Consolidated Zarah Notes

Commercial Law Review
Corporation Code
Maria Zarah Villanueva - Castro
CORPORATION CODE (BP BLG 68)
*Corporation Code is the general law on Private

Corporation regarding to its creation, formation
and powers.
INTRODUCTION:
A. Historical Background
Effectivity: May 1, 1980
Article XII Section 16 of the 1987
Constitution: The Congress shall not,
except by general law, provide for the
formation, organization, or regulation of
private corporations. Government-owned
or controlled corporations may be created
or established by special charters in the
interest of the common good and subject
to the test of economic viability.
*Congress has limited powers in the
formation, creation and regulation of a
private corporation.
Purposes:
1. Uniformity
2. To avoid corruption
General Rule: Congress is prohibited to
enact a law directly forming a private
corporation.
Exception: GOCC may be created by
special charter.
*GOCC is a private corporation with regard
to function and in the meantime a public
corporation with regard to ownership.
Twin Conditions must be present in
forming a GOCC:
1. Interest in the common good
2. Subject to the test of economic
viability
- Means can survive alone in the
market; can generate income
which they can use for their
operating expenses
CONCEPT
AND
CORPORATION:
ATTRIBUTES
OF
A. Statutory definition of a Corporation

Section 2 of the Corporation Code: 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.
B. Attributes of a Corporation
Artificial Being
It exist by fiction of law only, hence

it is subject to limitations that are
inherent because of its nature
A corporation is a juridical person
which exists by process of legal
fiction
Doctrine
of
Corporate
Entity/Doctrine
of
Separate
Personality - A corporation is a
legal or juridical person with a
personality separate and apart
from its individual stockholders or
members and from any other legal
entities to which it may be
connected
Consequences/Implications
of
Separate Personality:
1. It is entitled to own properties
in its own name and its
properties
are
not
the
properties of its stockholders,
directors and officers.
Cases: Magsaysay-Labrador
v CA; Sulo ng Bayan v
Araneta
*The
interest
of
the
stockholders
over
the
properties of the corporation is
merely inchoate.
*Merely inchoate because there
are still condition precedents
before the shareholders get
their share, viz, in Asset, there
are dissolution and satisfaction
of claims; in profit-sharing,
there are unrestricted retained
earnings and declaration by the
Board of Directors.
2. It can incur obligations and its
obligations
are
not
the
obligations of its stockholders,
directors and officers.
Case: Francisco v CA
3. The rights belonging to the
corporation cannot be invoked
by the stockholders, directors
and officers and vice versa.
4. Corporations are entitled to
certain constitutional rights,
i.e., right against unreasonable
searches and seizure, due
process clause.
*It is not entitled to certain
constitutional right, i.e., right
against
self-incrimination
particularly
production
of
corporate documents.

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5.
6.
7.
8.
*Right against self-incrimination

is applicable only to natural
persons.
General Rule: Constitutional
guarantees are applicable to
corporations.
Exceptions:
1. Right
against
selfincrimination
2. Freedom to travel
Case: Bataan Shipyard v
PCGG
It is liable for tort. It is liable
when the act was committed by
the officer or agent under
express direction or authority
from
the
stockholders
or
members acting as a body or
generally from the directors as
the governing body.
Generally, the corporation is
considered a national of the
country
where
it
was
incorporated
(Place
of
incorporation test)
*Exceptions: 1. In times of war,
the nationality of a corporation
is determined by the nationality
of the controlling stockholders;
2.
Under
the
Foreign
Investment Act of 1991
Corporations are incapable of
intent, hence, they cannot
commit
felonies
that
are
punishable under the RPC. They
cannot commit crimes that are
punishable under special laws
because crimes are personal in
nature
requiring
personal
performance of overt acts. In
addition,
the
penalty
of
imprisonment
cannot
be
imposed.
*Criminal liability falls upon to
responsible officers.
*Responsible officers cannot
invoke the doctrine of separate
personality.
*Corporations
cannot
be
incarcerated.
Moral damages cannot be
awarded
in
favor
of
corporations because they do
not have feelings and mental
state.
*Corporations
can
claim
damages
such
as
actual,
compensatory, exemplary, loss

of earning capacity.
General
Rule: Corporation
cannot claim moral damages.
Exception: If the corporation
has a good reputation and such
reputation was destroyed.
Case: Coastal Pacific Trading
v Southern Rolling Mills, Co.
*In
Filipinas
Broadcasting
Network Inc. v. Ago Medical and
Educational Center, the SC
ruled that a corporation can
recover moral damages under
Article 2219(7) if it was the
victim of defamation.
Doctrine of Piercing the Veil of Corporate
Entity The doctrine that a corporation is a legal
entity distinct from the persons composing it. It is
a theory introduced for the purposes of
convenience and to serve the ends of justice. But
when the veil of corporate fiction is used as a
shield to perpetuate fraud, to defeat public
convenience, justify wrong, or defend crime, this
fiction shall be disregarded and the individuals
composing it will be treated identically.
Cases: Times Transportation Co. v Santos
Sotelo; Concept Builders v NLRC
*The doctrine of piercing the veil of corporate
entity is the exception to the doctrine of
corporate entity.
*The users of this doctrine are: 1. Stockholder; 2.
Group of stockholders; 3. Another corporation.
Effects: 1. Stockholders, officers and corporation
are in effect jointly liable; 2. In case of two
corporations, they will be treated as one wherein
they will be both solidarily liable. (Instrumentality
rule)
*There is no effect on the existence of each
corporation as long as their separate entity is
used for legitimate purposes.
Instrumentality Rule When one corporation is
so organized and controlled and its affairs are
conducted so that it is in fact a mere
instrumentality or adjunct of the other, the fiction
of the corporate entity to the instrumentality may
be disregarded.
*The user is another corporation.
Keyword: CONTROL
Requisites: 1. Control, not mere majority or
complete stock control, but complete
dominion, not only of finances but of policy
and business in respect to the transaction
attacked so that the corporate entity as to
this transaction had at the time no separate

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mind, will or existence of its own; 2. Such
control must have been used by the
defendant to commit fraud or wrong in
contravention of plaintiffs legal rights; 3. The
aforesaid control and breach of duty must
proximately cause the injury or unjust loss
complained of.
Three cases of piercing the veil:
1. Fraud Cases when a corporation is used
as a cloak to cover fraud, or to do wrong;
2. Alter Ego Cases when the corporate
entity is merely a farce since the corporation
is an alter ego, business conduit or
instrumentality of a person or another
corporation;
3. Equity cases when piercing the
corporate fiction is necessary to achieve
justice or equity.
Probative Factors of Identity:
1. Identical shareholders;
2. Same set of officers, directors, or trustees;
3. Use of same premises, properties, tools and
equipments;
4. Engage practically in the same business; 5.
The same manner of keeping books and
records.
*The probative factors of identity are not
conclusive but may be considered as strong
evidence.
Creature of Law
Article XII Section 16 of the 1987
Constitution:
The Congress shall
not, except by general law, provide for
the
formation,
organization,
or
regulation of private corporations.
Government-owned
or
controlled
corporations may be created or
established by special charters in the
interest of the common good and
subject to the test of economic
viability.
Concession Theory It is a principle
in the creation of corporations, under
which a corporation is an artificial
creature without any existence until it
has received the imprimatur of the
State acting according to law, through
the SEC. The life of the corporation is a
concession made by the State.
Right of Succession
- Capacity to have continuity of
existence despite the changes on
the persons who compose it. Thus,
the personality continues despite
the
change
of
stockholders,
members, board members or
officers; death or disability.
Also
known
as
Principle
Perpetual Succession
Reason: To
more stable
make
the
of
corporation
Creature of enumerated powers,

attributes and properties
Doctrine of Limited Capacity No
corporation under the Corporation
Code, shall possess or exercise any
corporate
powers,
except
those
conferred by law, its Articles of
Incorporation, those implied from
express powers and those as are
necessary or incidental to the exercise
of the powers so conferred. The
corporations capacity is limited to
such express, implied and incidental
powers.
*Corporation may be restrained from
engaging a particular transaction
because it is beyond their powers.
*General Capacity a corporation
can perform any act for as long as it is
lawful, moral and not contrary to
public policy or order.
Ultra Vires Doctrine Even if the act
is lawful, moral and not contrary to
public order or policy but such act is
not within the express, implied and
incidental powers of the corporation
such act shall be void for being ultra
vires.
*These doctrines are based on Section
2 and Section 45 of the Corporation
Code.
C. Classification of Private Corporations:

1. As to existence of Stocks:
Stock Corporation Corporations which
have capital stock divided into shares and
are authorized to distribute to the holders
of such shares dividends or allotments of
the surplus profits on the basis of the
shares held. (Sec. 3)
Non-stock Corporation A corporation
where no part of its income is distributable
as dividends to its members, trustees, or
officers, subject to the provisions of this
Code on dissolution. (Sec. 87)
Q: Is it correct to say that a Non-stock
corporation cannot generate income on
their own?
A: NO
2. As to function/organizers:
Public Corporation for public purpose
and organized by the State.

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Private Corporation for profit making
functions and organized by private
persons alone or with the State
3. As to laws of Incorporation (Place of
Incorporation) :
Domestic Corporation corporation
formed, organized or existing under the
Philippine Laws.
Foreign Corporation corporation
formed, organized or existing under any
laws other than those of the Philippines
and whose laws allow Filipino citizens and
corporations to do business in its own
country or state. (Sec. 123)
*License is necessary for; 1. Regulation
purposes and 2. Access to local courts.
4. As to legal status:
De Jure Corporation corporation
created in strict or substantial compliance
with the mandatory requirements for
incorporation and the right of which to
exist as a corporation cannot be
successfully attacked or questioned by
any party even in a direct proceeding for
that purpose by the state.
De Facto Corporation the due
incorporation of any corporation claiming
in good faith to be a corporation under the
Corporation Code, and its right to exercise
corporate powers, shall not be inquired
into collaterally in any private suit to
which such corporation may be a party.
Such inquiry may be made by Solicitor
General in a quo warranto proceeding.
(Sec. 20)
- organized
with
a
colourable
compliance with the requirements
of a valid law and its existence
cannot be inquired collaterally.
- There is an irregularity or defect in
the constitution or organization.
Can be compared to a voidable
contract, i.e., valid until annulled.
*Can be challenged by the State later
on.
Cases: Hall v Piccio; Seventh
Adventist
v
Northeastern
Mindanao Mission
*The
filing
of
the
Articles
of
Incorporation and the issuance of the
certificate of registration are the
essential requisites for the existence of
a de facto corporation.
Requisites:
1. The existence of a valid law under
which it may be incorporated;
2. An attempt in good faith to

incorporate; 3. Use of corporate
powers;
4. Filing of the Articles of Incorporation;
5. Subsequent compliance with the
requirement of law.
*In both corporations, there must be a
certificate of registration issued.
Doctrine of Corporation by Estoppel All
persons who assume to act as a corporation
knowing it to be without authority to do so
shall be liable as general partners for all
debts, liabilities and damages incurred or
arising as an result thereof: Provided,
however, that when any such ostensible
corporation is sued on any transaction
entered into by it as a corporation or on any
tort committed by it as such, it shall not be
allowed to use as a defense its lack or
corporate personality. (Sec. 21)
- Group of persons which holds itself
out as a corporation and enters
into a contract with a third person
on the strength of such appearance
cannot be permitted to deny its
existence in an action under said
contract.
Case: Lim Tong Lim v CA
*Lim is stopped because he benefited
from the transaction.
Remedy: To ran after those persons
responsible for the representations
Essence: They are precluded from
denying their existence by their
previous act or conduct
Holding Corporation it is one which controls
another as a subsidiary by the power to elect
management. It is one that holds stocks in other
companies for purposes of control rather than for
mere investment.
Affiliate one related to another by owning or
being owned by common management or by a
long-term lease of its properties or other control
device. It may be the controlled or controlling
corporation, or under common control.
Subsidiary Corporation one which is so
related to another corporation that the majority
of its directors can be elected either directly or
indirectly by such other corporation. It is always
controlled.
Open Corporation one which is open to any
person who may wish to become a stockholder or
member thereto.

Corporation Code
Close Corporation those whose shares of
stock are held by limited number of persons like
the family or other closely knit group. (Sec. 96)
FORMATION AND ORGANIZATION
PRIVATE CORPORATION:
OF
A. Submission of Articles of Incorporation;

contractual significance
*The life of a corporation commences from
the issuance of the Certificate of
Registration by the SEC upon filing of the
Articles of Incorporation and other
documents.
Article of Incorporation is the charter
of the corporation, and the contractual
relationships between the State and the
corporation, the stockholder and the
State, and between the corporation and its
stockholders.
Contractual Significance:
1. The issuance of a certificate of
incorporation signals the birth of the
corporations juridical personality;
2. It is an essential requirement for the
existence of a corporation, even a de facto
one.
B. Contents and Form of the Articles of
Incorporation (Secs. 14 and 15)
Contents of Articles of Incorporation:
1. Corporate Name;
2. Purpose Clause;
3. Principal office;
4. Term of existence;
5. Incorporators;
6. Directors or trustees;
7. Capitalization;
8. Shares of stock;
9. Treasurers Affidavit.
Corporate Name
Purpose: Identification
*Corporation can not adopt any name
or group of words at its pleasure
because of statutory limitation, viz.,
Sec. 18 of the Corporation Code
which provides that: No corporate
name may be allowed by the SEC if the
proposed name is identical or
deceptively or confusingly similar
to that of any existing corporation
or to any other name already
protected by law or is patently
deceptive, confusing or contrary
to existing laws. When a change in
the corporate name is approved, the
Commission shall issue an amended
certificate of incorporation under the

amended name.
SEC Guideline x x x b. In order to
prevent confusion and difficulties of
administration,
supervision
and
control, if the proposed name contains
a word already use as a part of the
firm name or style of a registered
entity, the proposed name must
contain two other words different and
distinct from the name of the company
already registered or protected by law.
x x x
Case: Ang Mga Kaanib Ni Jesus
Cristo
*The phrase Ang Mga Kaanib are
words
merely
descriptive
of
membership while the phrase Sa
Bansang
Pilipinas
are
merely
descriptive of the place.
*Both parties are religious institutions
*Both use the acronym H.S.K.
As a rule, generic name or descriptive
word may be used as a corporate
name.
Reason: public domain; can be used
by anyone; public use.
Exception: Doctrine of Secondary
Meaning a word or phrase originally
incapable of exclusive appropriation
with reference to an article on the
market, because geographically or
otherwise
descriptive,
might
nevertheless have been used so long
and so exclusively by one producer
with reference to his article that in that
trade and to that branch of the
purchasing public, the word or phrase
has come to mean that the article was
his product.
Requisites:
1. Period of use;
2. The use must be exclusive.
Case: Lyceum of the Philippines
*The exclusivity requirement was not
satisfied by Lyceum of the Philippines.
*In case of change of name, the
corporation is not dissolve nor create a
new corporation; it also does not
extinguish the corporate liability.
*Change of name can be done by
amending the Articles of Incorporation.
Procedure:
1. Obtain approval of majority of the
Board and 2/3 stockholders;
2. Submission to the SEC for approval.
Purpose Clause
*Only one primary purpose. Primary
purpose defines the business activities

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of the corporation. It is the ordinary

course of business of the corporation.
*Secondary Purpose is for future
expansion. There is no limit on the
secondary purpose.
*In case the primary purpose is not
viable then secondary purpose may be
used.
Principal Office
*The principal place of business may
determine the venue of court cases
involving corporations. It may also
determine if service of summons and
notices was properly made. It is also
important for tax purposes (local
taxation).
*The SEC requires the exact address to
be indicated in the Articles of
Incorporation.
*It is the residence of the corporation.
It is where the corporation maintains
its books and records and where
normally the bulk of its business is
being conducted or undertaken.
*For personal action, venue is the
residence.
Term of Existence
*A corporation has a maximum term of
50 years. It may be extended for a
period not exceeding 50 years in any
single instance.
As a rule, no extension can be made
earlier than 5 years prior to the
expiration of the term.
*No limitations regarding number of
extension can apply.
Reason: To compel the stockholders to
meet the corporations term.
Exception: If for compelling reasons,
earlier extension will be allowed.
*During the three year winding up
period, the corporation still has
personality but activities are limited to
the liquidation of the corporation
affairs and not to transact further
business.
As a rule, after the term has expired,
no more extensions be allowed or
entertained by the SEC.
Reason: No more period to extend.
Exception: Doctrine of Relation
The filing and recording of a certificate
of extension after the term cannot
relate back to the date of the passage
of the resolution of the stockholders to
extend the life of the corporation.
However, the doctrine of relations
applies if the failure to file the
application for existence within the

term of the corporation is due to
neglect of the officer with whom the
certificate is required to be filed or to
wrongful refusal on is part to receive it.
*The
delay
in
submitting
the
application for extension is justifiable.
Keywords:
1. Excusable delay;
2. Beyond the control of the
corporation (insuperable intervening
causes)
Incorporators
*Once an incorporator always an
incorporator. (Fait accompli an
accomplished fact which cannot be
altered)
*They are the signatories to the
Articles of Incorporation.
*They are originally forming the
corporation
Q: What is the reason behind the
phrase that an incorporator is not
always a corporator?
A: To be an incorporator it is not
necessary to own a share unlike as a
corporator.
*Number is limited to 5 to 15.
*They must have a contractual
capacity.
*Juridical person cannot create another
juridical person.
*There is no citizen requirement but
special laws may require otherwise.
*Majority must be a resident of the
Philippines.
Directors and trustees
*The Board of Directors is the
governing body in a stock corporation
while Board of Trustees is the
governing body in a non-stock
corporation.
*They exercise the powers of the
corporation.
Qualifications:
1. Every director must own at least one
(1) share of the capital stock;
2. Majority of the directors or trustees
must be residents of the Philippines.
*Any director who ceases to be the
owner of at least one share of the
capital stock of the corporation of
which he is a director shall thereby
cease to be a director.
*Trustees of non-stock corporations
must be members thereof.
*Initial directors/trustees shall hold
office for one year until their
successors are elected and qualified.

