark Infringement
The question is not whether the two articles are distinguishable by their label when set
side by side but whether the general confusion made by the article upon the eye of the
casual purchaser who is unsuspicious and off his guard, is such as to likely result in his
confounding it with the original. It is not difficult to see that the Sunshine label is a
colorable imitation of the Del Monte trademark; the predominant colors used in the Del
Monte label are green and red-orange, the same with Sunshine; the word "catsup" in
both bottles is printed in white and the style of the print/letter is the same; and although
the logo of Sunshine is not a tomato, the figure nevertheless approximates that of a
tomato. (Del Monte Corporation and Philippine Packing Corporation vs. Court of
Appeals, G.R. No. L-78325, January 25, 1990)
The fact that the words pale pilsen are part of ABI's trademark does not constitute an
infringement of SMC's trademark: SAN MIGUEL PALE PILSEN, for "pale pilsen" are
generic words descriptive of the color ("pale"), of a type of beer ("pilsen"), which is a
light bohemian beer with a strong hops flavor that originated in the City of Pilsen in
Czechoslovakia and became famous in the Middle Ages. Moreover, ABIs use of the
steinie bottle, similar but not identical to the SAN MIGUEL PALE PILSEN bottle, is not
unlawful as SMC did not invent but merely borrowed the steinie bottle from abroad and
it has not claimed neither patent nor trademark protection for that bottle shape and
design. (Asia Brewery, Inc. vs. Court of Appeals and San Miguel Corporation, G.R. No.
103543, July 5, 1993)
One who has adopted and used a trademark on his goods does not prevent the adoption
and use of the same trademark by others for products which are of a different
description. Assuming arguendo that "Poster Ads" could validly qualify as a trademark,
the failure of Pearl & Dean to secure a trademark registration for specific use on the
light boxes meant that there could not have been any trademark infringement since
registration was an essential element thereof. (Pearl & Dean (Phil.), Inc. vs. Shoemart,
Inc., G.R. No. 148222, August 15, 2003)
When a trademark is used by a party for a product in which the other party does not
deal, the use of the same trademark on the latters product cannot be validly objected
to. There is no infringement when the trademark CANON is used by the petitioner for
paints, chemical products, toner and dyestuff while it is used by the private respondent

for footwear (sandals). (Canon Kabushiki Kaisha vs. Court of Appeals, G.R. No. 120900,
July 20, 2004)
Mere unauthorized use of a container bearing a registered trademark in connection
with the sale, distribution or advertising of goods or services which is likely to cause
confusion, mistake or deception among the buyers/consumers can be considered as
trademark infringement. The petitioners, as directors/officers of MASAGANA, are
utilizing the latter in violating the intellectual property rights of Petron and Pilipinas
Shell; thus, petitioners collectively and MASAGANA should be considered as one and
the same person for liability purposes. (William C. Yao, Sr., et. al. vs. People of the
Philippines, G.R No. 168306, June 19, 2007)
The trademark Marlboro is not only valid for being neither generic nor descriptive, it
was also exclusively owned by PMPI, as evidenced by the certificate of registration
issued by the Intellectual Property Office. Infringement of trademark clearly lies since
the counterfeit cigarettes not only bore PMPIs trademark, but they were also packaged
almost exactly as PMPIs products. (Ong vs. People of the Philippines, GR No. 169440,
November 23, 2011)
The mere unauthorized use of a container bearing a registered trademark in connection
with the sale, distribution or advertising of goods or services which is likely to cause
confusion among the buyers or consumers can be considered as trademark
infringement. Petitioners act of refilling, without the respondents consent, the LPG
containers bearing the registered marks of the respondents will inevitably confuse the
consuming public, who may also be led to believe that the petitioners were authorized
refillers and distributors of respondents LPG products. (Republic Gas Corporation
(REGASCO), et. al. vs. Petron Corporation, et. al., G.R. No. 194062, June 17, 2013)
The Rules on the Issuance of the Search and Seizure in Civil Actions for Infringement of
Intellectual Property Rights are not applicable in a case where the search warrants were
applied in anticipation of criminal actions for violation of intellectual property rights
under RA 8293. Rule 126 of the Revised Rules of Court would apply and a warrant shall
be validly issued upon finding the existence of probable cause. (Century Chinese
Medicine Co., et. al. vs. People of the Philippines, G.R. No. 188526, November 11, 2013)
b. Damages
c. Requirement of Notice
11. Unfair Competition
Mere similarity in the shape and size of the container and label does not constitute
unfair competition. SMC cannot claim unfair competition arising from the fact that ABI's
BEER PALE PILSEN is sold, like SMC's SAN MIGUEL PALE PILSEN in amber steinie bottles
absent any showing that the BEER PALE PILSEN is being passed off as SAN MIGUEL PALE
PILSEN. (Asia Brewery, Inc. vs. Court of Appeals and San Miguel Corporation, G.R. No.
103543, July 5, 1993)