Corporation Code
Capitalization
Section 14(8) states that: If it be a
stock corporation, the amount of its
authorized capital stock in lawful
money of the Philippines, the number
of shares into which it is divided, and
in case the share are par value shares,
the par value of each, the names,
nationalities and residences of the
original subscribers, and the amount
subscribed and paid by each on his
subscription, and if some or all of the
shares are without par value, such fact
must be stated.
*It is required that at least 25% of the
subscribed capital must be paid and in
no case may be paid-up capital be less
than P5,000.
Authorized Capital Stock the
amount fixed in the articles of
incorporation to be subscribed and
paid by the stockholders of the
corporation.
*Shows the total number of shares
Subscribed Capital that portion of
the authorized capital stock that is
covered by subscription agreements
whether fully paid or not.
Paid-Up Capital the portion of the
authorized capital stock which has
been subscribed and actually paid.
Outstanding Capital Stock the
total shares of stock issued to
subscribers or stockholders, whether
or not fully or partially paid except
treasury shares so long as there is a
binding subscription agreement.
Shares of stock
Q: Why shares of stock?
A: Because there is a share on the
capitalization.
Economic Value:
1. expectancy on the share in the
profits
2. expectancy on the share of assets in
case of dissolution/liquidation.
Political Value:
1. vote
2. control in the management of the
corporation.
Doctrine of Equality of Shares
Except as otherwise provided in the
articles of incorporation and stated in
the certificate of stock, each share
shall be equal in all respects to every
other share.
- Provides that where the Article of
Incorporation do not provide for any
distinction of the shares of stock, all

shares issued by the corporation are
presumed to be equal and enjoy the
same rights and privileges and are also
subject to the same liabilities.
Classes of Shares:
1. Par Value Share shares that
have a nominal value in the
certificate of stock.
Contractual Significance: The
minimum price at which the shares
are to be issued.
*The price is fixed. It is stated in
the Articles of Incorporation.
2. No Par Value Share those
shares which do not have nominal
value. However, they have issued
value stated in the certificate or
articles of incorporation.
*There is flexibility in the price.
*The price is determined by the
Board.
Limitations:
1. No par value shares cannot have
an issued price of less than P5.00;
2. The entire consideration for its
issuance constitutes capital so that
no part of it should be distributed
as dividends;
3. They cannot be used as
preferred stocks;
4. They cannot be issued by banks,
trust
companies,
insurance
companies, public utilities and
building and loan association
(Reason: imbued with public
interest);
5. The articles of incorporation
must state the fact that it issued no
par value shares as well as the
number of said shares;
6. Once issued, they are deemed
fully paid and non-assessable.
3. Voting Shares shares with the
right to vote. They have the right
to participate in the management
of the corporation through the
exercise of such right.
4. Non-voting Shares shares
without the right to vote.
*Has only a limited right to vote.
General Rule: Shareholder owning
non-voting shares has no right to
vote.
Exceptions:
1. Amendment of the articles of
incorporation;
2. Adoption and amendment of bylaws;

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3.
Sale,
lease,
exchange,
mortgage,
pledge
or
other
disposition of all or substantially all
of the corporate property;
4. Incurring, creating or increasing
bonded indebtedness;
5. Increase or decrease of capital
stock; 6. Merger or consolidation of
the
corporation
with
another
corporation or other corporations;
7. Investment of corporate funds in
another corporation or business in
accordance with the Corporation
Code;
8.
Dissolution
of the
corporation.
*The exceptions are exclusive; the
list is a closed list
Statutory Constraint: Sec. 6 of
the Corporation Code
*The corporation cannot provide for
shares with no voting right
General Rule: Only redeemable
and preferred shares are deprived
of voting right.
Exception: Common shares may
be denied of its voting right in the
following instances: 1. Delinquent
in paying the subscription; 2. If
there was a founders share where
it was given the right to vote
exclusively for 5 years (Sec. 7).
5. Common Shares the most
common type of shares which
enjoy no preference.
*The basic class of stock ordinarily
and
usually
issued
without
extraordinary rights and privileges,
and the owners thereof are entitled
to a pro rata share in the profits of
the corporation and in its assets
upon dissolution and, likewise, in
the management of its affairs
without preference or advantage
whatsoever.
6. Preferred Shares- shares which
enjoy preference as to dividends or
assets upon dissolution as stated in
the Articles of Incorporation.
Reason: To attract investors.
*Preference does not give them a
lien upon the property nor make
them creditors of the corporation.
*Characterized
as
redeemable
shares.
Kinds:
1. Preferred shares as to assets
share which gives the holder
thereof
preference
in
the
distribution of the assets of the

corporation in case of liquidation;
2. Preferred shares as to
dividends share which gives the
holder thereof preference in the
distribution of the dividends to the
extent agreed upon before any
dividends at all are paid to the
holders of common shares;
3.
Participating
preferred
shares the holders thereof are
still given the right to participate
with the common stockholders in
dividends beyond their stated
preference;
4. Non-participating preferred
shares where there is no such
participation;
5. Cumulative preferred shares
the shareholder is entitled to
recover dividends in arrears. While
dividend declaration may not be
compelled, once it is declared, the
shareholder is entitled to the said
arrears;
6. Non-cumulative preferred
shares not entitled to arrears
only to present dividends.
7. Redeemable Shares are those
which
permit
the
issuing
corporation to redeem or purchase
its own shares.
Limitations:
1. Redeemable shares may be
issued
only
when
expressly
provided for in the Articles of
Incorporation;
2. The terms and conditions
affecting said shares must be
stated both in the certificate of
stock representing such share;
3. Redeemable shares may be
deprived of voting rights in the
Articles of Incorporation, unless
otherwise
provided
in
the
Corporation Code;
4. The corporation is required to
maintain a sinking fund to answer
for
redemption
price
if
the
corporation is required to redeem;
5. The redeemable shares are
deemed retired upon redemption
unless otherwise provided in the
Articles of Incorporation;
6. Unrestricted retained earnings is
not necessary before shares can be
redeemed but there must be
sufficient assets to pay the

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creditors and to answer for

operations.
8. Treasury Shares shares which
have been earlier issued as fully
paid and have thereafter been
acquired by the corporation by
purchase, donation, redemption or
through some lawful means.
- Shares which are previously
issued by the corporation but
subsequently reacquired by the
corporation.
*Retired thus can no longer be reissued.
*They are not entitled to dividends.
*They are not entitled to voting
rights. Rationale: to prevent
abuse by the management.
*These shares may again be
disposed of for a reasonable price
fixed by the Board of Directors.
9. Founders Shares classified as
such in the articles of incorporation
may be given certain rights and
privileges not enjoyed by the
owners of other stocks, provided
that where the exclusive right to
vote and be voted for in the
election of directors is granted, it
must be for the limited period not
to exceed 5 years subject to the
approval of the SEC. The 5 year
period shall commence from the
date of the approval by the SEC.
Treasurers affidavit
*The SEC shall not accept the Articles
of
Incorporation
of
any
stock
corporation unless accompanied by a
sworn statement of the Treasurer
elected by the subscribers showing
that at least 25% of the authorized
capital stock of the corporation has
been subscribed, and at least 25% of
the total subscription has been fully
paid to him in actual cash and/or in
property the fair valuation of which is
equal to at least 25% of the said
subscription, such paid up capital
being not less than P5,000.
*If the Treasurers affidavit is false
such act is tantamount to fraud. (PD
902-A)
*Fraud on the part of the corporation is
a ground for revocation or suspension
of license depending upon the extent
of the violation committed.
*If theres no Treasurers Affidavit, the
first ground shall apply, i. e.,
noncompliance with the minimum

requirement.
General
Rule:
25%
must
be
subscribed and 25% must be paid.
Exception: If the law provides
otherwise, i.e., special laws.
C. Grounds for rejection of the Articles of
Incorporation
1. The articles of incorporation or any
amendment
thereto
is
not
substantially in accordance with the
form prescribed herein;
2. The purpose or purposes of the
corporation
are
patently
unconstitutional, illegal, immoral, or
contrary to government rules and
regulations;
3. The Treasurers Affidavit concerning
the amount of capital stock subscribed
and/or paid is false;
4. The percentage of ownership of the
capital stock to be owned by citizens of
the Philippines has not been complied
with as required by existing laws or the
Constitution.
Dual
Franchise
Requirement:
No
articles of incorporation or amendment to
articles of incorporation of banks, banking
and quasi-banking institutions, building
and loan associations, trust companies
and
other
financial
intermediaries,
insurance companies, public utilities,
educational
institutions,
and
other
corporations governed by special laws
shall be accepted or approved by the
Commission unless accompanied by a
favourable
recommendation
of
the
appropriate government agency to the
effect that such articles or amendment is
in accordance with law.
D. Commencement of Corporate Existence
Sec. 19 of the Corporation Code states
that A private corporation formed or
organized under this Code commences to
have corporate existence and juridical
personality and is deemed incorporated
from the date the SEC issues a certificate
of incorporation under its official seal; and
thereupon
the
incorporators,
stockholders/members
and
their
successors shall constitute a body politic
and corporate under the name stated in
the articles of incorporation for the period
of time mentioned therein, unless said

Corporation Code
period is extended or the corporation is
sooner dissolved in accordance with law.
*For purposes of determining whether a
corporation enjoys the status of a de facto
corporation, it must have been at least
issued a certificate of registration.
E. Amendment
of
the
Articles
of
Incorporation
that: Unless otherwise prescribed by this
Code or by special law, and for legitimate
purposes, any provision or matter stated
in the articles of incorporation may be
amended by a majority vote of the board
of directors or trustees and the vote or
written assent of the stockholders
representing
at
least
2/3
of
the
outstanding
capital
stock,
without
prejudice to the appraisal right of
dissenting stockholders in accordance with
the provisions of this Code, or the vote or
written assent of at least 2/3 of the
members if it be a non-stock corporation.
*It is effective upon the approval of the
SEC.
*There may be an amendment by inaction.
Amendment by Inaction Upon filing
with the SEC of the amendment and the
Commission failed to act on it within 6
months from the date of filing for a cause
not attributable to the corporation.
F.
Effects of Non-Use of Corporate Charter

that: If a corporation does not formally
organize and commence the transaction of
its business or the construction of its work
within 2 years from the date of its
incorporation, its corporate powers cease
and the corporation shall be deemed
dissolved. However, if the corporation has
commenced the transaction of its business
but subsequently becomes continuously
inoperative for a period of at least 5 years,
the same shall be a ground for the
suspension or revocation of its corporate
franchise or certificate of incorporation.
This provision shall not apply if the failure
to organize, commence the transaction of
its businesses or the construction of its
works, or to continuously operate is due to
causes beyond the control of the
corporation as may be determined by the
SEC.
*The period must be counted from the
issuance
of
the
Certificate
of
Incorporation.
*Automatic
dissolution
is
not
contemplated under Section 22. (SEC
Opinion).
*Section 22 must be read in conjunction
with Sec 6(1) of PD 902-A which requires
that the corporation must be given the
opportunity to be heard in compliance
with the requirement of due process
before the revocation of its license.
CONTROL
AND
CORPORATION:
MANAGEMENT
OF
A. Levels of Corporate Control

1. By Stockholders/Shareholders;
2. By Corporate Officers;
3. By Directors/Trustees
B. Board of Directors/Trustees
General Powers of the Board
states that: Unless otherwise provided
in this Code, the corporate powers of
all corporations formed under this
Code shall be exercised, all business
conducted and all property of such
corporations controlled and held by the
board of directors or trustees to be
elected from among the holders of
stocks, or where there is no stock, from
among
the
members
of
the
corporation, who shall hold office for
one year until their successors are
elected and qualified.
Powers of the Board of Directors:
1. Corporate Powers;
2. Manage the Corporation; and
3. Control over and hold the properties
of the Corporation.
*Board of Directors/Trustees is the
statutory
representative
of
the
corporation.
General Rule: All corporate powers
emanate
from
the
Board
of
Directors/Trustees.
Exception: Unless otherwise provided
in this Code. (Limiting Clause)
The limiting clause means that there
are certain corporate matters that
cannot be done by the Board by
reason that such matters fall upon the
shareholders; or corporate matters
that cannot be resolved by the Board
alone, i.e., it must be done with the
approval of the shareholders.
Business Judgment Rule
Business Judgment Rule questions
of policy or management are left solely
10

Corporation Code
to the honest decision of officers and

directors of a corporation and the
courts are without authority to
substitute their judgment for the
judgment of the board of directors; the
board is the business manager of the
corporation and so long as it acts in
good faith its orders are not reviewable
by the courts or the SEC.
- A resolution or transaction pursued
within the corporate powers and
business operations of the corporation,
and passed in good faith by the board
of directors/trustee, is valid and
binding, and generally the courts have
no authority to review the same and
substitute their own judgment, even
when the exercise of such power may
cause losses to the corporation or
decrease the profits of a department.
*Great respect is accorded to the
decisions
of
the
Board
of
Directors/Trustees.
*The directors are not liable to the
stockholders in performing such acts.
Qualifications of the Board Members
states that: Every director must have
at least one share of the capital stock
of the corporation of which he is a
director, which share shall stand in his
name on the books of the corporation.
Any director who ceases to be the
owner of at least one share of the
capital stock of the corporation of
which he is a director shall thereby
cease to be a director. Trustees of nonstock corporations must be members
thereof. A majority of the directors or
trustees of all corporations organized
under this Code must be residents of
the Philippines.
*In order to be eligible as director,
what is material is the legal title to and
not beneficial title or ownership of the
stocks appearing on the books of the
corporation.
*The
directors/trustees
must
be
natural persons.
*They must also be of legal age.
*He must possess other qualifications
as may be prescribed in the by-laws of
the corporation.
*Under Sec. 27 of the Corporation
Code: No person convicted by final
judgment of an offense punishable by
imprisonment for a period exceeding 6
years, or a violation of this Code
committed within 5 years prior to the

date of his election or appointment,
shall qualify as a director, trustee or
officer of any corporation.
Reason: The position is based on trust
and confidence.
*No citizenship requirement.
*The By-Laws may provide additional
qualifications/disqualifications.
Election of the Board Members
provides that: At all elections of
directors or trustees, there must be
present, either in person or by
representative authorized to act by
written proxy, the owners of a majority
of the outstanding capital stock, or if
there be no capital stock, a majority of
the members entitled to vote. The
election must be by ballot if requested
by any voting stockholder or member.
In
stock
corporations,
every
stockholder entitled to vote shall have
the right to vote in person or by proxy
the number of shares of stock
standing, at the time fixed in the bylaws, in his own name on the stock
books of the corporation, or where the
by-laws are silent at the time of the
election; and said stockholder may
vote such number of shares for as
many persons as there are directors to
be elected or he may cumulate said
shares and give one candidate as
many votes as the number of directors
to be elected multiplied by the number
of his shares shall equal, or he may
distribute them on the same principle
among as many candidates as he shall
see fit: Provided, that the total number
of votes cast by him shall not exceed
the number of shares owned by him as
shown in the books of the corporation
multiplied by the whole number of
directors to be elected: Provided,
however, that no delinquent stock
shall be voted. Unless otherwise
provided
in
the
articles
of
incorporation or in the by-laws,
members of the corporations which
have no capital stock may cast as
many votes as there are trustees to be
elected but may not cast more than
one
vote
for
one
candidate.
Candidates receiving the highest
number of votes shall be declared
elected.
Any
meeting
of
the
11

Corporation Code
stockholders or members called for an
election may adjourn from day to day
or from time to time but not sine die or
indefinitely if, for any reason, no
election is held, or if there not present
or represented by proxy, at the
meeting, the owners of a majority of
the outstanding capital stock, or if
there be no capital stock, a majority of
the member entitled to vote.
*It is the stockholders or corporators
who elect members of the Board of
Directors.
*The only procedure required by the
Code is through Election. There can
be no other modes.
*The election must be by ballot if
requested by any voting member or
stockholder.
*A stockholder cannot be deprived in
the articles of incorporation or in the
by-laws of his statutory right to use
any of the methods of voting in the
election of directors.
*No delinquent stock shall be voted.
*It is not required that the candidate
received the majority vote, what the
law provides is only plurality of votes.
*Majority number is required only for
the existence of a quorum.
Not
included
in
outstanding
capital stocks: 1. Unissued stocks;
2. Non-voting stocks;
3. Treasury Shares.
Methods of Voting:
1.
Straight
Voting
every
stockholder may vote such number of
shares for as many persons as there
are directors to be elected.
2. Cumulative Voting for One
Candidate a stockholder is allowed
to concentrate his votes and give one
candidate as many votes as the
number of directors to be elected
multiplied by the number of his shares
shall equal.
*Example: X has 10 shares in his
name; there are 5 numbers of directors
to be elected. X has 50 votes (10x5)
available to him. X may opt to
concentrate all his 50 votes to a
particular candidate.
3.
Cumulative
Voting
by
Distribution a stockholder may
cumulate his shares by multiplying
also the number of his shares by the
number of directors to be elected and
distribute the same among as many

candidates as he shall see fit.
*Example: X has 10 shares in his
name; there are 5 numbers of directors
to be elected. X has 50 votes available
to him. X may opt to distribute the
votes to as many candidates as there
are provided that the total number of
votes does not exceed 50.
Purpose of cumulative voting: To
protect the minority stockholders.
*The elected officer must act as a
body.
*In a stock corporation, cumulative
voting is a statutory right whereas in a
non-stock
corporation,
cumulative
voting is applicable if it is provided in
the Article of Incorporation.
provides that: Within 30 days after the
election of the directors, trustees and
officers of the corporation, the
secretary, or any other officer of the
corporation, shall submit to the SEC,
the
names,
nationalities
and
residences of the directors, trustees
and officers elected. Should a director,
trustee or officer die, resign or in any
manner cease to hold office, his heirs
in case of his death, the secretary, or
any other officer of the corporation, or
the director, trustee or officer himself,
shall immediately report such fact to
the SEC.
Term of Office
*The directors or trustees shall hold
office for one (1) year subject to the
hold over principle, i.e., they
continue in office until their successors
are elected and qualified.
*The one year period does not apply to
directors initially elected for purposes
of incorporation.
Quorum
Requirement in Board
Meetings
states that: Unless the articles of
incorporation or the by-laws provide
for a greater majority, a majority of the
number of directors or trustees as
fixed in the articles of incorporation
shall constitute a quorum for the
transaction of corporate business, and
every decision of at least a majority of
the directors or trustees present at a
meeting at which there is a quorum
shall be valid as a corporate act,
12

Corporation Code
except for the election of officers

which shall require the vote of a
majority of all the members of the
board.
Q: Is the director allowed to let a proxy
attend a board meeting in behalf for
himself?
A: NO. Proxy prohibition.
Reason: Because of their personal
qualifications.
*Quorum requirement should always
be computed based on the number
specified
in
the
Articles
of
Incorporation regardless of ensuing
vacancies.
*The basis is always the number
specified
in
the
Articles
of
Incorporation.
*The corporation can modify the
number by providing a different
provision
in
the
articles
of
incorporation,
however,
the
law
provides that the modification must be
for a number greater than that
provided in the law. It cannot provide
for a number less than the general
requirement of the code.
*For voting purposes, majority of the
member
present
constituting
a
quorum. Except: election of directors.
Removal of Board Members
states that: Any director or trustee of
a corporation may be removed from
office by a vote of the stockholders
holding or representing at least 2/3 of
the outstanding capital stock, or if the
corporation
be
a
non-stock
corporation, by a vote of at least 2/3 of
the
members entitled
to vote:
Provided, that such removal shall take
place either at a regular meeting of the
corporation or at a special meeting
called for the purpose, and in either
case,
after
previous
notice
to
stockholders or members of the
corporation of the intention to propose
such removal at the meeting. A special
meeting of the stockholders or
members of a corporation for the
purpose of removal of directors or
trustees, or any of them, must be
called by the secretary on order of the
president or on the written demand of
the stockholders representing or
holding at least a majority of the
outstanding capital stock, or, if it be a
non-stock corporation, on the written

demand of a majority of the members
entitled to vote. Should the secretary
fail or refuse to call the special
meeting upon such demand or fail or
refuse to give the notice, or if there is
no secretary, the call for the meeting
may be addressed directly to the
stockholders or members by any
stockholder
or
member
of
the
corporation signing the demand.
Notice of the time and place of such
meeting, as well as of the intention to
propose such removal, must be given
by publication or by written notice
prescribed in this Code. Removal may
be with or without cause: Provided,
that removal without cause may not be
used to deprive minority stockholders
or
members
of
the
right
of
representation to which they may be
entitled under Sec. 24 of this Code.
Requisites:
1. It must take place either at a regular
meeting or special meeting of the
stockholders or members called for the
purpose;
2. There must be previous notice to
the stockholders or member of the
intention to remove;
3. The removal must be by a vote of
the stockholders representing 2/3
outstanding capital stock or 2/3 of
members;
4. The director may be removed with
or without cause unless he was elected
by the minority, in which case, it is
required that there is cause for
removal.
Reason: The functions of directors are
fiduciary in nature.
Requisites for the removal of
minority directors are:
1. Justifiable cause;
2.
Satisfaction
of
the
voting
requirements, i.e., 2/3 of OCS or
members.
*It is the secretary of the corporation
upon order of the president or in case
there is no secretary, stockholder
representing
majority
of
the
outstanding capital stocks or member
signing the demand who may call a
meeting for the purpose of removal.
Vacancies in the Board
provides that: Any vacancy occurring
in the board of directors or trustees
13

Corporation Code
other than by removal by the

stockholders or members or by
expiration of term, may be filled by the
vote of at least a majority of the
remaining directors or trustees, if still
constituting a quorum; otherwise, said
vacancies must be filled by the
stockholders in a regular or special
meeting called for that purpose. A
director or trustee so elected to fill a
vacancy shall be elected only or the
unexpired term of his predecessor in
office. A directorship or trusteeship to
be filled by reason of an increase in
the number of directors or trustees
shall be filled only by an election at a
regular or at a special meeting of
stockholders or members duly called
for the purpose, or in the same
meeting authorizing the increase of
directors or trustees if so stated in the
notice of the meeting.
General Rule: Power to elect directors
is vested in the stockholders
Exception: Vacancy occurring in the
board of directors or trustees other
than by removal by the stockholders or
members or by expiration of term may
be filled by the vote of at least a
majority of the remaining directors or
trustees if still constituting a quorum.
Compensation of Board Members
provides that: In the absence of any
provision in the by-laws fixing their
compensation, the directors shall not
receive any compensation, as such
directors, except for reasonable per
diems: Provided, however, that any
such compensation other than per
diems may be granted to directors by
the
vote
of
the
stockholders
representing at least a majority of the
outstanding capital stock at a regular
or special stockholders meeting. In no
case
shall
the
total
yearly
compensation of directors, as such
directors, exceed 10% of the net
income before income tax of the
corporation during the preceding
year.
General Rule: Directors are not
entitled to receive compensation
Exceptions:
1. When their compensation is fixed in
the by-laws;
2. If compensation is granted to
directors
by
the
vote
of
the
stockholders representing at least a
majority of the outstanding capital
stock at a regular or special
stockholders meeting.
Limitation: In no case shall the total
yearly compensation of directors
exceed 10% of the net income before
income tax of the corporation during
the preceding year.
Reason: In order to avoid temptation
on the part of directors to abuse
powers by appropriating compensation
packages since they are in control of
corporate assets.
C. Corporate Officers
Concept of Corporate Officers
*Corporate powers reside on the Board
of Directors; decision/policymaking
resides on them. Implementation of
rules/policy lies on the corporate
officers
Categories:
1. Statutory Corporate Officers
President (must be a stockholder);
Secretary (must be a resident and
citizen of the Philippines); Treasurer
(must be a resident and citizen of the
Philippines).
2. As provided by the By-Laws
must be clearly stated in the By-Laws
that such office is a corporate office.
3. Those designated by the
Board of Directors provided the
Board of Directors is authorized to
do so by the By-Laws.
Validity and Binding Effect of Acts of
Corporate Officers
General Rule: No one, even corporate
officers can bind the corporation. It is
only the Board of Directors who has
the authority to bind the corporation.
Exceptions:
1. If the By-Laws provides that such act
is part of the function of such office;
2. If authorized by the Board of
Directors
Doctrine of Apparent Authority
Doctrine
of
Apparent
Authority/Doctrine of Estoppel If a
corporation, knowingly permits one of
its officers, or any other agent, to act
within the scope of an apparent
authority, it holds him out to the public
as possessing the power to do those
acts; and thus, the corporation will, as
14

Corporation Code
against anyone who has in good faith
dealt with it through such agent, be
stopped from denying the agents
authority.
Cases: Peoples Aircargo; InterAsia; Lapu-Lapu
*Requires good faith on the part of
third person.
D. Liability of Directors, Trustees and Officers
Instances
when
Corporate
Officers/Directors are held Solidarily
Liable
provides that: Directors or trustees
who wilfully and knowingly vote for or
assent to patently unlawful acts of the
corporation or who are guilty of gross
negligence or bad faith in directing the
affairs of the corporation or acquire
any personal or pecuniary interest in
conflict with their duty as such
directors or trustees shall be liable
jointly and severally for all damages
resulting therefrom suffered by the
corporation,
its
stockholders
or
members and other persons. When a
director, trustee or officer attempts to
acquire or acquires, in violation of his
duty, any interest adverse to the
corporation in respect of any matter
which has been reposed in him in
confidence, as to which equity imposes
a disability upon him to deal in his own
behalf, he shall be liable as a trustee
for the corporation and must account
for the profits which otherwise would
have accrued to the corporation.
General
Rule:
Directors/Trustees/Officers
are
not
solidarily liable with the corporation.
Exceptions:
1. Wilfully and knowingly vote for
and assent to patently unlawful
acts of the corporation (Sec.
31).
Case: Carag v NLRC
2. Guilty of gross negligence or
bad faith in directing the affairs
of the corporation (Sec. 31).
Case: David v Construction
Industry
3. Acquire
any
personal
or
pecuniary interest in conflict of
their duty (Sec.31).
4. Consent to the issuance of
watered
stocks
or
having
knowledge thereof, fails to file
objections with the secretary

(Sec. 65).
5. Agree or stipulate in a contract
to hold himself personally liable
with the corporation.
6. By virtue of a specific provision
of law such as BP 22; Trust
receipts Law; RA 7832 (AntiElectricity Pilferage Act of
1997); Securities Regulation
Code
*In Carag v NLRC, the Supreme Court
held that not any violative of law, the
Code means that violation must have a
corresponding penalty. Patently unlawful
act means that a law declares an act
unlawful and that such law provides
penalty for that unlawful act.
Self-Dealing Directors/Officers
states that: A contract of the
corporation with one or more of its
directors or trustees or officers is
voidable, at the option of such
corporation, unless all of the following
conditions are present: 1. That the
presence of such director or trustee in
the board meeting in which the
contract was approved was not
necessary to constitute a quorum for
such meeting; 2. That the vote of such
director or trustee was not necessary
for the approval of the contract; 3.
That the contract is fair and
reasonable under the circumstances;
and 4. That in case of an officer, the
contract
has
been
previously
authorized by the board of directors.
Where any of the first two conditions
set forth in the preceding paragraph is
absent, in the case of a contract with a
director or trustee, such contract may
be ratified by the vote of the
stockholders representing at least 2/3
of the outstanding capital stock or of
at least 2/3 of the members in a
meeting called for the purpose:
Provided, That full disclosure of the
adverse interest of the directors or
trustees involved is made at such
meeting: Provided, however, that the
contract is fair and reasonable under
the circumstances.
Example:
15

Corporation Code
In XYZ Corporation, A is a director. The
corporation acts through the Board of
Directors. XYZ Corporation and A
entered into a lease contract. A as the
lessor and XYZ Corporation as lessee.
The contract was approved by the
Board of Directors.
Q: What is the status of the contract?
General Rule: The contract is
voidable.
Exception: If the requisites provided
in Sec. 32 are present.
Exception to the Exception: If
requirement number 1 or 2 is absent,
in the case of a contract with a director
or trustee, such contract may be
considered valid by the ratification of
at least 2/3 of the outstanding capital
stock or 2/3 of the members.
Requisites:
1. The presence of such director or
trustee in the board meeting in which
the contract was approved was not
necessary to constitute a quorum for
such meeting;
2. The vote of such director or trustee
was not necessary for the approval of
the contract;
3. The contract is fair and reasonable
under the circumstances;
4. In case of an officer, the contract
has been previously authorized by the
board of directors.
Reason: As presence in the board
meeting might affect the status of the
contract.
Self-Dealing Directors/Officers
directors/officers
who
transact
business with their own corporation.
- This is not prohibited by law.
Interlocking Directors those who
have been elected as directors in 2 or
more different corporations.
- May be prohibited by the By-Laws
(Gokongwei case).
-Not prohibited by law however there
are consequences.
Contracts
involving
Inter-locking
Directors
provides that: Except in cases of
fraud, and provided the contract is fair
and
reasonable
under
the
circumstances, a contract between two
or
more
corporations
having
interlocking directors shall not be
invalidated on that ground alone:
Provided, That if the interest of the
interlocking director in one corporation

is substantial and his interest in the
other corporation or corporations is
merely nominal, he shall be subject to
the provisions of the preceding section
insofar as the latter corporation or
corporations
are
concerned.
Stockholdings exceeding 20% of the
outstanding capital stock shall be
considered substantial for purposes of
interlocking directors.
Example:
A is a director of two corporation, ABC
Corporation and XYZ Corporation. XYZ
Corporation and ABC Corporation
entered into a lease contract where
ABC Corporation is the lessor and XYZ
Corporation is the lessee.
Q: Can this contract be invalidated on
the ground that there is an interlocking
director?
A: NO.
Q: What is the status of the contract?
A: General Rule: Contracts between
two or more corporations having
interlocking directors are valid.
Exceptions:
1.
Contracts are void if contracts
are fraudulent or if contracts are
unfair and unreasonable.
2.
If
the
By-Laws
prohibits
interlocking director.
Case: Gokongwei, Jr. v SEC
*The interest is nominal if his interest
is 20% or less of the outstanding
capital
stock.
The
interest
is
substantial if his interest is more than
20% of the outstanding capital stock.
*If the interlocking director has a
substantial interest in one corporation
and has a nominal interest in the other
corporation, the director must comply
with the requisites provided in Sec. 32
on self-dealing directors.
Reason: The case is analogous to that
of transactions involving self-dealing
directors because such director holds
substantial interest with the other
company.
Doctrine of Corporate Opportunity
states that: Where a director, by
virtue of his office, acquires for himself
a business opportunity which should
belong to the corporation, thereby
obtaining profits to the prejudice of
such corporation, he must account to
the latter for all such profits by
16

Corporation Code
refunding the same, unless his act has
been ratified by a vote of the
stockholders owning or representing at
least 2/3 of the outstanding capital
stock.
This
provision
shall
be
applicable notwithstanding the fact
that the director risked his own funds
in the venture.
General Rule: A director shall refund
to the corporation all the profits he
realizes on a business opportunity
which: 1. the corporation is financially
able to undertake; 2. from its nature, is
in line with corporations business and
is of practical advantage to it; and 3.
the corporation has an interest or a
reasonable expectancy.
Exception: His act has been ratified
by a vote of the stockholders owning
or representing at least 2/3 of the
outstanding capital stock.
*A business opportunity ceases to be
corporate opportunity and transforms
to personal opportunity where the
corporation refuses or is definitely no
longer able to avail itself of the
opportunity.
E. Executive Committee
that: The by-laws of a corporation may
create an executive committee composed
of not less than 3 members of the board to
be appointed by the board. Said
committee may act, by majority vote of all
its members, on such specific matters
within the competence of the board, as
may be delegated to it in the by-laws or
on a majority vote of the board, except
with respect to: (1) approval of any action
for which shareholders approval is also
required; (2) the filing of vacancies in the
board; (3) the amendment or repeal of bylaws or the adoption of new by-laws; (4)
the amendment or repeal of any resolution
of the board which by its express terms is
not so amendable or repealable; and (5) a
distribution of cash dividends to the
shareholders.
Keyword: BY-LAWS
*It must be stated in the By-Laws.
*Board Resolution is not sufficient if there
is no provision in the By-Laws.
*The decision of the executive committee
is considered a Board Resolution.
is not subject to appeal to the board.
However, if the resolution of the Executive
Committee is invalid it may be ratified by

the Board.
needs no confirmation from the Board.
Case: Filipinas Port, Inc.
*The corporation may create other
committees.
Distinction: In executive committee,
there is a statutory restriction on members
whereas in other committee there is no
such restriction.
General Rule: The executive committee
may act on specific matters within the
competence of the board as may be
delegated to it in the by-laws or on a
majority vote of the board.
Exceptions:
1. Approval of any action for which
shareholders approval is also required;
2. The filing of vacancies in the board;
3. The amendment or repeal of by-laws
or the adoption of new by-laws;
4. The amendment or repeal of any
resolution of the board which by its
express terms is not so amendable or
repealable;
5. A distribution of cash dividends to the
shareholders.
CORPORATE POWERS:
A. Doctrine of Limited Capacity; Concept of
Ultra Vires Act
that: No corporation under this Code shall
possess or exercise any corporate powers
except those conferred by this Code or by
its articles of incorporation and except
such as are necessary or incidental to the
exercise of powers so conferred.
Ultra Vires Acts an act committed
outside the object for which a corporation
is created as defined by the law of its
organization and therefore beyond the
power conferred upon it by law.
Effects of Ultra Vires Acts:
1. Executed Contract courts will not
set aside or interfere with such
contracts.
2. Executory
Contract
no
enforcement even at the suit of either
party.
3. Partly
executed
and
Partly
executory
contract
principle
against unjust enrichment shall apply.
B. Classes of Corporate Powers
1. Express
2. Implied
3. Incidental
17

Corporation Code
Express those expressly authorized

by the Corporation Code and other
laws, and its Articles of Incorporation
or Charter.
Implied those that can be inferred
from or necessary for the exercise of
the express powers.
Incidental those that are incidental
to the existence of the corporation.
Doctrine of Necessary Implication those

which can be reasonably inferred from the
express powers given since they are necessary
for the corporation to perform a particular act are
deemed part of such powers.
C. Statutory Powers of a Corporation and the
Limitations on their Exercise
that: Every corporation incorporated
under this Code has the power and
capacity: 1. To sue and be sued in its
corporate name; 2. Of succession by its
corporate name for the period of time
stated in the articles of incorporation and
the certificate of incorporation; 3. To adopt
and use a corporate seal; 4. To amend its
articles of incorporation in accordance
with the provisions of this Code; 5. To
adopt by-laws, not contrary to law, morals,
or public policy, and to amend or repeal
the same in accordance with this Code; 6.
In case of stock corporations, to issue or
sell stocks to subscribers and to sell
treasury stocks in accordance with the
provisions of this Code; and to admit
members to the corporation if it be a nonstock corporation; 7. To purchase, receive,
take or grant, hold, convey, sell, lease,
pledge, mortgage and otherwise deal with
such real and personal property, including
securities and bonds of other corporations,
as the transaction of the lawful business of
the corporation may reasonably and
necessarily require, subject to the
limitations prescribed by law and the
Constitution; 8. To enter into merger or
consolidation with other corporations as
provided in this Code; 9. To make
reasonable donations, including those for
the public welfare or for hospital,
charitable, cultural, scientific, civic, or
similar purposes: Provided, That no
corporation, domestic or foreign, shall give
donations in aid of any political party or
candidate or for purposes of partisan
political activity; 10. To establish pension,
retirement, and other plans for the benefit

of its directors, trustees, officers and
employees; and 11. To exercise such other
powers as may be essential or necessary
to carry out its purpose or purposes as
stated in the articles of incorporation.
Amendment of Articles of Incorporation
states
that:
Unless
otherwise
prescribed by this Code or by special
law, and for legitimate purposes, any
provision or matter stated in the
articles of incorporation may be
amended by a majority vote of the
board of directors or trustees and the
vote or written assent of the
of the outstanding capital stock,
without prejudice to the appraisal right
of
dissenting
stockholders
in
accordance with the provisions of this
Code, or the vote or written assent of
at least 2/3 of the members if it be a
non-stock corporation.
*The following are excluded in
counting the outstanding capital stock:
1. Treasury stock; 2. Unissued shares.
*Aside from the votes of majority of
the board and assent of the 2/3 of the
OCS, the approval of the SEC is
necessary for the amendment of the
AOI.
*There is an implied approval of the
SEC, i.e., failure to act on the
application filed by the corporation
within 6 mos.
Q: How to get the approval of the
stockholders?
A: 1. Call for a meeting; 2. Obtain the
written assent of the stockholders.
*In Tan v Sycip, the Supreme Court
held that in case of a non-stock
corporation, membership is personal
and non-transferrable unless the bylaws provides otherwise. The deceased
member is not entitled to vote.
Four changes in Articles of Incorporation
that
require
the
approval
of
the
stockholders.
1. Extension of corporate term;
2. Shortening of corporate term;
3. Increase or Decrease of Capital Stock;
4. Increase or Decrease of Bonded indebtedness.
*Approval of Stockholders is necessary in these
changes because they are necessary for the
corporations existence.
18

Corporation Code
Extension/Shortening
of
Corporate
Term
states that: A private corporation may
extend or shorten its term as stated in
the articles of incorporation when
approved by a majority vote of the
board of directors or trustees and
ratified
at
a
meeting
by
the
of the outstanding capital stock or by
at least 2/3 of the members in case of
non-stock corporation. Written notice
of the proposed action and of the time
and place of the meeting shall be
addressed to each stockholder or
member at his place of residence as
shown on the books of the corporation
and deposited to the addressee in the
post office with postage prepaid, or
served personally: Provided, That in
case of extension of corporate term,
any
dissenting
stockholder
may
exercise his appraisal right under the
conditions provided in this code.
Increase or Decrease of Capital Stock/
Incurrence, Creation or Increase of
Bonded Indebtedness
states that: No corporation shall
increase or decrease its capital stock
or incur, create or increase any bonded
indebtedness unless approved by a
majority vote of the board of directors
and, at a stockholders meeting duly
called for the purpose, 2/3 of the
outstanding capital stock shall favor
the increase or diminution of the
capital stock, or the incurring, creating
or
increasing
of
any
bonded
indebtedness. Written notice of the
proposed increase or diminution of the
capital stock or of the incurring,
creating, or increasing of any bonded
indebtedness and of the time and
place of the stockholders meeting at
which the proposed increase or
diminution of the capital stock or the
incurring or increasing of any bonded
indebtedness is to be considered ,
must be addressed to each stockholder
at his place of residence as shown on
the books of the corporation and
deposited to the addressee in the post
office with postage prepaid, or served
personally. xxx.
Q: When the corporation increases its

capital stock, is the 25% requirement
necessary? How can it be computed?
A: YES. The SEC ruled that the 25%
applies to the increase amount.
*The corporation is required to
maintain a sinking fund.
Q: What does bonded indebtedness
mean?
A: Requires longer time of payment;
special burden on the corporation;
involves the important assets of the
corporation.
Denial of Pre-emptive Right
states that: All stockholders of a stock
corporation shall enjoy pre-emptive
right to subscribe to all issues or
disposition of shares of any class, in
proportion
to
their
respective
shareholdings, unless such right is
denied by the articles of incorporation
or an amendment thereto: Provided,
That such pre-emptive right shall not
extend to shares to be issued in
compliance with laws requiring stock
offerings or minimum stock ownership
by the public; or to shares to be issued
in good faith with the approval of the
stockholders representing 2/3 of the
outstanding capital stock, in exchange
for property needed for corporate
purposes or in payment of a previously
contracted debt.
*Coming from the increased authorized
capital stock.
* Similar to Right of First Refusal
*It is not a matter of right. It can be
denied by the corporation through
denial of such right in the articles of
incorporation.
Purposes:
1. In order that the stockholder may be
able
to
maintain
their
relative
proportional voting trend and control in
the corporation; 2. To avoid dilution of
their proportionate voting and control
in the corporation.
General Rule: Pre-emptive right is
available to stockholders.
Exception: if it is denied in the
Articles of Incorporation or through
amendment.
Exception to the Exception: Preemptive right shall not extend to:
1. Shares to be issued in compliance
with laws requiring stock offerings or
19

Corporation Code
minimum stock ownership by the

public;
2. Shares to be issued in good faith
with the approval of the stockholders
representing 2/3 of the outstanding
capital stock, in exchange for property
needed for corporate purposes; and
3. In payment of a previously
contracted debt.
*Pre-emptive right is satisfied as long
as
the
corporation
gives
the
stockholder the opportunity to buy the
shares.
*The offer must first be made to the
stockholders.
Sale or Disposition of Assets
states that: Subject to the provisions
of existing laws on illegal combinations
and monopolies, a corporation may, by
a majority vote of its board of directors
or trustees, sell, lease, exchange,
mortgage, pledge or otherwise dispose
of all or substantially all of its property
and assets, including its goodwill, upon
such terms and conditions and for such
consideration, which may be money,
stocks, bonds or other instruments for
the payment of money or other
property or consideration, as its board
of directors or trustees may deem
expedient, when authorized by the
vote of the stockholders representing
at least 2/3 of the outstanding capital
stock, or in case of non-stock
corporation by the vote of at least 2/3
of the members, in a stockholders or
members meeting duly called for the
purpose.
Written
notice
of
the
proposed action and of the time and
place of the meeting shall be
addressed to each stockholder or
served personally: Provided, That any
dissenting stockholder may exercise
his appraisal right under the conditions
provided in this Code. A sale or other
disposition shall be deemed to cover
substantially all the corporate property
and assets if thereby the corporation
would be rendered incapable of
continuing
the
business
or
accomplishing the purpose for which it
was incorporated. xxx.
Q: What makes the disposition

peculiar?
A: The disposition is of all or
substantially all of the corporations
properties and assets.
Q: What kind of disposition involve?
A: 1. Sell; 2. Lease; 3. Exchange; 4.
Mortgage; 5. Pledge.
Requirements:
1. Majority vote of the Board.
2. Vote
of
the
Stockholders
representing 2/3 of the OCS.
3. The sale does not bring about the
illegal
combinations
and
monopolies.
*No need for the approval of the SEC.
Tests:
1. Quantitative Test no statutory
test; pertains to the disposition of
all assets
2. Qualitative Test there is a
statutory test; pertains to the
disposition of substantially all of its
assets.
*The provision is so strict because the
law wants the corporation will reach its
expiration term.
Q: With the sale of all the assets of the
corporation, will the same result to its
dissolution?
A: NO. Possession or continued
possession of corporate properties is
not a condition for the existence of a
corporation. Corporation still exists
despite the disposition of all its
properties and assets.
Q: Will the buying corporation be
made answerable for the liabilities of
the selling corporation?
A: NO. The two corporations are two
separate personalities thus they are
separate and distinct from each other
hence the buying corporation cannot
be held liable to the obligations of the
selling corporation.
General Rule: The sale of all or
substantially all of the assets of the
corporation does not make the buyer
answerable for the obligations of the
seller.
Exceptions:
1. If the buyer expressly agrees to
assume the obligations of the
seller.
2. If sale amounts to merger or
consolidation.
20