The essential elements of an action for unfair competition are (1) confusing similarity in
the general appearance of the goods, and (2) intent to deceive the public and defraud
a competitor. The confusing similarity may or may not result from similarity in the marks,
but may result from other external factors in the packaging or presentation of the goods.
In this case, the intent to deceive and defraud may be inferred from the fact that there
was actually no notice (on their plastic wrappers) to the public that the Big Mak
hamburgers are products of L.C. Big Mak Burger, Inc.(McDonalds Corporation vs. L.C.
Big Mak Burger, Inc., G.R. No. 143993, August 18, 2004)
Hoarding does not relate to any patent, trademark, trade name or service mark that the
respondents have invaded, intruded into or used without proper authority from the
petitioner nor are the respondents alleged to be fraudulently passing off their
products or services as those of the petitioner. The respondents are not also alleged to
be undertaking any representation or misrepresentation that would confuse or tend to
confuse the goods of the petitioner with those of the respondents, or vice versa. What
in fact the petitioner alleges is an act foreign to the Code, to the concepts it embodies
and to the acts it regulates; as alleged, hoarding inflicts unfairness by seeking to limit
the oppositions sales by depriving it of the bottles it can use for these sales. (Coca-Cola
Bottlers Philippines, Inc. (CCBPI), Naga Plant vs. Quintin Gomez, et, al., G.R. No. 154491,
November 14, 2008)
Unfair competition has been defined as the passing off (or palming off) or attempting
to pass off upon the public of the goods or business of one person as the goods or
business of another with the end and probable effect of deceiving the public. The mere
use of the LPG cylinders for refilling and reselling, which bear the trademarks "GASUL"
and "SHELLANE" will give the LPGs sold by REGASCO the general appearance of the
products of the petitioners. (Republic Gas Corporation (REGASCO), et. al. vs. Petron
Corporation, et. al., G.R. No. 194062, June 17, 2013)
12. Trade Names or Business Names
The ownership of a trademark or tradename is a property right which the owner is
entitled to protect since there is damage to him from confusion or reputation or
goodwill in the mind of the public as well as from confusion of goods. By appropriating
the word "CONVERSE," respondent's products are likely to be mistaken as having been
produced by petitioner. The risk of damage is not limited to a possible confusion of
goods but also includes confusion of reputation if the public could reasonably assume
that the goods of the parties originated from the same source. (Converse Rubber
Corporation vs. Universal Rubber Products, Inc., G.R. No. L-27906, January 8, 1987)
A trade name previously used in trade or commerce in the Philippines need not be
registered with the IPO before an infringement suit may be filed by its owner against
the owner of an infringing trademark. Nonetheless, respondent does not have the right
to the exclusive use of the geographic word San Francisco or the generic word
coffee. It is only the combination of the words SAN FRANCISCO COFFEE, which is
respondents trade name in its coffee business, that is protected against infringement
on matters related to the coffee business to avoid confusing or deceiving the public.