Corporation Code
3. If and when application of piercing

the veil of corporate entity doctrine
is warranted.
4. If the purchaser becomes a
continuation of the seller.
5. Sale was done in violation of the
Bulk Sales Law.
Case: PNB v Andrada
Acquisition of Corporate Shares
states that: A stock corporation shall
have the power to purchase or acquire
its own shares for a legitimate
corporate
purpose
or
purposes,
including but not limited to the
following cases: Provided, That the
corporation has unrestricted retained
earnings in its books to cover the
shares to be purchased or acquired: 1.
To eliminate fractional shares arising
out of stock dividends; 2. To collect or
compromise an indebtedness to the
corporation, arising out of unpaid
subscription, in a delinquency sale,
and to purchase delinquent shares sold
during said sale; and 3. To pay
dissenting or withdrawing stockholders
entitled to payment for their shares
under the provisions of this Code.
Requisites:
1. Unrestricted Retained Earnings
2. The acquisition must be for
legitimate purpose
Q: What is an unrestricted retained
earnings?
A: Earnings not allocated for any other
purpose.
Q: What happens to reacquired
shares?
A:
General
Rule:
They
are
automatically deemed retired.
Exception:
The
AOI
provides
otherwise.
Trust Fund Doctrine The capital stock,

property and other assets of the corporation are
regarded as equity in trust for the payment of the
corporate creditors. The subscribed capital stock
of the corporation is a trust fund for the payment
of debts of the corporation which the creditors
have the right to look up to satisfy their credits.
Corporation may not dissipate this and the
creditors may sue stockholders directly for the
unpaid subscription.
Investment of Corporate Funds

states that: Subject to the provisions
of this Code, a private corporation may
invest its funds in any other
corporation or business or for any
purpose other than the primary
purpose for which it was organized
when approved by a majority of the
board of directors or trustees and
ratified
by
the
stockholders
representing at least 2/3 of the
outstanding capital stock, or by at
least 2/3 of the members in the case of
non-stock
corporations,
at
a
stockholders or members meeting
duly called for the purpose. Written
notice of the proposed investment and
the time and place of the meeting shall
be addressed to each stockholder or
served personally: Provided, That any
dissenting stockholder shall have
appraisal right as provided in this
Code: Provided, however, That where
the investment by the corporation is
reasonably necessary to accomplish its
primary purpose as stated in the
articles of incorporation, the approval
of the stockholders or members shall
not be necessary.
Requisites:
1. Majority vote of the Board
2. Vote
of
the
stockholders
representing 2/3 OCS.
Declaration of Dividends
states that: The board of directors of
a stock corporation may declare
dividends out of the unrestricted
retained earnings which shall be
payable in cash, in property, or in
stock to all stockholders on the basis
of outstanding stock held by them:
Provided, That any cash dividends due
on delinquent stock shall first be
applied to the unpaid balance on the
subscription plus costs and expenses,
while stock dividends shall be withheld
from the delinquent stockholder until
his unpaid subscription is fully paid:
Provided, further, That no stock
dividend shall be issued without the
approval of stockholders representing
not less than 2/3 of the outstanding
21

Corporation Code
capital stock at a regular or special
meeting duly called for the purpose.
Stock corporations are prohibited from
retaining surplus profits in excess of
100% of their paid-in capital stock,
except: 1. When justified by definite
corporate
expansion
projects
or
programs approved by the board of
directors; or 2. When the corporation is
prohibited under any loan agreement
with any financial institution or
creditor, whether local or foreign, from
declaring dividends without its/his
consent, and such consent has not yet
been secured; or 3. When it can be
clearly shown that such retention is
necessary
under
special
circumstances
obtaining
in
the
corporation, such as when there is
need for special reserve for probable
contingencies.
*This section is exclusive to stock
corporations.
Dividends represents part of the
earnings of the corporation which the
board has decided to distribute among
the stockholders.
*The fact that the corporation has
surplus earning does not mean that it
is mandated to declare dividends; it is
still upon the sound discretion of the
board of directors.
Reason: Trust Fund Doctrine
*There must be a unrestricted retained
earnings before dividends may be
declared.
*The board may opt to restrict its
earnings, as the earnings may be
allocated
to
legitimate
business
purpose.
CASH
DIVIDENDS
does not require
stockholders
approval
The stockholders
receive cash
Creditor-debtor
relationship
STOCK
DIVIDENDS
Requires
stockholders
approval
The stockholders
receive stocks
No creditor-debtor
relationship
Requisites
for
declaration
cash/property dividends:
1. Board approval
2. Unrestricted Retained Earnings
of
Requisites for declaration of stock

dividends:
1. Unrestricted Retained Earnings;

2. Board approval;
3. Ratification by the stockholders.
Q: Why stockholders ratification is
necessary in the declaration of stock
dividends?
A:
Because
the
earnings
are
capitalized. It is considered to be a
corporate assets.
Q: May the board be compelled to
declare dividends?
A: General Rule: NO.
Exception: Stock corporations are
prohibited from retaining surplus
profits in excess of 100% of their paidin capital stock.
Exceptions to the Exception:
1. Corporate expansion
2. Pursuant to loan agreement
3. Special circumstances/contingent
liabilities
Q: Are the stock dividends considered
as watered stocks because the
stockholder concerned does not pay
anything therefor?
A: NO. The unrestricted retained
earnings are considered to be a
consideration thus dividends received
through stocks are not watered stocks.
*The source of payment is the
unrestricted retained earnings.
Q: Are delinquent stockholders entitled
to receive dividends?
A: YES. But only in terms of cash
dividends.
Q: Who are entitled to receive
dividends?
A: Stockholders
*In Nielson case, the SC held that
dividends cannot be given to nonstockholders.
*If there is date of record Dividends
may be received by those persons who
are holders of stocks as of date of
record.
*If there is no date of record
dividends may be received by those
persons who are holders of stocks as of
the declaration.
Q: When the corporation declares
stock dividends, would it likewise
create a creditor-debtor relationship
between the corporation and the
stockholder?
A: NO. Stock dividends will not bring
about a creditor-debtor relationship.
When it comes to shareholdings, the
22

Corporation Code
one holding the shares are considered

investors; risk-takers.
Q: Will legal compensation possible to
occur?
A: NO. The parties are not mutually
creditor-debtor of each other. The
requisites under the Civil Code on legal
compensation are not present.
Management Contract
states that: No corporation shall
conclude a management contract with
another
corporation
unless
such
contract shall have been approved by
the board of directors and by
stockholders owning at least the
majority of the outstanding capital
stock, or by at least a majority of the
members in the case of a non-stock
corporation, of both the managing and
the managed corporation, at a meeting
duly called for the purpose: Provided,
That 1. Where a stockholder or
stockholders representing the same
interest of both the managing and the
managed corporations own or control
more than 1/3 of the total outstanding
capital stock entitled to vote of the
managing corporation; or 2. Where a
majority of the members of the board
of
directors
of
the
managing
corporation also constitute a majority
of the members of the board of
directors of the managed corporation,
then the management contract must
be approved by the stockholders of the
managed corporation owning at least
2/3 of the total outstanding capital
stock entitled to vote, or by at least
2/3 of the members in the case of a
non-stock
corporation.
No
management contract shall be entered
into for a period longer than 5 years
for any one term. The provisions of the
next preceding paragraph shall apply
to any contract whereby a corporation
undertakes to manage or operate all or
substantially all of the business of
another corporation, whether such
contracts are called service contracts,
operating agreements or otherwise:
Provided, however, That such service
contracts or operating agreements
which relate to the exploration,
development, exploitation or utilization
of natural resources may be entered
into for such periods as may be

provided by the pertinent laws or
regulations.
Requisite:
General Rule: Majority vote of the
OCS
Exception: 2/3 of the OCS
*SECs approval is not necessary
*When the corporation enters into a
management contract, appraisal right
is NOT AVAILABLE to any dissenting
stockholder.
Reason:
Sound
business
policy
dictates that it would be better for the
corporation, at the inception of its
operation, to be managed by a
company who has been experienced in
a particular kind of business if the
managed
corporation
needs
the
technical expertise, skills, experiences,
background of another entity.
CORPORATE BY-LAWS:
A. Concept, Use and Nature of By-Laws
By-Laws relatively permanent and
continuing rules of action adopted by the
corporation for its own government and
that of the individuals composing it and
those having the direction, management
and control of its affairs, in whole or in
part, in the management and control of its
affairs and activities.
Nature: Regulates internal affairs of the
corporation.
B. By-Laws in relation to Articles of
Incorporation
Distinction between By-Laws and
Articles of Incorporation:
By-Laws is a condition subsequent.
Articles of Incorporation is a condition
precedent.
Essential
for
corporate
existence.
ARTICLES OF
INCORPORATION
BY-LAWS
External affairs
Affects the status
of existence of the
corporation
Internal Affairs
Does not affect the
status
of
the
existence but has
impact
on
the
existence; failure to
submit is a ground
for
disenfranchisement
General Rule: joint
decision
Exception:
Joint decision of the

board
and
stockholders
23

Corporation Code
Delegates the power
to amend the ByLaws to the Board
C. Adoption of By-Laws; Effect of Non-Filing
within the prescribed period
that: Every corporation formed under this
Code must, within 1 month after receipt of
official notice of the issuance of its
certificate of incorporation by the SEC,
adopt a code of By-Laws for its
government not inconsistent with this
Code. For the adoption of By-Laws by the
corporation the affirmative vote of the
stockholders representing at least a
majority of the outstanding capital stock,
or of at least a majority of the members in
case of non-stock corporations, shall be
necessary. The By-Laws shall be signed by
the stockholders or members voting for
them and shall be kept in the principal
office of the corporation, subject to the
inspection of the stockholders or members
during office hours. A copy thereof, duly
certified to by a majority of the directors
or trustees countersigned by the secretary
of the corporation, shall be filed with the
SEC which shall be attached to the original
articles of incorporation. Notwithstanding
the provisions of the preceding paragraph,
By-Laws may be adopted and filed prior to
incorporation; in such case, such By-Laws
shall be approved and signed by all the
incorporators and submitted to the SEC,
together with the articles of incorporation.
In all cases, By-Laws shall be effective
only upon the issuance by the SEC of a
certification that the By-Laws are not
inconsistent with this Code. The SEC shall
not accept for filing the By-Laws or any
amendment thereto of any bank, banking
institution, building and loan association,
trust company, insurance companies,
public utility, educational institution or
other special corporations governed by
special laws, unless accompanied by a
certificate of the appropriate government
agency to the effect that such By-Laws or
amendments are in accordance with law.
*Submission
of
By-Law
is
not
a
requirement for acquisition of corporate
existence, however, for the corporation to
be able to continue its corporate
existence, the corporation is required to
submit the corporate By-Law.
*Non-submission of the By-Laws within the

prescribed period allowed by law is a
ground for the dissolution of the
corporation.
*In Loyola Grandvillas Homeowners
Association v CA, the SC held that failure
to adopt a set of By-Laws within the
prescribed period, notwithstanding the
word used in the Code, the same would
not result to automatic dissolution of the
corporation. The failure to file by-laws
would not, by itself, amount to dissolution
or extinguishment of the corporate
existence.
*Section 46 of the Corporation Code must
be read in conjunction with PD 902-A
which outlines the procedure to be
followed before the franchise/license of a
private corporation may be suspended or
revoked.
*Observance of Due Process is necessary.
*In Sawadjaan v CA, the SC held that
meanwhile when the By-Laws is not yet
submitted, the corporation, at that time,
and the very least, may be considered as
a De Facto Corporation and therefore, its
right to exist as such cannot be inquired
into or cannot be collaterally attacked in a
private suit. It is for the State to initiate a
proceeding questioning the existence, on
the ground of its non-submission of ByLaws, within the prescribed period.
D. Contents of By-Laws; Requisites of a Valid
By-Law Provision
that: Subject to the provisions of the
Constitution, this Code, other special laws,
and the articles of incorporation, a private
corporation may provide in its By-Laws for:
1. The time, place and manner of calling
and
conducting
regular
or
special
meetings of the directors or trustees; 2.
The time and manner of calling and
conducting regular or special meetings of
the stockholders or members; 3. The
required
quorum
in
meetings
of
stockholders or members and the manner
of voting therein; 4. The form for proxies
of stockholders and members and the
manner
of
voting
them;
5.
The
qualifications, duties and compensation of
directors
or
trustees,
officers
and
employees; 6. The time for holding the
annual election of directors or trustees
and the mode or manner of giving notice
thereof; 7. The manner of election or
24

Corporation Code
appointment and the term of office of all
officers other than directors or trustees; 8.
The penalties for violation of the By-Laws;
9. In the case of stock corporations, the
manner of issuing stock certificates; and
10. Such other matters as may be
necessary for the proper or convenient
transaction of its corporate business and
affairs.
Requisites:
1. It must be consistent with Corporation
Code, other pertinent laws and
regulations.
2. It must be consistent with the Articles
of Incorporation.
3. It must be reasonable and not arbitrary
or oppressive.
4. It must not disturb vested rights,
impair contract or property rights of
stockholders or members or create
obligations unknown to law.
E. Amendment to By-Laws
provides that: The board of directors or
trustees, by a majority vote thereof, and
the owners of at least a majority of the
outstanding capital stock, or at least a
majority of the members of a non-stock
corporation, at a regular or special
meeting duly called for the purpose, may
amend or repeal any By-Laws or adopt
new By-Laws. The owners of 2/3 of the
outstanding capital stock or 2/3 of the
members in a non-stock corporation may
delegate to the board of directors or
trustees the power to amend or repeal any
By-Laws or adopt new By-Laws: Provided,
That any power delegated to the board of
directors or trustees to amend or repeal
any By-Laws or adopt new By-Laws shall
be considered as revoked whenever
stockholders owning or representing a
majority of the outstanding capital stock
or a majority of the members in non-stock
corporations, shall so vote at a regular or
special
meeting.
Whenever
any
amendment or new By-Laws are adopted,
such amendment or new By-Laws shall be
attached to the original By-Laws in the
office of the corporation, and a copy
thereof, duly certified under oath by the
corporate secretary and a majority of the
directors or trustees, shall be filed with the
SEC the same to be attached to the
original articles of incorporation and
original By-Laws. The amended or new By-
Laws shall only be effective upon the

issuance by the SEC of a certification that
the same are not inconsistent with this
Code.
F.
By-Laws in relation to Third Parties

*In China Banking Corporation v CA,
the SC held that in the absence of
evidence that China Bank is aware of the
provisions of the By-Laws, China Bank is
not bound to observe the provisions of the
By-Laws. Hence, China Bank must be
allowed to register the shares in its name.
General Rule: Third parties are not
affected by the By-Laws.
Exception: If the third party has actual
knowledge of the provisions of the ByLaws.
CORPORATE MEETINGS:
A. Kinds of Corporate Meetings
provides that: Meetings of directors,
trustees, stockholders, or members may
be regular or special.
Kinds:
a. Stockholders/Members:
1. Regular meeting
2. Special meeting
b. Directors/Trustees:
1. Regular meeting
2. Special meeting
provides that: Regular meetings of
stockholders or members shall be held
annually on a date fixed in the by-laws, or
if not so fixed, on any date in April of
every year as determined by the board of
directors or trustees: Provided, That
written notice of regular meetings shall be
sent to all stockholders or members of
record at least 2 weeks prior to the
meeting, unless a different period is
required by the by-laws. Special meetings
of stockholders or members shall be held
at any time deemed necessary or as
provided in the by-laws: Provided,
however, That at least 1 week written
notice shall be sent to all stockholders or
members, unless otherwise provided in
the by-laws. Notice of any meeting may be
waived, expressly or impliedly, by any
stockholder or member. Whenever, for any
cause, there is no person authorized to
call a meeting, the SEC, upon petition of a
stockholder or member on a showing of
good cause therefor, may issue an order
to the petitioning stockholder or member
25

Corporation Code
directing him to call a meeting of the
corporation by giving proper notice
required by this Code or by the by-laws.
The petitioning stockholder or member
shall preside thereat until at least a
majority of the stockholders or members
present have been chosen one of their
number as presiding officer.
*Regular
meeting
of
stockholders/members shall be held
annually on a date fixed in the by-laws or
if not so fixed, on any date in April of
every year. Written notice of regular
meetings shall be sent 2 weeks prior to
the meeting unless a different period is
required by the by-laws.
**
Special
meeting
of
stockholders/members shall be held at
any time deemed necessary or as
provided in the by-laws. Written notice
shall be sent to all stockholders or
members at least one week or unless
otherwise provided in the by-laws.
provides that: Regular meetings of the
board of directors or trustees of every
corporation shall be held monthly, unless
the by-laws provide otherwise. Special
meetings of the board of directors or
trustees may be held at any time upon the
call of the president or as provided in the
by-laws. Meetings of directors or trustees
of corporations may be held anywhere in
or outside of the Philippines, unless the
by-laws provide otherwise. Notice of
regular or special meetings stating the
date, time and place of the meeting must
be sent to every director or trustee at
least 1 day prior to the scheduled
meeting, unless otherwise provided by the
by-laws. A director or trustee may waive
this requirement, either expressly or
impliedly.
*Regular meetings of directors/trustees
shall be held monthly unless the by-laws
provide otherwise.
*Special meetings of directors/trustees
may be held at any time upon the call of
the president or as provided in the bylaws.
*Meetings of directors or trustees may be
held anywhere in or outside of the
Philippines unless the by-laws provide
otherwise.
*Notice of regular or special meetings
stating the date, time and place of the
meeting must be sent to every director or

trustee at least 1 day prior to the
scheduled meeting unless otherwise
provided by the by-laws.
B. Requirements of a Meeting
1. It must be held at the proper place.
2. It must be held at the stated date and
at the appointed time or at a
reasonable time thereafter.
3. It must be called by the proper person.
4. There must be a previous notice.
5. There must be a quorum.
provides that: Stockholders or members
meetings, whether regular or special, shall
be held in the city or municipality where
the principal office of the corporation is
located, and if practicable in the principal
office of the corporation: Provided, That
Metro Manila shall, for purposes of this
section,
be
considered
a city
or
municipality. Notice of meetings shall be in
writing, and the time and place thereof
stated therein. All proceedings had and
any business transacted at any meeting of
the stockholders or members, if within the
powers or authority of the corporation,
shall be valid even if the meeting be
improperly held or called, provided all the
stockholders
or
members
of
the
corporation
are
present
or
duly
represented at the meeting.
*Applies to both stock and non-stock
corporations.
General Rule: The meeting must be held
in the city or municipality where the
principal office is located.
Exception:
Sec. 93 on non-stock
corporations, the By-Laws may provide
different venue for their meeting.
*A casual reading of section 51 would say
that a corporation cannot provide any
other
place
for
the
meeting
of
stockholders. But in case of a non-stock
corporation, Section 93 of the Corporation
provides that the by-laws could provide
any place for the meeting of its members
provided that it is within the Philippines
and proper notice has been given.
Q: Is there a conflict between Section 51
and Section 93?
A: YES. There is conflict but this conflict
may be reconciled. As a rule, the by-laws
may provide a different place of meeting
provided that it is within the Philippines
and notice has been given. As an
26

Corporation Code
exception, if the by-laws is silent of the
place of the meeting, section 51 applies.
provides that: Unless otherwise provided
for in this Code or in the by-laws, a
quorum shall consist of the stockholders
representing a majority of the outstanding
capital stock or a majority of the members
in the case of non-stock corporations.
General Rule: Majority of the OCS or
Majority of the members
Exception: Unless otherwise provided by
the Code or by the By-Laws.
*In Tan v Sycip, deceased member is not
entitled to vote
provides that: The president shall preside
at all meetings of the directors or trustees
as well as of the stockholders or members,
unless the by-laws provide otherwise.
C. Right to Vote of Stockholders
Instances when voting right not
available
provides that: Except as provided in
the immediately preceding paragraph,
the vote necessary to approve a
particular corporate act as provided in
this Code shall be deemed to refer only
to stocks with voting rights.
Instances when voting right is not
available:
1. Delinquent shares
2. Treasury shares
3. Fractional shares
4. Escrow shares
Rules on:
1. Delinquent Shares
Sec. 71 of the Corporation
Code provides that: No delinquent
stock shall be voted for or be
entitled
to
vote
or
to
representation at any stockholders
meeting, nor shall the holder
thereof be entitled to any of the
rights of a stockholder except the
right to dividends in accordance
with the provisions of this Code,
until and unless he pays the
amount due on his subscription
with accrued interest, and the costs
and expenses of advertisement, if
any.
*Delinquency arises upon default in
payment of subscription.
Q: Are they included for quorum
and voting purposes?
A: NO.
Q: Even if there are proxies?
A: YES.
Q: Shares not yet fully paid but not
yet delinquent, are they entitled to
vote?
A: YES.
*Delinquent stock is not entitled to
vote and his presence would not be
taken for purposes of quorum.
*The only right remain is the right
to receive dividends subject to the
provision of Section 43.
2. Escrow Shares
*Escrow shares are not entitled to
vote before the fulfillment of the
condition imposed thereon.
3. Unpaid Shares
Code provides that: Holders of
subscribed shares not fully paid
which are not delinquent shall have
all the rights of a stockholder.
General Rule: The holder of
unpaid shares can exercise the
right to vote.
Exception: If it is provided in the
subscription contract that such
right cannot be exercised until the
subscription is fully paid.
4. Sequestered Shares
Q: What is the reason for
sequestration process?
A: For investigative purposes; To
avoid
wastage
dissipation
of
assets.
Q: Is PCGG authorized to vote for
the sequestered shares?
A: General Rule: No. PCGG
cannot vote for the sequestered
shares
because
being
a
conservator/administrator, it should
only perform acts of administration
and not acts of ownership.
Exception: If there is a strong
evidence that indeed the shares
have been purchased through
public funds.
Requisites:
1. Strong evidence or prima facie
evidence that the shares are illgotten.
2. There is an imminent danger
that
the
shares
will
be
dissipated.
Case: Transmiddle East v CA
Q: During the pendency of
sequestration process, are the
27

Corporation Code
sequestered shares included for
quorum purposes?
A: General Rule: YES.
Q: Who can vote them?
A: General Rule: Stockholder of
record.
*In Republic of the Philippines v
COCOFED, the SC held that there
is a prima facie evidence that the
shares are purchased with the use
of public funds.
5. Pledgor,
Mortgagor
or
Administrator of Shares
Code provides that: In case of
pledged or mortgaged shares in
stock corporations, the pledgor or
mortgagor shall have the right to
attend and vote at meetings of
stockholders, unless the pledgee or
mortgagee is expressly given by
the pledgor or mortgagor such
right in writing which is recorded
on the appropriate corporate
books. Executors, administrators,
receivers,
and
other
legal
representatives duly appointed by
the court may attend and vote in
behalf of the stockholders or
members without need of any
written proxy.
Q: Can the pledgee/mortgagee
exercise the right to vote?
A: General Rule: No. The right to
vote remains to the owner thus, it
is the pledgor/mortgagor that can
exercise it.
Exception:
If
there
is
an
agreement
that
the
pledgee/mortgagee can exercise
the right to vote.
Case: Calapatia
*Administrator/executor/heirs have
the right to vote even without prior
proxy. But the SEC requires them to
submit letters of appointment or
documents showing that he has
been
duly
instituted
as
executor/administrator
of
the
deceased.
6. Shares Jointly Owned
Code provides that: In case of
shares of stock owned jointly by
two or more persons, in order to
vote the same, the consent of all
the co-owners shall be necessary,
unless there is a written proxy,
signed by all the co-owners,

authorizing one or some of them or
any other person to vote such
share or shares: Provided, That
when the shares are owned in an
and/or capacity by the holders
thereof, any one of the joint owners
can vote said shares or appoint a
proxy therefor.
D. Concept of Proxy and Voting Trust
Agreement
Proxy is a written authorization given by
one person to another so that the second
person can act for the first.
*Proxy is a representative.
*Relationship: Principal-Agent.
*Proxy is authorized to vote and also
authorized to be present in a meeting.
Functions:
For quorum purposes; for
voting purposes.
*In Board meeting, proxy is not allowed
(Sec. 25 of the Corporation Code).
provides that: Stockholders and members
may vote in person or by proxy in all
meetings of stockholders or members.
Proxies shall be in writing, signed by the
stockholder or member and filed before
the scheduled meeting with the corporate
secretary. Unless otherwise provided in the
proxy, it shall be valid only for the meeting
for which it is intended. No proxy shall be
valid and effective for a period longer than
5 years at any one time.
Requisites:
1. Must be in writing
2. Filed before the scheduled meeting;
under the SEC rule, 10 days before the
scheduled meeting
*Proxy ensures presence of a quorum and
also approval of corporate acts.
General Rule: Proxy is revocable.
Exception: If proxy is coupled with
interest.
Ways to revoke proxy:
1. By execution of subsequent proxy.
2. If the stockholder concerned would
appear in the scheduled meeting.
Voting
Trust
Agreement
is
an
agreement
whereby
one
or
more
stockholders transfer their shares of
stocks to a trustee, who thereby acquires
for a period of time the voting rights
(and/or any other rights) over such shares;
and in return, trust certificates are given
to the stockholders, which are transferable
28

Corporation Code
like stock certificates, subject however, to
the trust agreement.
PROXY
The
stockholder
remains
the
stockholder
of
record
Revocable
VOTING TRUST
AGREEMENT
The
stockholder
ceases to be a
stockholder
of
record
Irrevocable
General Rule:
5
years
Exception:
If
coupled
with
interest
*The transfer includes the transfer of legal

title.
provides that: One or more stockholders
of a stock corporation may create a voting
trust for the purpose of conferring upon a
trustee or trustees the right to vote and
other rights pertaining to the shares for a
period not exceeding 5 years at any time:
Provided, That in the case of a voting trust
specifically required as a condition in a
loan agreement, said voting trust may be
for a period exceeding 5 years but shall
automatically expire upon full payment of
the loan. A voting trust agreement must
be in writing and notarized, and shall
specify the terms and conditions thereof. A
certified copy of such agreement shall be
filed with the corporation and with the
SEC; otherwise, said agreement is
ineffective
and
unenforceable.
The
certificate or certificates of stock covered
by the voting trust agreement shall be
cancelled and new ones shall be issued in
the name of the trustee or trustees stating
that they are issued pursuant to said
agreement.
In
the
books
of
the
corporation, it shall be noted that the
transfer in the name of the trustee or
trustees is made pursuant to said voting
trust agreement. The trustee or trustees
shall execute and deliver to the
transferors voting trust certificates, which
shall be transferable in the same manner
and with the same effect as certificates of
stock. The voting trust agreement filed
with the corporation shall be subject to
examination by any stockholder of the
corporation in the same manner as any
other corporate book or record: Provided,
That both the transferor and the trustee or
trustees may exercise the right of
inspection of all corporate books and

records in accordance with the provisions
of this Code. Any other stockholder may
transfer his shares to the same trustee or
trustees upon the terms and conditions
stated in the voting trust agreement, and
thereupon shall be bound by all the
provisions of said agreement. No voting
trust agreement shall be entered into for
the purpose of circumventing the law
against
monopolies
and
illegal
combinations in restraint of trade or used
for purposes of fraud. Unless expressly
renewed, all rights granted in a voting
trust agreement shall automatically expire
at the end of the agreed period, and the
voting trust certificates as well as the
certificates of stock in the name of the
trustee or trustees shall thereby be
deemed cancelled and new certificates of
stock shall be reissued in the name of the
transferors. The voting trustee or trustees
may vote by proxy unless the agreement
provides otherwise.
Consequence: The stockholder entering
into a voting trust agreement ceases to be
a stockholder of record.
*In case of Lee v CA, the SC held that the
stockholder concerned loses his legal title
to the shares so that if the stockholder is,
at the same time, a director of the
corporation,
automatically
he
is
disqualified to continue performing the
duties of a director because the law
requires each and every director to have
legal, not beneficial title to at least one
share.
E. Derivative Suit; Concept and Requisites
Derivative Suit is a suit brought by any
stockholder,
usually
a
minority
shareholder,
to
redress
a
wrong
committed
against
the
corporation
whenever the responsible officers refuse
to take any action thereon or are the very
person to be sued.
*This prerogative is developed through
jurisprudence.
*This is expressly mandated by Sec. 31 of
the Corporation Code.
Q: Why derivative?
A: From the word derive. The one bringing
the suit derives the cause of action from
the corporation.
Q: Who brings the suit?
A:
Any stockholder/member usually
minority stockholder.
Q: Whose cause of action?
29

Corporation Code
A: It is the corporations cause of action.
Q: Are we in violation of the Code?
A: No. Because the power to sue lies on
the board thus when the board refuses to
take action in order to protect the
corporation derivative suit may be
allowed.
Compelling Reason: Inaction of the
officers.
Failure
to
discharge
their
responsibilities. Requisites:
1. The stockholder bringing the suit must
be one of record as of the time the
cause of action accrues as well as of
the time the action is brought unless
the cause of action is a continuing
offer.
*The stockholder must implead the
real party in interest, i.e. the
corporation.
*In Chua v CA, the SC held that the
corporation must be impleaded since it
is the real party in interest.
2. The action must be named under the
corporations name
3. General
Rule:
The
stockholder
bringing the suit must have exhausted
intra-corporate remedies within the
corporation.
Exception: If the very person to be
sued is the responsible officers
themselves.
**This is a condition precedent.
4. The suit is not intended to harass the
defendant,
not
a
nuisance
or
harassment suit.
5. Appraisal right must not be an
available remedy.
Individual suit is a suit filed by the
stockholder because his personal right has
been violated. The cause of action is
personal to the stockholder. The party
injured is the stockholder himself.
Representative suit is a suit filed by a
group of stockholders that suffered
common injury.
SUBSCRIPTION CONTRACT:
A. Ways to become a Stockholder of a
Corporation
1. Subscription
contract
with
the
corporation.
2. Purchase or acquisition of shares from
existing stockholders.
3. Purchase of treasury shares from the
corporation.
*All of them involve shareholdings.
*Subscription is unique because it involves

unissued shares.
B. Concept of Subscription Contract
Subscription Contract is, under Sec. 60
of the Corporation Code, any contract
for the acquisition of unissued stock in an
existing corporation or a corporation still
to be formed shall be deemed a
subscription within the meaning of this
Title, notwithstanding the fact that the
parties refer to it as a purchase or some
other contract.
*This is strictly regulated by the
Corporation Code.
C. Kinds of Subscription
1. Pre-incorporation subscription
one entered into before incorporation.
provides that: A subscription for
shares of stock of a corporation still to
be formed shall be irrevocable for a
period of at least 6 months from the
date of subscription, unless all of the
other subscribers consent to the
revocation, or unless the incorporation
of said corporation fails to materialize
within said period or within a longer
period as may be stipulated in the
contract of subscription: Provided, That
no pre-incorporation subscription may
be revoked after the submission of the
articles of incorporation to the SEC.
*Contracts between the subscribers.
2 Fold Characteristics:
a. It
is
a
contract
between
subscribers.
b. May be regarded as continuing
offer on the part of the subscriber
concerned which the corporation
may accept upon acquisition of
juridical personality.
Reason: The corporation is not yet
in existence.
2. Post incorporation subscription
one
entered
into
after
the
incorporation for the acquisition of
unissued stock.
*Contracts between the subscribers
and the corporation.
*Creates a creditor-debtor relationship.
D. Consideration for the Issuance of Shares
provides that: Stocks shall not be issued
for a consideration less than the par or
issued price thereof. Consideration for the
issuance of stock may be any or a
30

Corporation Code
combination of any two or more of the

following: 1. Actual cash paid to the
corporation; 2. Property, tangible or
intangible, actually received by the
corporation and necessary or convenient
for its use and lawful purposes at a fair
valuation equal to the par or issued value
of the stock issued; 3. Labor performed for
or services actually rendered to the
corporation;
4.
Previously
incurred
indebtedness of the corporation; 5.
Amounts transferred from unrestricted
retained earnings to stated capital; and 6.
Outstanding shares exchanged for stocks
in the event of reclassification of
conversion. Where the consideration is
other than actual cash, or consists of
intangible property such as patents of
copyrights, the valuation thereof shall
initially
be
determined
by
the
incorporators or the board of directors,
subject to the approval by the SEC. Shares
of stock shall not be issued in exchange
for promissory notes or future service. The
same considerations provided for in this
section, insofar as they may be applicable,
may be used for the issuance of bonds by
the corporation. The issued price of no-par
value shares may be fixed in the articles
of incorporation or by the board of
directors pursuant to authority conferred
upon it by the articles of incorporation or
the by-laws, or in the absence thereof, by
the stockholders representing at least a
majority of the outstanding capital stock
at a meeting duly called for the purpose.
Valid
considerations
for
the
subscription agreements:
1. Cash
2. Property
3. Labor or services actually rendered to
the corporation
4. Prior corporate obligations
5. Amounts transferred from unrestricted
retained earnings to stated capital
6. Outstanding shares in exchange for
stocks in the event of reclassification
or conversion.
E. Payment of Subscription
Q When payment of the subscription is
made?
A: Look into the subscription agreement. If
subscription agreement is silent as to
when the amount of subscription to be
paid, the board of directors may call on all
the unpaid subscribers to pay the
remaining balance of their subscription.
F.
Remedies to enforce payment of

subscription
1. By Extra-judicial sale at public
auction.
2. By judicial action.
3. Collection from cash dividends and
withholding of stock dividends.
When
shares
are
considered
delinquent
provides
that:
Subject
to
the
provisions
of
the
contract
of
subscription, the board of directors of
any stock corporation may at any time
declare due and payable to the
corporation unpaid subscriptions to the
capital stock and may collect the same
or such percentage thereof, in either
case with accrued interest, if any, as it
may deem necessary. Payment of any
unpaid subscription or any percentage
thereof, together with the interest
accrued, if any, shall be made on the
date specified in the contract of
subscription or on the date stated in
the call made by the board. Failure to
pay on such date shall render the
entire balance due and payable and
shall make the stockholder liable for
interest at the legal rate on such
balance, unless a different rate of
interest is provided in the by-laws,
computed from such date until full
payment. If within 30 days from the
said date no payment is made, all
stocks covered by said subscription
shall thereupon become delinquent
and shall be subject to sale as
hereinafter provided, unless the board
of directors orders otherwise.
*If there was no date as to payment of
subscription stated in the subscription
agreement, the board may call on all
the unpaid subscribers to pay the
remaining
balance
of
their
subscription. Failure to pay within 30
days from the said date, all stocks
covered by said subscription shall
thereupon become delinquent and
shall be subject to sale unless the
board of directors orders otherwise.
Certificate of Stock
Certificate of Stock is a written
evidence of the shares of stock but it is
not the share itself.
*Does not represent credit.
Q: How important is a stock certificate?
31

Corporation Code
A: It is an evidence of ownership of stocks.
Q: Who issue stock certificate?
A: Stock certificates must be signed by
the
president
or
vice-president,
countersigned by the secretary or
assistant secretary.
Q: When certificate of stock may be
issued?
A: Sec. 64 of the Corporation Code
states that: No certificate of stock shall
be issued to a subscriber until the full
amount of his subscription together with
interest and expenses (in case of
delinquent shares), if any is due, has been
paid.
Doctrine of Indivisibility of Subscription
Contract
Doctrine
of
Indivisibility
of
Subscription Contract: Failure to
pay any of the installments due would
necessarily affect all the other
installments because the subscription
is to be treated as one, whole, entire,
indivisible contract. Upon default of
payment on any of the installment
results to entire subscription due and
demandable.
*The Certificate of Stock cannot be
divided into portions.
*No certificate of stock shall be issued
until the full payment of the
subscription.
*The corporation has an automatic lien
over the shares.
Q: What will happen to the payment
already made by the subscriber?
A: The payment partially made shall
be applied proportionately to all the
shares covered by the subscription.
Example:
P10 per share; payment made is P6000
covering 1000 shares. The P6000 shall
be allocated equally to all shares. P6
per share has been paid. P4 per share
is the liability.
Certificate of Stock, quasi-negotiable
Q: can the stock certificate be treated
as negotiable instrument under NIL?
A: No. The requisites are not complied
with. There is no engagement to pay in
sum certain in money.
*Negotiable
instrument
represents
credit.
Creditor-debtor
relationship
arises.
Q: Are certificates of stock negotiable?
A: They are negotiable in certain
extent. That is why they are quasinegotiable.
*The title over the share can be

assigned, transferred by indorsement
and delivery.
*Due course holding is not applicable.
G. Transfer of Shares
If represented by a certificate, the
following must be strictly complied
with:
1. Delivery of the certificate;
2. Indorsement by the owner or his agent;
3. To be valid to third parties, the transfer
must be recorded in the books of the
corporation.
*If not represented by the certificate, the
shares may be transferred by means of a
deed of assignment and such is duly
recorded in the books of the corporation.
*To make the transfer binding to the
corporation and third person, the transfer
must be recorded in the stock and transfer
book of the corporation.
Q: Who is the owner of the share?
A: The stockholder of record.
H. Lost and Destroyed Certificate of Stock
provides that: The following procedure
shall be followed for the issuance by a
corporation of new certificates of stock in
lieu of those which have been lost, stolen
or destroyed: 1. The registered owner of a
certificate of stock in a corporation or his
legal representative shall file with the
corporation an affidavit in triplicate setting
forth, if possible, the circumstances as to
how the certificate was lost, stolen or
destroyed,
the
number
of
shares
represented by such certificate, the serial
number of the certificate and the name of
the corporation which issued the same. He
shall also submit such other information
and evidence which he may deem
necessary; 2. After verifying the affidavit
and other information and evidence with
the books of the corporation, said
corporation shall publish a notice in a
newspaper of general circulation published
in the place where the corporation has its
principal office, once a week for 3
consecutive weeks at the expense of the
registered owner of the certificate of stock
which has been lost, stolen or destroyed.
The notice shall state the name of said
corporation, the name of the registered
owner and the serial number of said
certificate, and the number of shares
represented by such certificate, and that
32