(Coffee Partners vs. San Francisco Coffee and Roastery, Inc., G.R. No. 169504, 3 March
2010)
The Philippines is obligated to assure nationals of countries of the Paris Convention that
they are afforded an effective protection against violation of their intellectual property
rights in the Philippines in the same way that their own countries are obligated to accord
similar protection to Philippine nationals. Thus, under Philippine law, a trade name of a
national of a State that is a party to the Paris Convention, whether or not the trade name
forms part of a trademark, is protected without the obligation of filing or registration.
(Fredco Manufacturing Corporation vs. President and Fellows of Harvard College, GR No.
185917, June 1, 2011)
Under the Paris Convention to which the Philippines is a signatory, a trade name of a
national of a State that is a party to the Paris Convention, whether or not the trade name
forms part of a trademark, is protected without the obligation of filing or registration. It
follows then that the applicant for registration of trademark is not the lawful owner
thereof and is not entitled to registration if the trademark has been in prior use by a
national of a country which is a signatory to the Paris Convention. (Ecole De Cuisine
Manille (Cordon Bleu of the Philippines), Inc. vs. Renaus Cointreau & Cie and Le Cordon
Bleu Intl, B.V., G.R. No. 185830, June 5, 2013)
13. Collective Marks
D. Copyrights
At most, the certificates of registration and deposit issued by the National Library and
the Supreme Court Library serve merely as a notice of recording and registration of the
work but do not confer any right or title upon the registered copyright owner or
automatically put his work under the protective mantle of the copyright law; it is not a
conclusive proof of copyright ownership. Hence, when there is sufficient proof that the
copyrighted products are not original creations but are readily available in the market
under various brands, as in this case, validity and originality will not be presumed. (Manly
Sportwear Manufacturing, Inc. vs. Dadodette Enterprises and/or Hermes Sports Center,
G.R. No. 165306, September 20, 2005)
1. Basic Principles, Sections 172.2, 175 and 181
2. Copyrightable Works
a. Original Works
b. Derivative Works
3. Non-Copyrightable Works
The format or mechanics of a television show is not included in the list of protected
works in Sec. 2 of P.D. No. 49, which is substantially the same as Sec. 172 of the
Intellectual Property Code (R.A. No, 8293). For this reason, the protection afforded by

the law cannot be extended to cover them. (Francisco Joaquin, Jr. vs. Franklin Drilon, et.
al., G.R. No. 108946, January 28, 1999)
Pearl & Deans copyright protection extended only to the technical drawings and not to
the light box itself as the latter does not fall under the category of prints, pictorial
illustrations, advertising copies, labels, tags and box wraps. The light box was not a
literary or artistic piece which could be copyrighted under the copyright law; and no less
clearly, neither could the lack of statutory authority to make the light box copyrightable
be remedied by the simplistic act of entitling the copyright certificate issued by the
National Library as "Advertising Display Units. (Pearl & Dean (Phil.), Inc. vs. Shoemart,
Inc., G.R. No. 148222, August 15, 2003)
4. Rights of Copyright Owner
5. Rules on Ownership of Copyright
6. Limitations on Copyright
Under Sec. 184.1 (h), the use made of a work by or under the direction or control
of the Government, by the National Library or by educational, scientific or
professional institutions where such use is in the public interest and is
compatible with fair use will not constitute copyright infringement. The carriage
of ABS-CBNs signals by virtue of the must-carry rule is under the direction and
control of the government through the NTC. The imposition of the must-carry
rule is within the NTCs power to promulgate rules and regulations, as public
safety and interest may require, to encourage a larger and more effective use of
communications, radio and television broadcasting facilities, and to maintain
effective competition among private entities in these activities whenever the
Commission finds it reasonably feasible. (ABS-CBN Broadcasting Corporation vs.
Philippine Multi-Media System, Inc., G.R. Nos. 175769-70, January 19, 2009)
PMSI cannot be said to be infringing upon the exclusive broadcasting rights of ABS-CBN
under the IP Code for PMSI does not perform the functions of a broadcasting
organization, thus, it cannot be said that it is engaged in rebroadcasting Channels 2 and
23. PMSI is not the origin nor does it claim to be the origin of the programs broadcasted
by the ABS-CBN; the former did not make and transmit on its own but merely carried
the existing signals of the latter and when PMSIs subscribers view ABS-CBNs programs
in Channels 2 and 23, they know that the origin thereof was the latter. ibid
a. Doctrine of Fair Use
b. Copyright Infringement
For the playing and singing the musical compositions involved, the combo was paid as
independent contractors; it is therefore obvious that the expenses entailed thereby are
either eventually charged in the price of the food and drinks or to the overall total of
additional income produced by the bigger volume of business which the entertainment
was programmed to attract. Consequently, it is beyond question that the playing and
singing of the combo in defendant-appellee's restaurant constituted performance for