Corporation Code
after the expiration of 1 year from the
date of the last publication, if no contest
has been presented to said corporation
regarding said certificate of stock, the
right to make such contest shall be barred
and said corporation shall cancel in its
books the certificate of stock which has
been lost, stolen or destroyed and issue in
lieu thereof new certificate of stock, unless
the registered owner files a bond or other
security in lieu thereof as may be
required, effective for a period of 1 year,
for such amount and in such form and with
such sureties as may be satisfactory to the
board of directors, in which case a new
certificate may be issued even before the
expiration of the 1 year period provided
herein: Provided, That if a contest has
been presented to said corporation or if an
action is pending in court regarding the
ownership of said certificate of stock
which has been lost, stolen or destroyed,
the issuance of the new certificate of stock
in lieu thereof shall be suspended until the
final decision by the court regarding the
ownership of said certificate of stock
which has been lost, stolen or destroyed.
Except in case of fraud, bad faith, or
negligence on the part of the corporation
and its officers, no action may be brought
against any corporation which shall have
issued certificate of stock in lieu of those
lost, stolen or destroyed pursuant to the
procedure above-described.
CORPORATE BOOKS AND RECORDS:
A. Books required to be kept by a
Corporation
provides that: Every corporation shall
keep and carefully preserve at its principal
office a record of all business transactions
and
minutes
of
all
meetings
of
stockholders or members, or of the board
of directors or trustees, in which shall be
set forth in detail the time and place of
holding the meeting, how authorized, the
notice given, whether the meeting was
regular or special, if special its object,
those present and absent, and every act
done or ordered done at the meeting.
Upon the demand of any director, trustee,
stockholder or member, the time when
any director, trustee, stockholder or
member entered or left the meeting must
be noted in the minutes; and on a similar
demand, the yeas and nays must be taken

on any motion or proposition, and a record
thereof carefully made. The protest of any
director, trustee, stockholder or member
on any action or proposed action must be
recorded in full on his demand. The
records of all business transactions of the
corporation and the minutes of any
meetings shall be open to inspection by
any director, trustee, stockholder or
member of the corporation at reasonable
hours on business days and he may
demand, writing, for a copy of excerpts
from said records or minutes, at his
expense. Any officer or agent of the
corporation who shall refuse to allow any
director, trustee, stockholder or member
of the corporation to examine and copy
excerpts from its records or minutes, in
Code, shall be liable to such director,
trustee, stockholder or member for
damages, and in addition, shall be guilty
of an offense which shall be punishable
under Section 144 of this Code: Provided,
That if such refusal is made pursuant to a
resolution or order of the board of
directors or trustees, the liability under
this section for such action shall be
imposed upon the directors or trustees
who voted for such refusal: and Provided,
further, That it shall be a defense to any
action under this section that the person
demanding to examine and copy excerpts
from the corporations records and
minutes
has
improperly
used
any
information secured through any prior
examination of the records or minutes of
such corporation or of any other
corporation, or was not acting in good
faith or for a legitimate purpose in making
his demand. Stock corporations must also
keep a book to be known as the stock
and transfer book, in which must be kept
a record of all stocks in the names of the
stockholders alphabetically arranged; the
installments paid and unpaid on all stock
for which subscription has been made, and
the date of payment of any installment; a
statement of every alienation, sale or
transfer of stock made, the date thereof,
and by and to whom made; and such
other entries as the by-laws may
prescribe. The stock and transfer book
shall be kept in the principal office of the
corporation or in the office of its stock
33

Corporation Code
transfer agent and shall be open for
inspection by any director or stockholder
of the corporation at reasonable hours on
business days. No stock transfer agent or
one engaged principally in the business of
registering transfers of stocks in behalf of
a stock corporation shall be allowed to
operate in the Philippines unless he
secures a license from the SEC and pays a
fee as may be fixed by the Commission,
which shall be renewable annually:
Provided, That a stock corporation is not
precluded from performing or making
transfer of its own stocks, in which case all
the rules and regulations imposed on
stock transfer agents, except the payment
of a license fee herein provided, shall be
applicable.
*Keeping of books and records are
mandatory.
Books required to be kept:
1. Book of minutes reflects the
decisions and actions of the Board of
Directors/Stockholders.
2. Record of all business transactions
3. Stock and Transfer Book/Membership
Book
4. Books of Proceedings
B. Right to Inspect Corporate Books
Basis and Extent of the Right of
Inspection
Q: Is the keeping of these books
mandatory?
A: YES. Section 144 of the Corporation
Code provides penalty for any violation
of the provision of the Code.
Rationale: Right of inspection would
be futile. Right of inspection would not
be exercised.
Limitations on the Right of Inspection
1. The books and records shall be
open to inspection at reasonable
hours on business days.
2. The books and records shall not be
improperly used any information
secured
through
any
prior
examination of the books or
records.
3. The stockholders demand must be
in good faith or for a legitimate
purpose.
*Inspection can be done personally or
through agent.
Remedies
to
Enforce
Right
of
Inspection
*In case of refusal to exercise the right
of
inspection,
the
stockholder
concerned may file an action

mandamus before the RTC.
*Can also claim damages.
for
MERGER AND CONSOLIDATION:

A. Concept of Merger and Consolidation
Merger is one where a corporation
absorbs the other and remains in
existence while the others are dissolved.
*There is a continuous flow of juridical
personality.
Examples:
A+B=B
A+B+C=C
A+B+C=A
A+B+C=B
Consolidation is one where a new
corporation is created, and consolidating
corporations are extinguished.
Examples:
A+B=C
A+B+C=D
A + B + C = ABC
A + B + C = XYZ
B. Requisites of and Procedure for Merger
and Consolidation
1. Approval by majority vote of the Board
of Directors of each corporation.
2. Approval of the stockholders of each
corporation representing 2/3 of the
outstanding capital stock.
3. Approval of SEC
Cases: Associated Bank v CA; Polyan
v CA
Procedure:
1. The Board of each corporation shall
draw
up
a
plan
of
merger/consolidation.
2. The plan of merger or consolidation
shall be approved by majority vote of
each
board
of
the
concerned
corporations at separate meetings.
3. The plan of merger/consolidation shall
be approved by the majority vote of
the 2/3 of the shareholders of the
outstanding capital stock or members
in case of a non-stock corporation.
4. Articles of Merger/Consolidation shall
be executed by each of the constituent
corporators, signed by the President or
Vice-President and certified by the
secretary or assistant secretary.
5. Four copies of the Articles of Merger or
Consolidation together with favorable
recommendation
of
a
pertinent
government agency in certain cases
shall be submitted to the SEC for
approval.
34

Corporation Code
6. The SEC shall issue a certificate or
merger if it is satisfied that the merger
or consolidation of the corporations
concerned is not inconsistent with the
provisions of this Code and existing
laws.
C. Effects of Merger or Consolidation
1. All property, real or personal, and all
receivables due to, and all other
interest
of
each
constituent
corporation,
shall
be
deemed
transferred to and vested in such
surviving or consolidated corporation
without further act or deed.
2. The
surviving
or
consolidated
corporation shall be responsible for all
the liabilities and obligations of each of
the constituent corporations.
3. Any claim, action or proceeding
pending by or against any of the
constituent corporations may be
prosecuted by or against the surviving
or consolidated corporations.
4. The rights of the creditors or lien upon
the property of any of each constituent
corporation shall not be impaired by
such merger or consolidation.
5. Dissolution
of
other
corporation
leaving the surviving or consolidated
corporation exists.
Remedy
of
the
dissenting
stockholder: The dissenting stockholder
may exercise his appraisal right.
RIGHT OF APPRAISAL:
A. Concept of Appraisal Right
Appraisal Right is the right to withdraw
from the corporation and demand
payment of the fair value of his shares
after dissenting from certain corporate
acts involving fundamental changes in
corporate structure.
*Demanding for the reasonable return of
investment.
*Stockholders cannot exercise this right at
his pleasure.
Requisites:
1. The Stockholder has dissented
2. Corporate change must have been
approved by the SEC.
*Any
changes
that
affect
the
stockholders right.
*Any changes that concern the
corporations existence.
*Corporate changes that appraisal
right can be availed of.
3. There must have an unrestricted

retained earnings,
*It is not a matter of right.
Reason: If it is a matter of right it shall
lead to the diminution or depletion of
corporate assets which is violative of the
Trust Fund Doctrine.
B. Instances of Appraisal Right
provides that: Any stockholder of a
corporation shall have the right to dissent
and demand payment of the fair value of
his shares in the following instances: 1. In
case any amendment to the articles of
incorporation has the effect of changing or
restricting the rights of any stockholder or
class of shares, or of authorizing
preferences in any respect superior to
those of outstanding shares of any class,
or of extending or shortening the term of
corporate existence; 2. In case of sale,
lease, exchange, transfer, mortgage,
pledge or other disposition of all or
substantially all of the corporate property
and assets as provided in the Code; and 3.
In case of merger or consolidation.
C. Requirements for a Valid Exercise of
Appraisal Right
provides that: The appraisal right may be
exercised by any stockholder who shall
have
voted
against
the
proposed
corporate action, by making a written
demand on the corporation within 30 days
after the date on which the vote was taken
for payment of the fair value of his shares:
Provided, That failure to make the demand
within such period shall be deemed a
waiver of the appraisal right. If the
proposed corporate action is implemented
or affected, the corporation shall pay to
such stockholder, upon surrender of the
certificate
or
certificates
of
stock
representing his shares, the fair value
thereof as of the day prior to the date on
which the vote was taken, excluding any
appreciation or depreciation in anticipation
of such corporate action. If within a period
of 60 days from the date the corporate
action was approved by the stockholders,
the withdrawing stockholder and the
corporation cannot agree on the fair value
of the shares, it shall be determined and
appraised by 3 disinterested persons, one
of whom shall be named by the
35

Corporation Code
stockholder, another by the corporation,
and the third by the two thus chosen. The
findings of the majority of the appraisers
shall be final, and their award shall be paid
by the corporation within 30 days after
such award is made: Provided, That no
payment shall be made to any dissenting
stockholder unless the corporation has
unrestricted retained earnings in its books
to cover such payment: and Provided,
further, That upon payment by the
corporation of the agreed or awarded
price, the stockholder shall forthwith
transfer his shares to the corporation.
Requisites:
1. Any of the instances set forth by law
must be present.
2. Dissenting stockholder must have
voted against the proposed action.
*Abstaining stockholder cannot claim
or exercise his appraisal right.
3. Demand for payment must be made
within 30 days from the date vote is
taken thereon. Failure to make demand
shall be deemed a waiver.
4. Price must be based on fair value as of
day prior to date on which vote was
taken
5. Submission
by
withdrawing
stockholder of his shares to the
corporation for notation of being a
dissenting stockholder within 10 days
from written demand.
6. Payment must be made only when the
corporation has unrestricted retained
earnings in its books.
7. Stockholder must transfer his shares to
the corporation upon payment by the
corporation.
D. Effects of Exercising Appraisal Right
provides that: From the time of demand
for payment of the fair value of a
stockholders shares until either the
abandonment of the corporate action
involved or the purchase of the said
shares by the corporation, all rights
accruing to such shares, including voting
and dividend rights, shall be suspended in
Code, except the right of such stockholder
to receive payment of the fair value
thereof: Provided, That if the dissenting
stockholder is not paid the value of his
shares within 30 days after the award, his
voting
and
dividend
rights
shall
immediately be restored.
Effects:
1. All rights accruing to such shares shall
be suspended from the time of
demand for payment of the fair value
of the shares until either the
abandonment of the corporate action.
2. The dissenting stockholder shall be
entitled to receive payment of the fair
value of his shares as agreed upon
between him and the corporation or as
determined by the appraisers chosen
by them.
*Sec. 86. The dissenting stock can be sold
during the pendency of its payment.
Remedy in case appraisal right
cannot be exercised: Dispose the
shareholdings.
NON-STOCK CORPORATIONS:
A. Definition and Purposes of a Non-Stock
Corporation
that: For the purposes of this Code, a
non-stock is one where no part of its
income is distributable as dividends to its
members, trustees, or officers, subject to
the provisions of this Code on dissolution:
Provided, That any profit which a nonstock corporation may obtain as an
incident to its operations shall, whenever
necessary or proper, be used for the
furtherance of the purpose or purposes for
which the corporation was organized,
subject to the provisions of this Title. The
provisions governing stock corporations,
when pertinent, shall be applicable to nonstock corporations, except as may be
covered by specific provisions of this
Title.
*Sec. 87 should be read in harmony with
Sec. 94.
*A Non-stock corporation is not precluded
from engaging in profit-business related.
provides that: Non-stock corporations
may be formed or organized for charitable,
religious,
educational,
professional,
cultural, fraternal, literary, scientific,
social, civic service, or similar purposes,
like trade, industry, agricultural and like
chambers, or any combination thereof,
subject to the special provisions of this
Title governing particular classes of nonstock corporations.
*The
purpose
of
a
non-stock
corporation is related to public welfare.
36

Corporation Code
B. Distinguished from Stock Corporation
Non- stock
Corporation
Public welfare
Board of Trustees
Generally, the term
of office of trustees
is 3 years
By-laws can provide
for a different venue
as long as it is
within
the
Philippines
Member may be
deprived of their
right to designate
proxies
by
provisions in the
articles
of
incorporation or bylaws
Reason:
To
promote
camaraderie,
togetherness, unity
and familiarity.
Generally, members
could directly elect
officers.
Except
unless AOI provides
otherwise.
Stock Corporation
For profit
Board of directors
1 year subject to
hold-over principle
City or municipality
where the principal
office is located
Proxy is allowed
Election is vested
upon
Board
of
Directors
C. Membership in a Non-Stock Corporation

provides
that:
The
right
of
the
membership of any class or classes to
vote may be limited, broadened or denied
to the extent specified in the articles of
incorporation or the by-laws. Unless so
limited, broadened or denied, each
member, regardless of class, shall be
entitled to one vote. Unless otherwise
provided in the articles of incorporation of
the by-laws, a member may vote by proxy
in accordance with the provisions of this
Code. Voting by mail or other similar
means
by
members
of
non-stock
corporations may be authorized by the bylaws of non-stock corporations with the
approval of, and under such conditions
which may be prescribed by, the SEC.
General Rule: Sec. 58
Exception: Sec. 89. This provision allows
denial of proxy.
Reason:
To
promote
camaraderie,
togetherness, unity and familiarity.
*A member is entitled to 1 vote. However,
such right may be limited, broadened or
denied in the Articles of Incorporation or

By-Laws. Thus, the By-laws of a non-stock
corporation may provide for the desired
voting rights of members including the
number of votes.
provides that: Membership in a non-stock
corporation
and
all
rights
arising
therefrom
are
personal
and
nontransferable, unless the articles of
incorporation or the by-laws otherwise
provide.
General Rule: Membership is nontransferable.
Exception: If the Articles of Incorporation
or the By-laws provide otherwise.
provides that: Membership shall be
terminated in the manner and for the
causes provided in the articles of
incorporation or the by-laws. Termination
of membership shall have the effect of
extinguishing all rights of a member in the
corporation or in its property, unless
otherwise provided in the articles of
incorporation or the by-laws.
Rules on Place of Meeting:
General Rule: Sec. 51
Exception: Sec. 93
D. Rule on Distribution of Assets
provides that: In case dissolution of a
non-stock corporation in accordance with
the provisions of this Code, its assets shall
be applied and distributed as follows: 1. All
liabilities
and
obligations
of
the
corporation shall be paid, satisfied and
discharged, or adequate provision shall be
made therefor; 2. Assets held by the
corporation upon a condition requiring
return, transfer or conveyance, and which
condition occurs by reason of the
dissolution, shall be returned, transferred
or conveyed in accordance with such
requirements; 3. Assets received and held
by the corporation subject to limitations
permitting their use only for charitable,
religious, benevolent, educational or
similar purposes, but not held upon a
condition requiring return, transfer or
conveyance by reason of the dissolution,
shall be transferred or conveyed to one or
more
corporations,
societies
or
organizations engaged in activities in the
Philippines substantially similar to those of
the dissolving corporation according to a
37

Corporation Code
plan of distribution adopted pursuant to
this Chapter; 4. Assets other than those
mentioned in the preceding paragraphs, if
any, shall be distributed in accordance
with the provisions of the articles of
incorporation or the by-laws, to the extent
that the articles of incorporation or the bylaws, determine the distributive rights of
members, or any class or classes of
members, or provide for distribution; and
5. In any other case, assets may be
distributed to such persons, societies,
organizations or corporations, whether or
not organized for profit, as may be
specified in a plan of distribution adopted
pursuant to this Chapter.
Order of distribution:
1. All its creditors shall be paid;
2. Assets held subject to return on
dissolution, shall be delivered back to
their givers;
3. Assets held for charitable, religious
purposes, etc., without a condition for
their return on dissolution, shall be
conveyed to one or more organizations
engaged in similar activities as
dissolved corporation; and
4. All other assets shall be distributed to
members, as provided for in the
Articles or By-Laws.
provides that: A plan providing for the
distribution of assets, not inconsistent with
the provisions of this Title, may be
adopted by a non-stock corporation in the
process of dissolution in the following
manner: The board of trustees shall, by
majority
vote,
adopt
a
resolution
recommending a plan of distribution and
directing the submission thereof to a vote
at a regular or special meeting of
members having voting rights. Written
notice setting forth the proposed plan of
distribution or a summary thereof and the
date, time and place of such meeting shall
be given to each member entitled to vote,
within the time and in the manner
provided in this Code for the giving of
notice of meetings to members. Such plan
of distribution shall be adopted upon
approval of at least 2/3 of the members
having
voting
rights
present
or
represented by proxy at such meeting.
Q: Would it be possible for a non-stock
corporation to be converted into a stock
corporation by mere amendment of the
Articles of Incorporation?
A: NO. Because it would violate Section

87 of the Corporation Code which prohibits
distribution of income as dividends to
members.
Reason: Fraudulent to donors
Q: Can a stock corporation be converted
to a non-stock corporation by mere
amendment
of
the
Articles
of
Incorporation?
A: YES.
Requirements:
1. Approval of 2/3 of the members
2. Approval of the SEC
Q: What was relinquished?
A: Proprietary rights.
*Appraisal right is available.
CLOSE CORPORATIONS:
A. Concept;
Distinguished
from
Open
Corporations
that: A corporation, within the meaning of
this Code, is one whose articles of
incorporation provide that: (1) All the
corporations issued stock of all classes,
exclusive of treasury shares, shall be held
of record by not more than a specified
number of persons, not exceeding 20; (2)
all the issued stock of all classes shall be
subject to one or more specified
restrictions on transfer permitted by this
Title; and (3) The corporation shall not list
in any stock exchange or make any public
offering of any of its stock of any class.
Notwithstanding
the
foregoing,
a
corporation shall not be deemed a close
corporation when at least 2/3 of its voting
stock or voting rights is owned or
controlled by another corporation which is
not a close corporation within the meaning
of this Code. Any corporation may be
incorporated as a close corporation,
except mining or oil companies, stock
exchanges, banks, insurance companies,
public utilities, educational institutions and
corporations declared to be vested with
public interest in accordance with the
provisions of this Code. The provisions of
this Title shall primarily govern close
corporations: Provided, That the provisions
of other Titles of this Code shall apply
suppletorily except insofar as this Title
otherwise provides.
*Whether open or close corporation
depends on its charter.
Case: San Juan Structural
38

Corporation Code
The following must be stated in the
Articles of Incorporation:
1. Membership is limited to 20
2. Transfer or disposition of shares is
subject to specified restrictions
3. Prohibition against offering to the
public of the shares or listing in the
stock exchange.
General Rule: Any corporation may be
incorporated as close corporation.
Exceptions:
1. Mining or oil companies
2. Stock exchanges
3. Banks
4. Insurance companies
5. Public utilities
6. Educational institutions
7. Corporations declared to be vested
with public interest
Code
The appraisal right
may be exercised
by a stockholder
only in the cases
provided in Sections
81 and 42 of the
Corporation Code
Except as regards
redeemable shares,
the purchase by the
corporation of its
own
stock
must
always be made
from
the
unrestricted
retained earnings
Distinctions from Open Corporations:
Arbitration
of
intracorporate
deadlock by the
SEC is not a remedy
in case the directors
or stockholders are
so
divided
respecting
the
management of the
corporation.
Open Corporation
Its
articles
of
incorporation need
only contain the
general
matters
enumerated
in
Section 14 of the
Corporation Code
Its status as an
ordinary
stock
corporation is not
affected
by
the
ownership of its
voting
stock
or
voting rights
Its articles cannot
classify its directors
Business
of
the
corporation
is
managed by the
board of directors
The
corporate
officers
and
employees
are
elected
by
a
majority vote of all
the members of the
board of directors
The
pre-emptive
right is subject to
the
exceptions
found in Section 39
of the Corporation
Close Corporation
Its articles must
contain the special
matters prescribed
by Section 97 aside
from the general
matters in Section
14. Failure to do so
precludes a de jure
close
corporation
status
2/3 of its voting
stock
or
voting
rights must not be
owned or controlled
by
another
corporation which is
not
a
close
corporation
Its
articles
may
classify its directors
Business
of
the
corporation may be
managed by the
stockholders if the
articles so provide,
but they are liable
as directors
Its
articles
may
provide that any or
all of the corporate
officers
or
employees may be
elected
or
appointed by the
stockholders
The
pre-emptive
right is subject to no
exceptions
unless
denied
in
the
articles
The appraisal right

may be exercised
and
compelled
against
the
corporation by a
stockholder for any
reason
In
case
of
an
arbitration of an
intracorporate
deadlock by the
SEC,
the
corporation may be
ordered to purchase
its own shares from
the
stockholders
regardless of the
availability
of
unrestricted
retained earnings
Arbitration
of
intracorporate
deadlock by the SEC
is
an
available
remedy in case the
directors
or
stockholders are so
divided respecting
the management of
the corporation.
*In
San
Juan
Structural
Steel
Fabricators v CA, the SC held that the
circumstance that around 99.86% of the
total share holding of petitioner belongs to
respondent would not justify classification
of the corporation as close.
B. Permissive Provisions in the Articles of
Incorporation
provides
that:
The
articles
of
incorporation of a close corporation may
provide: 1. For a classification of shares or
rights and the qualifications for owning or
holding the same and restrictions on their
transfers as may be stated therein,
subject to the provisions of the following
section; 2. For a classification of directors
into one or more classes, each of whom
may be voted for and elected solely by a
particular class of stock; and 3. For a
greater quorum or voting requirements in
meetings of stockholders or directors than
those provided in this Code. The articles of
incorporation of a close corporation may
provide that the business of the
corporation may provide that the business
of the corporation shall be managed by
39

Corporation Code
the stockholders of the corporation rather
than by a board of directors. So long as
this provision continues in effect: 1. No
meeting of stockholders need be called to
elect directors; 2. Unless the context
clearly
requires
otherwise,
the
stockholders of the corporation shall be
deemed to be directors for the purpose of
applying the provisions of this Code; and
3. The stockholders of the corporation
shall be subject to all liabilities of
directors. The articles of incorporation
may likewise provide that all officers or
employees or that specified officers or
employees shall be elected or appointed
by the stockholders, instead of by the
board of directors.
C. Restrictions on Transfer of Shares
provides that: Restrictions on the right to
transfer shares must appear in the articles
of incorporation and in the by-laws as well
as in the certificate of stock; otherwise,
the same shall not be binding on any
purchaser thereof in good faith. Said
restrictions shall not be more onerous than
granting the existing stockholders or the
corporation the option to purchase the
shares of the transferring stockholder with
such reasonable terms, conditions or
period stated therein. If upon the
expiration of said period, the existing
stockholders or the corporation fails to
exercise the option to purchase, the
transferring stockholder may sell his
shares to any third person.
Option Restriction this restriction
provides that no disposition of shares will
be made unless the shares are offered first
to the corporation or the stockholders.
*Pre-emptive right is exercisable or
available.
*This restriction is valid and allowed.
Reason: it is the one contemplated by
law.
*Restriction derogates private rights.
Consent Restriction this restriction
provides that no disposition of shares will
be made without the consent of directors.
*This restriction is not valid.
Reason: It is more onerous and
burdensome.
CORPORATE DISSOLUTION/LIQUIDATION:
A. Methods
of
Voluntary
Corporate
Dissolution and the Requirements therefor
Dissolution refers to the extinguishment

of franchise or termination of corporate
existence.
Modes of Dissolution:
1. Voluntary dissolution
2. Involuntary dissolution
Methods of Voluntary Dissolution:
1. Voluntary
dissolution
where
no
creditors are affected
2. Voluntary dissolution where creditors
are affected
3. Shortening of the corporate term by
amending the articles of incorporation
*Dissolution takes effect upon the
coming of the shortened term.
4. Expiration of corporate term
Voluntary
dissolution
where
no
creditors are affected
provides that: If dissolution of a
corporation does not prejudice the
rights of any creditor having a claim
against it, the dissolution may be
effected by majority vote of the board
of directors or trustees, and by a
resolution duly adopted by the
affirmative vote of the stockholders
owning at least 2/3 of the outstanding
capital stock or of at least 2/3 of the
members of a meeting to be held upon
call of the directors or trustees after
publication of the notice of time, place
and object of the meeting for 3
consecutive weeks in a newspaper
published
in the place where the
principal office of said corporation is
located; and if no newspaper is
published in such place, then in a
newspaper of general circulation in the
Philippines, after sending such notice
to each stockholder or member either
by registered mail or by personal
delivery at least 30 days prior to said
meeting. A copy of the resolution
authorizing the dissolution shall be
certified by a majority of the board of
directors
or
trustees
and
countersigned by the secretary of the
corporation. The SEC shall thereupon
issue the certificate of dissolution.
Requisites:
1. A meeting must be held on the call
of the directors or trustees;
2. Notice of the meeting should be
given to the stockholders by
personal delivery or registered mail
40

Corporation Code
3.
4.
5.
6.
at least 30 days prior to the

meeting;
The notice of meeting should also
be published for 3 consecutive
weeks in a newspaper published in
the place;
The resolution to dissolve must be
approved by the majority of the
directors/trustees and approved by
the stockholders representing at
least 2/3 of the outstanding capital
stock or 2/3 of members;
A copy of the resolution shall be
certified by the majority of the
directors
or
trustees
and
countersigned by the secretary;
The signed and countersigned copy
will be filed with the SEC and the
latter will issue the certificate of
dissolution
Voluntary dissolution where creditors

are affected
provides that: Where the dissolution
of a corporation may prejudice the
rights of any creditor, the petition for
dissolution shall be filed with the
Securities and Exchange Commission.
The petition shall be signed by a
majority of its board of directors or
trustees or other officers having the
management of its affairs, verified by
its president or secretary or one of its
directors or trustees, and shall set
forth all claims and demands against
it, and that its dissolution was resolved
upon by the affirmative vote of the
stockholders representing at least twothirds (2/3) of the outstanding capital
stock or by at least two-thirds (2/3) of
the members at a meeting of its
stockholders or members called for
that purpose. If the petition is
sufficient in form and substance, the
Commission shall, by an order reciting
the purpose of the petition, fix a date
on or before which objections thereto
may be filed by any person, which date
shall not be less than thirty (30) days
nor more than sixty (60) days after the
entry of the order. Before such date, a
copy of the order shall be published at
least once a week for three (3)
consecutive weeks in a newspaper of
general circulation published in the
municipality or city where the principal
office of the corporation is situated, or
if there be no such newspaper, then in
a newspaper of general circulation in
the Philippines, and a similar copy
shall be posted for three (3)
consecutive weeks in three (3) public

places in such municipality or city.
Upon five (5) day's notice, given after
the date on which the right to file
objections as fixed in the order has
expired, the Commission shall proceed
to hear the petition and try any issue
made by the objections filed; and if no
such objection is sufficient, and the
material allegations of the petition are
true,
it
shall
render
judgment
dissolving
the
corporation
and
directing such disposition of its assets
as justice requires, and may appoint a
receiver to collect such assets and pay
the debts of the corporation.
Requisites:
1. Approval
of
the
stockholders
representing at least 2/3 of the
outstanding capital stock or 2/3 of
members in a meeting called for
that purpose;
2. Filing of a Petition with the SEC
signed by majority of directors or
trustees or other officers having
the management of its affairs
verified by President or Secretary
or Director. Claims and demands
must be stated in the petition;
3. If petition is sufficient in form and
substance, the SEC shall issue an
Order fixing a hearing date for
objections;
4. A copy of the Order shall be
published at least once a week for
3
consecutive
weeks
in
a
newspaper of general circulation or
if there is no newspaper in the
municipality or city of the principal
office, posting for 3 consecutive
weeks in 3 public places is
sufficient;
5. Objections must be filed no less
than 30 days nor more than 60
days after the entry of the order;
6. After the expiration of the time to
file objections, a hearing shall be
conducted upon prior 5 day notice
to hear the objections;
7. Judgment
shall
be
rendered
dissolving the corporation and
directing the disposition of assets;
the
judgment
may
include
appointment of a receiver.
Shortening of term of existence

provides that: A voluntary dissolution
may be effected by amending the
articles of incorporation to shorten the
corporate term pursuant to the
provisions of this Code. A copy of the
amended articles of incorporation shall
41

Corporation Code
be submitted to the Securities and
Exchange Commission in accordance
with this Code. Upon approval of the
amended articles of incorporation of
the expiration of the shortened term,
as the case may be, the corporation
shall be deemed dissolved without any
further proceedings, subject to the
provisions of this Code on liquidation.
B. Concept of Involuntary Dissolution and the
Grounds therefor
provides that: A corporation may be
dissolved by the Securities and Exchange
Commission upon filing of a verified
complaint and after proper notice and
hearing on the grounds provided by
existing laws, rules and regulations.
*This must be done with substantive and
procedural due process.
Grounds:
1. Failure to submit by-laws within the
prescribed period
2. Fraud in the procurement of Certificate
of Registration
3. Misrepresentation as to the activities
that the corporation will undertake
4. Treasurers affidavit is false
5. Continued inoperation for 5 years
6. Failure
to
commence
business
transactions within 2 years from
issuance of certificate of registration
7. To some cases, performance of ultra
vires act since it is a violation to the
franchise but depending on the
seriousness or gravity of the offense
8. Issuance of watered stocks
9. De facto status
10. Failure to keep corporate books and
records depending on the gravity or
seriousness of the offense
11. Violation of its charter
C. Corporate Liquidation
Liquidation is a process by which all the
assets of the corporation are converted
into liquid assets in order to facilitate the
payment of obligations to creditors, and
the remaining balance if any is to be
distributed to the stockholders.
*Liquidation takes place after dissolution.
provides that: Every corporation whose
charter expires by its own limitation or is
annulled by forfeiture or otherwise, or
whose corporate existence for other
purposes is terminated in any other
manner, shall nevertheless be continued
as a body corporate for three (3) 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 to settle and close its affairs, to
dispose of and convey its property and to
distribute its assets, but not for the
purpose of continuing the business for
which it was established. At any time
during
said
three
(3)
years,
the
corporation is authorized and empowered
to convey all of its property to trustees for
the benefit of stockholders, members,
creditors, and other persons in interest.
From and after any such conveyance by
the corporation of its property in trust for
the benefit of its stockholders, members,
creditors and others in interest, all interest
which the corporation had in the property
terminates, the legal interest vests in the
trustees, and the beneficial interest in the
stockholders, members, creditors or other
persons in interest. Upon the winding up
of the corporate affairs, any asset
distributable to any creditor or stockholder
or member who is unknown or cannot be
found shall be escheated to the city or
municipality where such assets are
located. Except by decrease of capital
stock and as otherwise allowed by this
Code, no corporation shall distribute any
of its assets or property except upon
lawful dissolution and after payment of all
its debts and liabilities.
D. Methods of Liquidation or Winding Up
1. By Board of Directors
2. Through a trustee to whom the
properties are conveyed
3. By
management
committee
or
rehabilitation receiver
Q: Can the 3 year period be extended?
A: NO.
Reason: Beyond the 3 year period, there
is no corporate existence for all purposes
subject to doctrine of relation.
Remedy: Before the expiration of the 3
year period, appoint a trustee/receiver.
Q: During the 3 year period, does the
corporation enjoy corporate existence?
A: YES. But for limited purpose only, i.e.,
for liquidation purposes only. (Limited
existence)
Q: May such corporation sue during the 3
year period?
42

Corporation Code
A: YES. But only when the subject matter
is related to liquidation and winding up of
its remaining affairs.
*In case trustee/receiver is appointed, he
is not bound by the 3 year period.
*In Gelano v CA, the SC held that the
lawyer of the corporation can be
considered as trustee. The term trustee
must be considered in its generic sense.
Anyone who has been designated by the
corporation to act on its behalf could be
considered as trustee for purposes of
pursuing a claim for and on behalf of the
corporation. A lawyer falls within the ambit
of the word trustee.
*Appointment of trustee can be inferred
from the conduct of the corporation. This
is by Implication.
*If the corporation is the creditor appoint a
trustee. If the corporation is the debtor
appoint a receiver.
Q: What if the corporate properties have
already been distributed among the
shareholders without trustee/receiver?
A: Remedy: Run after the erring directors
and officers.
E. Concept of Rehabilitation; Effects of
Appointment of Management Committee
or Receiver
Rehabilitation connotes a reopening or
reorganization.
Contemplates
a
continuance of corporate existence in an
effort to restore the corporation to its
former successful operation.
*This is a remedy expressly allowed under
Section 6 of PD 902-A.
Purpose: To make the corporation
financially viable again.
Substantive Grounds:
1. When there is imminent danger of
dissipation or wastage of corporate
assets
2. Serious paralyzation of business which
would work to the prejudice of the
stockholders and creditors of the
corporation
*Mere misconduct of an officer is not a
ground for corporate rehabilitation.
*A corporation cannot ask for corporate
rehabilitation and at the same time
dissolution.
*With the passage of RA8799, the remedy
could now be instituted with the proper
RTC.
Effect: Stay Order - stops or suspends
the enforcement of all claims for money or
otherwise whether enforcement is by

court
or
not,
until
rehabilitation
proceedings are terminated.
Cases: PAL v Garcia; Sobrejuanite;
Lingkod
Manggagawa
ng
Rubberworld
v
Rubberworld
Philippines; RCBC v IAC
*In PAL v Garcia, the SC held that stay
order suspends all enforcement in all
stages of the proceedings.
*In
Lingkod
Manggagawa
sa
Rubberworld
v
Rubberworld
Philippines, the SC held that labor claims
are likewise affected by the Stop order.
*In RCBC v IAC, the SC held that whether
creditors are secured or not, stay order
will still affect them. The preference still
remains it is just the enforcement that is
suspended.
FOREIGN CORPORATIONS:
A. Concept of Foreign Corporation
Foreign Corporation is a corporation
formed, organized or existing under any
law other than those of the Philippines,
and whose laws allow Filipino citizens and
country or state.
provides that: For the purposes of this
Code, a foreign corporation is one formed,
organized or existing under any laws other
than those of the Philippines and whose
laws
allow
Filipino
citizens
and
country or state. It shall have the right to
transact business in the Philippines after it
shall have obtained a license to transact
business in this country in accordance
with this Code and a certificate of
authority
from
the
appropriate
government agency.
Reciprocity Clause provides that the
foreign laws allow Filipino citizens and
country or state.
B. Tests to Determine Nationality of a
Corporation
1. Incorporation Test when the
corporation is incorporated, organized
under the law of other country.
2. Control Test for purposes of
investment; the citizenship of a
particular
corporation
is
to
be
determined by the citizenship of the
controlling stockholders.
43

Corporation Code
C. Concept of Doing Business and the

License Requirement therefor
Substance Test provides that: a foreign
corporation is doing business in the
country if it is continuing the body or
substance of the enterprise of business for
which it was organized.
Continuity Test provides that: doing
business
implies
a
continuity
of
commercial dealings and arrangements,
and contemplates to some extent the
performance of acts or works or the
exercise of some functions normally
incident to and in progressive prosecution
of, the purpose and object of its
organization.
*Foreign Corporation is required to obtain
license from the SEC to enable them to do
business in the Philippines.
*The foreign corporation must appoint a
resident agent so that court may acquire
jurisdiction over the foreign corporation
*License is essential if there is an intention
to maintain main or substance of the
business in the Philippines or to continue
the same.
*Lack of license does not affect the
validity of the transaction.
*License is for regulatory purposes.
*License requirement does not prevent
performance of acts that are isolated from
the main business of the corporation and
there is no intent to continue the same in
the Philippines.
*If the foreign corporation is not licensed
to do business in the Philippines, General
Rule: they have no access in Philippine
Courts
Exceptions:
1. Isolated transactions
2. Infringement of trademark
*International offense can be sued
anywhere.
Cases: Expert Travel Tours v CA;
Home Insurance v Eastern Shipping
Lines
*In Expert Travel Tours v CA, the SC
held that resident agent is not with
authority to execute a certification of
Forum shopping following Sec. 23 of the
Corporation Code.
*In
Home
Insurance
v
Eastern
Shipping Lines, the SC held that if at the
time the suit was brought, the suing
foreign entity already have license to do
business in the Philippines, the suit will be
allowed although at the time the
transaction was made it does not have the

requisite of a license to do so, the
remedial defect is cured.
Cases: Japan Airlines v CA
*In Japan Airlines v CA, the SC held that
the selling of tickets though there is no
aircraft
landing
in
the
Philippines
constitute
doing
business
in
the
Philippines.
*In Ericks v CA, the SC held that license
is necessary in order the foreign
corporation may sue. In this case, the
court considered the continuity test, they
found out that the foreign corporation has
the intent to continue business in the
Philippines.
*Credit is obtained to maintain longer
transactions.
D. Effects of Being Issued a License
1. They are placed under the jurisdiction
of the Philippine courts
2. They are placed under the same
footing as domestic corporations
3. The public is protected in dealing with
foreign corporations.
E. Revocation and Withdrawal of License
Grounds for Revocation:
1. Failure to file its annual report or pay
any
fees
as
required
by
the
Corporation Code
2. Failure to appoint and maintain a
resident agent in the Philippines as
required by the Corporation Code
3. Failure, after change of its resident
agent or his address, to submit to the
SEC a statement of such change as
required by the Corporation Code
4. Failure to submit to the SEC an
authenticated copy of any amendment
to its articles of incorporation or bylaws or of any articles of merger or
consolidation
within
the
time
prescribed by the Corporation Code
5. A misrepresentation of any material
matter in any application, report
affidavit or other document submitted
by such corporation pursuant to the
provisions of the Corporation Code
6. Failure to pay any and all taxes,
imposts, assessments or penalties, if
any, lawfully due to the Philippine
Government or any of its agencies or
political subdivision
7. Transacting business in the Philippines
outside of the purpose or purposes for
44

Corporation Code
which such corporation is authorized
under its license
8. Transacting business in the Philippines
as agent of or acting for and in behalf
of any foreign corporation or entity not
duly licensed to do business in the
Philippines
9. Any other ground as would render it
unfit to transact business in the
Philippines.
Applicable Laws:
1. Code of Commerce of Letters of Credit
Article 568 of the Code of Commerce
provides that: A letter of credit shall: 1.
Be issued in favor of a definite person and
not to orders; and 2. Be limited to a fixed
and specified amount or to one or more
undetermined amount but with maximum
limit stated exactly.
*Letter of credit is not a negotiable
instrument.
2. Customs, primarily those embodied in the
Uniform
Customs
and
Practice
for
Documentary Credits which was adopted
by
the
International
Chamber
of
Commerce
Parties to a Letter of Credit:
LETTERS OF CREDIT
Definition:
Q: What is a letter of credit?
A: Letters of Credit is an engagement by a
bank or other person made at the request of a
customer that the issuer will honor drafts or other
demands for payment upon compliance with the
conditions specified in the credit.
Example: importation of purchase of goods
Q: Are you applying a loan when you open a
letter of credit?
A: YES.
Reasons why businessmen open letter of
credit:
1. Lack of funds
2. Security purposes
3. Dont want to part his money until the
goods are received
Q: What are the relationships may arise in a
letter of credit?
A: General Rule: Three relationships they are: 1.
Buyer-seller (contract of sale); 2. Issuing bankbeneficiary; and 3. Issuing bank-buyer (contract
of loan)
Usual conditions imposed by the bank: 1.
Financial capacity; 2. collateral
1. Buyer one who procures the letter of

credit and obliges himself to reimburse the
issuing bank upon receipt of the document
of title.
2. Issuing Bank one which undertakes to
pay the seller upon receipt of the draft and
proper documents of titles and to
surrender the documents to the buyer
upon reimbursement.
3. Seller one who in compliance with the
contract of sale ships the goods to the
buyer and delivers the documents of title
and draft to the issuing bank to recover
payment.
4. Advising (notifying) Bank may be utilized
to convey to the seller the existence of the
credit.
5. Confirming Bank which will lend
credence to the letter of credit issued by a
lesser known issuing bank; the confirming
bank is directly liable to pay the sellerbeneficiary.
6. Paying Bank which undertakes to encash
the drafts drawn by the exporter/seller.
7. Negotiating Bank
*Most common parties are the buyer, seller and
issuing bank.
Transactions involved in a Letter of Credit:
a. Independence Principle
This principle provides that the three
contracts entered into in this transaction,
the contracts are: 1. Contract of sale
between the buyer and seller; 2. Contract
of the buyer with the issuing bank; and 3.
Letter of Credit proper, are separate from
each other thus any infirmity from one
45