profit contemplated by the Copyright Law. (Filipino Society of Composers, Authors and
Publishers, Inc. vs. Benjamin Tan, G.R. No. L-36402, March 16, 1987)
Infringement of a copyright is a trespass on a private domain owned and occupied by
the owner of the copyright, and, therefore, protected by law, and infringement of
copyright, or piracy, which is a synonymous term in this connection, consists in the doing
by any person, without the consent of the owner of the copyright, of anything the sole
right to do which is conferred by statute on the owner of the copyright. Failure to
comply with registration and deposit does not deprive the copyright owner of the right
to sue for infringement but merely limits the remedies available to him because the
copyright for a work is granted from the moment of creation. (Columbia Pictures, Inc.,
et. al. vs. Court of Appeals, G.R. No. 110318, August 28, 1996)
To constitute infringement, it is not necessary that the whole or even a large portion of
the work shall have been copied; if so much is taken that the value of the original is
sensibly diminished, or the labors of the original author are substantially and to an
injurious extent appropriated by another, that is sufficient in point of law to constitute
piracy. The injury is sustained when respondent lifted from petitioners book materials
that were the result of the latters research work and compilation and misrepresented
them as her own, even circulating the book DEP for commercial use without
acknowledging petitioners as her source. (Pacita Habana, et. al. vs. Felicidad Robles and
Goodwill Trading Co., Inc., G.R. No. 131522, July 19, 1999)
The gravamen of copyright infringement is not merely the unauthorized
manufacturing of intellectual works but rather the unauthorized performance of any
of the rights exclusively granted to the copyright owner. Hence, any person who
performs any of such acts without obtaining the copyright owners prior consent renders
himself civilly and criminally liable for copyright infringement. (NBI-Microsoft
Corporation vs. Judy Hwang, et. al., G.R. No. 147043, June 21, 2005)
E. Rules of Procedure for Intellectual Property Rights Cases (A.M. No. 10-3-10-SC)
X. Special Laws
A. The Chattel Mortgage Law and Real Estate Mortgage Law (Excluded and made a part of Civil
Law coverage)
B. Anti-Money Laundering Act (R.A. No. 9160, as amended by R.A. No. 9194)
1. Policy of the Law
2. Covered Institutions
3. Obligations of Covered Institutions
4. Covered Transactions
5. Suspicious Transactions

6. When is Money Laundering Committed


7. Unlawful Activities or Predicate Crimes
Since the account of Glasgow in CSBI was (1) covered by several suspicious transaction
reports and (2) placed under the control of the trial court upon the issuance of the writ
of preliminary injunction, the conditions provided in Section 12(a) of RA 9160, as
amended, were satisfied. A criminal conviction for an unlawful activity is not a
prerequisite for the institution of a civil forfeiture proceeding. A finding of guilt for an
unlawful activity is not an essential element of civil forfeiture. (Republic of the
Philippines vs. Glasgow Credit and Collection Services, Inc., G.R. No. 170281, January 18,
2008)
Section 11 allows the AMLC to inquire into bank accounts without having to obtain a
judicial order in cases where there is probable cause that the deposits or investments
are related to kidnapping for ransom, certain violations of the Comprehensive
Dangerous Drugs Act of 2002, hijacking and other violations under R.A. No. 6235,
destructive arson and murder. Absent any of the mentioned predicate crimes, a court
order is necessary to inquire into bank deposits. (Republic of the Philippines vs. Hon.
Antonio Eugenio, G.R. No. 174629, February 14, 2008)
NOTE: By virtue of R.A. No. 10168, Anti-Financing of Terrorism is now included as one
of the predicate crimes where a court order is not necessary to examine or inquire into
bank deposits.
8. Anti-Money Laundering Council
9. Functions
10. Freezing of Monetary Instrument or Property
The amendment by RA 9194 of RA 9160 erased any doubt on the jurisdiction of the
Court of Appeals over the extension of freeze orders. It is solely the CA which has the
authority to issue a freeze order as well as to extend its effectivity; it also has the
exclusive jurisdiction to extend existing freeze orders previously issued by the AMLC vis-vis accounts and deposits related to money-laundering activities. (Republic of the
Philippines vs. Cabrini Green & Ross, Inc., G.R. No. 154522, May 5, 2006)
The primary objective of a freeze order is to temporarily preserve monetary instruments
or property that are in any way related to an unlawful activity or money laundering, by
preventing the owner from utilizing them during the duration of the freeze order. The
effectivity of the freeze order was limited to a period not exceeding six months, which
may be extended by the CA should it become completely necessary. Nonetheless, when
the Republic has not offered any explanation why it took six years before a civil
forfeiture case was filed in court, it can only be concluded that the continued extension
of the freeze order beyond the six-month period violated the partys right to due

process. (Ret. Lt. Gen. Jacinto Ligot, et. al. vs. Republic of the Philippines, G.R. No. 176944,
March 6, 2013)
11. Authority to Inquire Into Bank Deposits
C. Foreign Investments Act (R.A. No. 7042)
1. Policy of the Law
2. Definition of Terms
a. Foreign Investment
b. Doing Business in the Philippines
Under Sec 3 (d) of the Foreign Investments Act of 1991, the phrase "doing business"
shall include appointing representatives or distributors domiciled in the Philippines or
who in any calendar year stay in the country for a period or periods totalling one
hundred eighty (180) days or more. Thus, the phrase includes "appointing
representatives or distributors in the Philippines" but not when the representative or
distributor independently transacts business in its name and for its own account. (Alfred
Hahn vs. Court of Appeals, G.R. No. 113074, January 22, 1997)
Whether a foreign corporation is "doing business" does not necessarily depend upon
the frequency of its transactions, but more upon the nature and character of the
transactions. Doing business covers any other act or acts that imply a continuity of
commercial dealings or arrangements, and contemplate to that extent the performance
of acts or works, or the exercise of some of the functions normally incident to, and in
progressive prosecution of, commercial gain or of the purpose and object of the
business organization. (Eriks Pte. Ltd. vs. Court of Appeals, G.R. No. 118843, February 6,
1997)
To constitute "doing business", the activity to be undertaken in the Philippines is one
that is for profit-making. When the activities of the foreign corporation were confined
to (1) maintaining a stock of goods in the Philippines solely for the purpose of having
the same processed by the respondent domestic corporation; and (2) consignment of
equipment with the respondent to be used in the processing of products for export, the
foreign corporation cannot be deemed to be "doing business" in the Philippines.
(Agilent Technologies Singapore (Pte.) Ltd. vs. Integrated Silicon Technology Philippines
Corporation, G.R. No. 154618, April 14, 2004)
The appointment of a distributor in the Philippines is not sufficient to constitute doing
business unless it is under the full control of the foreign corporation. In the present
case, 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; hence, the
latter cannot be considered to be doing business in the Philippines. (Steelcase, Inc. vs.
Design International Selections, Inc., G.R. No. 171995, April 18, 2012)

c. Export Enterprise
d. Domestic Market Enterprise
3. Registration of Investments on Non-Philippine Nationals
4. Foreign investments in Domestic Market Enterprise
5. Foreign Investment Negative List
The Foreign Investments Act is the basic law governing foreign investments in the
Philippines, irrespective of the nature of business and area of investment. The concept
of a negative list or the Foreign Investments Negative List provides for two components:
List A, which enumerates the areas of activities reserved to Philippine nationals by
mandate of the Constitution and specific laws; and List B, which enumerates the areas
of activities and enterprises regulated pursuant to law. (Heirs of Wilson Gamboa vs.
Finance Secretary Margarito Teves, G.R. No. 176579, October 9, 2012)