Corporation Code
contract does not affect the other
contracts.
A direct consequence of this principle is
the rule that banks only deal with
documents and not with goods, services or
obligations to which they relate.
*In BPI v De Reny, the SC held that the
bank has no obligation to inquire the
specifications of the goods.
b. Fraud Exception Principle
c. Rule of Strict Compliance
This rule provides that the documentary
requirements imposed by the issuing bank
must be strictly complied with by the
beneficiary otherwise the issuing bank
cannot ask for reimbursement.
Usual documents submitted to the
bank:
1. Vouchers;
2. Contract of sale; and
3. Purchase orders
bank that the drafts already drawn by the

beneficiary have been reimbursed to the
opening bank by the buyer.
e. Back-to-Back Letter of Credit a credit
with identical documentary requirements
and covering the same merchandise as
another letter of credit, except for a
difference in the price of the merchandise
as shown by the invoice and the draft. The
second letter of credit can be negotiated
only after the first is negotiated.
Types of Letters of Credit:

a. Irrevocable Letter of Credit is a
definite undertaking on the part of the
issuing
bank
and
constitutes
the
engagement of that bank to the
beneficiary and bona fide holders of drafts
drawn and or documents presented
thereunder, that the provisions for
payment, acceptance or negotiation
contained in the credit will be duly
fulfilled, provided that all the terms and
conditions of the credit are complied with.
b. Confirmed Letter of Credit whenever
the beneficiary stipulates that the
obligation of the opening bank shall also
be made the obligation of another bank
(also bank that notifies) to himself.
c. Standby Letter of Credit a security
arrangement for the performance of
certain obligations. It can be drawn
against
only
if
another
business
transaction is not performed. It may also
be issued in lieu of a performance bond.
*This type of letter of credit involves an
obligation to do.
*In Transfield v Luzon, the SC held that
Luzon can ran after the Letter of Credit
despite the pending arbitration of before
the
Commission
because
of
the
independence principle.
*Upon default, the bank pay the
beneficiary.
d. Revolving Letter of Credit one that
provides for renewed credit to become
available as soon as the opening bank has
advised that the negotiating or paying
46

Corporation Code
SECURITIES REGULATION CODE (R.A. 8799)

SEC JURISDICTION:
A. Powers
and
Functions
of
the
Securities and Exchange Commission:
Section 5 of RA 8799 states that: The
commission shall act with transparency
and shall have the powers and functions
provided by this code, Presidential Decree
No. 902-A, the Corporation Code, the
Investment Houses law, the Financing
Company Act and other existing laws.
Pursuant thereto the Commission shall
have, among others, the following powers
and functions:
(a) Have jurisdiction and supervision over
all
corporations,
partnership
or
associations who are the grantees of
primary franchises and/or a license or a
permit issued by the Government;
(b)
Formulate
policies
and
recommendations on issues concerning
the securities market, advise Congress
and other government agencies on all
aspect of the securities market and
propose legislation and amendments
thereto;
(c) Approve, reject, suspend, revoke or
require
amendments
to
registration
statements, and registration and licensing
applications;
(d) Regulate, investigate or supervise the
activities of persons to ensure compliance;
(e) Supervise, monitor, suspend or take
over the activities of exchanges, clearing
agencies and other SROs;
(f) Impose sanctions for the violation of
laws and rules, regulations and orders,
and issued pursuant thereto;
(g) Prepare, approve, amend or repeal
rules, regulations and orders, and issue
opinions and provide guidance on and

supervise compliance with such rules,
regulation and orders;
(h) Enlist the aid and support of and/or
deputized any and all enforcement
agencies of the Government, civil or
military as well as any private institution,
corporation, firm, association or person in
the implementation of its powers and
function under its Code;
(i) Issue cease and desist orders to
prevent fraud or injury to the investing
public;
(j) Punish for the contempt of the
Commission, both direct and indirect, in
accordance with the pertinent provisions
of and penalties prescribed by the Rules of
Court;
(k) Compel the officers of any registered
corporation or association to call meetings
of stockholders or members thereof under
its supervision;
(l) Issue subpoena duces tecum and
summon witnesses to appear in any
proceedings of the Commission and in
appropriate cases, order the examination,
search and seizure of all documents,
papers, files and records, tax returns and
books of accounts of any entity or person
under investigation as may be necessary
for the proper disposition of the cases
before it, subject to the provisions of
existing laws;
(m) Suspend, or revoke, after proper
notice and hearing the franchise or
certificate of registration of corporations,
partnership or associations, upon any of
the grounds provided by law; and
(n) Exercise such other powers as may be
provided by law as well as those which
may be implied from, or which are
necessary or incidental to the carrying out
of, the express powers granted the
Commission to achieve the objectives and
purposes of these laws.
The Commissions jurisdiction over all
cases enumerated under section 5 of
Presidential Decree No. 902-A is hereby
transferred to the Courts of general
jurisdiction or the appropriate Regional
Trial Court: Provided, That the Supreme
Court in the exercise of its authority may
designate the Regional Trial Court
branches that shall exercise jurisdiction
over the cases. The Commission shall
retain jurisdiction over pending cases
involving
intra-corporate
disputes
47

Corporation Code
submitted for final resolution which should
be resolved within one (1) year from the
enactment of this Code. The Commission
shall retain jurisdiction over pending
suspension
of
payment/rehabilitation
cases filed as of 30 June 2000 until finally
disposed.
B. Cases transferred to the RTC:
Sec. 5. In addition to the regulatory and
adjudicative functions of the Securities
and
Exchange
Commission
over
corporations, partnerships and other forms
of associations registered with it as
expressly granted under existing laws and
decrees, it shall have original and
exclusive jurisdiction to hear and decide
cases involving:
(a) Devices or schemes employed by or
any acts, of the board of directors,
business associates, its officers or
partnership, amounting to fraud and
misrepresentation
which
may
be
detrimental to the interest of the public
and/or of the stockholder, partners,
members of associations or organizations
registered with the Commission;
(b) Controversies arising out of intracorporate
or
partnership
relations,
between
and
among
stockholders,
members, or associates; between any or
all of them and the corporation,
partnership or association of which they
are stockholders, members or associates,
respectively;
and
between
such
corporation, partnership or association
and the state insofar as it concerns their
individual franchise or right to exist as
such entity; and
(c) Controversies in the election or
appointments
of
directors,
trustees,
officers or managers of such corporations,
partnerships or associations.
(d) Appointment of Rehabilitation Receiver
or Management Committee.
*Judico v Quiambao
Q: How does the SRC protect the public who
wishes to invest in securities?
A: The law protects the public as follows:
a. The law requires full disclosure of
information to the public regarding the
securities that are being offered and the
issuers, including the filing of and approval
of the registration statement and the
approval of the prospectus.
b. A continuing duty to regularly submit
material information to the SEC.
c. Close monitoring of the securities and
other circumstances that may affect the
same as well as the persons involved
including brokers, issuers, the exchange
itself, etc. in order to ensure compliance

with pertinent laws and regulations.
d. Prohibiting
and
penalizing
different
fraudulent practices and transactions.
e. Providing the SEC with powers and
functions.
Definition of terms:
a. Securities are share, participation or
interests in a corporation or in a
commercial enterprise or profit-making
venture and evidenced by a certificate,
contract, instrument, whether written or
electronic in character. It includes: a.
shares of stocks, bonds, debentures,
notes, evidences of indebtedness, assetbacked
securities;
b.
investment
contracts, certificates of interest or
participation
in
a
profit
sharing
agreement, certificates of deposit for a
future subscription; c. fractional undivided
interests in oil, gas or other mineral rights;
d. derivatives like option and warrants; e.
certificates of assignments, certificates of
participation, trust certificates, voting
trust certificates or similar instruments; f.
proprietary
or
non-proprietary
membership certificates in corporations;
and other instruments as may in the
future be determined by the Commission.
b. Issuer is the originator, maker, obligor,
or creator of the security.
c. Broker is a person engaged in the
business of buying and selling securities
for the account of others.
d. Dealer means any person who buys and
sells securities for his/her own account in
the ordinary course of business.
e. Clearing Agency is any person who
acts as intermediary in making deliveries
upon payment to effect settlement in
securities transactions.
f. Exchange is an organized marketplace
or facility that brings together buyers and
sellers and executes trades of securities
and/or commodities.
g. Pre-Need Plans are contracts which
provide for the performance of future
services or the payment of future
monetary considerations at the time of
actual need, for which planholders pay in
cash or installment at stated prices, with
or without interest or insurance coverage
and includes life, pension, education,
interment, and other plans which the
Commission may from time to time
approve.
h. Promoter is a person who, acting alone
or with others, takes initiative in founding
and organizing the business or enterprise
of the issuer and receives consideration
therefore.
48

Corporation Code
i.
j.
k.
l.
m.
n.
o.
p.
q.
r.
s.
t.
u.
Prospectus is the document made by

or on behalf of an issuer, underwriter or
dealer to sell or offer securities for sale to
the
public
through
a
registration
statement filed with the Commission.
Registration statement
is the
application
for
the
registration
of
securities required to be filed with the
Commission.
Uncertificated security is a security
evidenced by electronic or similar records.
Underwriter
is a person who
guarantees on a firm commitment and/or
declared best effort basis the distribution
and sale of securities of any kind by
another company.
Investment contracts a contract,
transaction
or
scheme
(collectively
contract) whereby a person invests his
money in a common enterprise and is led
to expect profits primarily from the efforts
of others.
Derivatives
financial investment,
including options and warrants whose
value depends on the interest in or
performance of an underlying security, but
which does not require any investment of
principal in the underlying security.
Options are contracts that give the
buyer the right, but not the obligation, to
buy or sell an underlying security at a
predetermined price, called the exercise or
strike price, on or before a predetermined
date, called the expiry date, which can
only be extended in accordance with
Exchange rules.
Call options are rights to buy.
Put options are rights to sell.
Warrants are rights to subscribe or
purchase new shares or existing shares in
a company, on or before a predetermined
date, called the expiry date, which can
only be extended in accordance with
Exchange rules. Warrants generally have a
longer exercise period than options.
Commodity futures contract means a
contract providing for the making or
taking delivery at a prescribed time in the
future of a specific quantity and quality of
a commodity or the cash value thereof,
which is customarily offset prior to the
delivery date, and includes standardized
contracts
having
the
indicia
of
commodities futures, commodity options
and commodity leverage, or margin
contracts.
Commodity means any goods, articles,
services, rights and interests, including
any group or index of any of the foregoing,
in which commodity interests contracts
are presently or in the future dealt in.
Put is a transferable option or offer to
deliver a given number of shares of stock
at a stated price at any given time during
a stated period.
v. Call is transferable option to buy a

specified number of shares at a stated
price.
w. Straddle is a combination put and call.
x. Insider means (a) the issuer; (b) a
director or officer (or person performing
similar functions) of, or a person
controlling the issuer; (c) a person whose
relationship or former relationship to the
issuer gives or gave him access to
material information about the issuer or
the security that is not generally available
to the public; (d) a government employee,
or director, or officer of an exchange,
clearing agency and/or self-regulatory
organization who has access to material
information about an issuer or a security
that is not generally available to the
public; or (e) a person who learns such
information by a communication from any
of the foregoing insiders.
y. Material non-public information An
information is material non-public if: (a)
it has not been generally disclosed to the
public and would likely affect the market
price of the security after being
disseminated to the public and the lapse
of a reasonable time for the market to
absorb the information; or (b) would be
considered by a reasonable person
important under the circumstances in
determining his course of action whether
to buy, sell or hold a security.
*Q: When SEC can suspend or cancel certificate
of registration?
A: 1. Fraud in procuring registration;
2. Serious misrepresentation as to objectives of
corporation;
3. Refusal to comply with lawful order of SEC;
4. Continuous inoperation for at least 5 years;
5. Failure to file by-laws within required period;
6. Failure to file reports;
7. Other similar grounds
Basic
rules
regarding
registration
of
securities:
Sec. 8.1 of the Securities Regulation Code
provides that: Securities shall not be sold or
offered for sale or distribution within the
Philippines, without a registration statement duly
filed with and approved by the Commission. Prior
to such sale, information on the securities, in
such form and with such substance as the
Commission may prescribe, shall be made
available to each prospective purchaser.
states that: The Commission may conditionally
approve the registration statement under such
terms as it may deem necessary.
states that: The Commission may specify the
terms and conditions under which any written
communication,
including
any
summary
49

Corporation Code
prospectus, shall be deemed not to constitute an
offer for sale under this Section.
states that: A record of the registration of
securities shall be kept in Register Securities in
which shall be recorded orders entered by the
Commission with respect such securities. Such
register and all documents or information with
the respect to the securities registered therein
shall be open to public inspection at reasonable
hours on business days.
states that: The Commission may audit the
financial
statements,
assets
and
other
information of firm applying for registration of its
securities whenever it deems the same necessary
to insure full disclosure or to protect the interest
of the investors and the public in general.
*In approving the registration of the securities,
the SEC is not only concerned with the
requirement that full disclosure of information is
given to the public. The SEC is also concerned
with the merit of the securities themselves and
the issuer.
*Baviera v Paglinawan
*There is no assurance on the part of the SEC
that the securities presented are valid and good
for investors. However, there is a penal sanction
in case the securities are not what were
disclosed.
*Q: What securities are exempt from the
requirement of registration?
A: Sec. 9.1 of the Securities Regulation
Code provides that: The requirement of
registration under Subsection 8.1 shall not as a
general rule apply to any of the following classes
of securities: (a) Any security issued or
guaranteed by the Government of the Philippines,
or by any political subdivision or agency thereof,
or by any person controlled or supervised by, and
acting as an instrumentality of said Government.
(b) Any security issued or guaranteed by the
government of any country with which the
Philippines maintains diplomatic relations, or by
any state, province or political subdivision thereof
on the basis of reciprocity: Provided, That the
Commission may require compliance with the
form and content for disclosures the Commission
may prescribe. (c) Certificates issued by a
receiver or by a trustee in bankruptcy duly
approved by the proper adjudicatory body. (d)
Any security or its derivatives the sale or transfer
of which, by law, is under the supervision and
regulation of the Office of the Insurance
Commission, Housing and Land Use Rule
Regulatory Board, or the Bureau of Internal
Revenue. (e) Any security issued by a bank
except its own shares of stock.
provides that: The Commission may, by rule or
regulation after public hearing, add

foregoing any class of securities if it finds
enforcement of this Code with respect
securities is not necessary in the public
and for the protection of investors.
to the
that the
to such
interest
*Reason: The issuer is a trusted and regulated

officer.
*Q: What transactions are exempt from the
registration
requirement
under
Securities
Regulation Code?
Code provides that: The requirement of
registration under Subsection 8.1 shall not apply
to the sale of any security in any of the following
transactions: (a) At any judicial sale, or sale by an
executor, administrator, guardian or receiver or
trustee in insolvency or bankruptcy. (b) By or for
the account of a pledge holder, or mortgagee or
any of a pledge lien holder selling of offering for
sale or delivery in the ordinary course of business
and not for the purpose of avoiding the provision
of this Code, to liquidate a bonafide debt, a
security pledged in good faith as security for such
debt. (c) An isolated transaction in which any
security is sold, offered for sale, subscription or
delivery by the owner therefore, or by his
representative for the owners account, such sale
or offer for sale or offer for sale, subscription or
delivery not being made in the course of repeated
and successive transaction of a like character by
such owner, or on his account by such
representative and such owner or representative
not being the underwriter of such security. (d)
The distribution by a corporation actively
engaged in the business authorized by its articles
of incorporation, of securities to its stockholders
or other security holders as a stock dividend or
other distribution out of surplus. (e) The sale of
capital stock of a corporation to its own
stockholders exclusively, where no commission or
other remuneration is paid or given directly or
indirectly in connection with the sale of such
capital stock. (f) The issuance of bonds or notes
secured by mortgage upon real estate or tangible
personal property, when the entire mortgage
together with all the bonds or notes secured
thereby are sold to a single purchaser at a single
sale. (g) The issue and delivery of any security in
exchange for any other security of the same
issuer pursuant to a right of conversion entitling
the holder of the security surrendered in
exchange to make such conversion: Provided,
That the security so surrendered has been
registered under this Code or was, when sold,
exempt from the provision of this Code, and that
the security issued and delivered in exchange, if
sold at the conversion price, would at the time of
such conversion fall within the class of securities
entitled to registration under this Code. Upon
such conversion the par value of the security
surrendered in such exchange shall be deemed
the price at which the securities issued and
delivered in such exchange are sold. (h) Brokers
50

Corporation Code
transaction, executed upon customers orders, on
any registered Exchange or other trading market.
(i) Subscriptions for shares of the capitals stocks
of a corporation prior to the incorporation thereof
or in pursuance of an increase in its authorized
capital stocks under the Corporation Code, when
no expense is incurred, or no commission,
compensation or remuneration is paid or given in
connection with the sale or disposition of such
securities, and only when the purpose for
soliciting, giving or taking of such subscription is
to comply with the requirements of such law as to
the percentage of the capital stock of a
corporation which should be subscribed before it
can be registered and duly incorporated, or its
authorized, capital increase. (j) The exchange of
securities by the issuer with the existing security
holders exclusively, where no commission or
other remuneration is paid or given directly or
indirectly for soliciting such exchange. (k) The
sale of securities by an issuer to fewer than
twenty (20) persons in the Philippines during any
twelve-month period. (l) The sale of securities to
any number of the following qualified buyers: (i)
Bank; (ii) Registered investment house; (iii)
Insurance company; (iv) Pension fund or
retirement plan maintained by the Government of
the Philippines or any political subdivision thereof
or manage by a bank or other persons authorized
by the Bangko Sentral to engage in trust
functions; (v) Investment company or; (vi) Such
other person as the Commission may rule by
determine as qualified buyers, on the basis of
such factors as financial sophistication, net worth,
knowledge, and experience in financial and
business matters, or amount of assets under
management.
*Reasons: 1. Limited character of offering; 2.
Mandated by law; 3. Stock dividends declared; 4.
Transaction is such that registration of the
securities is unwarranted.
provides that: The Commission may exempt
other transactions, if it finds that the
requirements of registration under this Code is
not necessary in the public interest or for the
protection of the investors such as by the reason
of the small amount involved or the limited
character of the public offering.
provides that: Any person applying for an
exemption under this Section, shall file with the
Commission a notice identifying the exemption
relied upon on such form and at such time as the
Commission by the rule may prescribe and with
such notice shall pay to the Commission fee
equivalent to one-tenth (1/10) of one percent
(1%) of the maximum value aggregate price or
issued value of the securities.
*Q: What are the grounds for revocation and/or

rejection
of
the
registration
of
securities/statement?
Code provides that: The Commission may reject
a registration statement and refuse registration of
the security there-under, or revoke the affectivity
of a registration statement and the registration of
the security there-under after the due notice and
hearing by issuing an order to such effect, setting
forth its finding in respect thereto, if it finds that:
(a) The issuer: (i) Has been judicially declared
insolvent; (ii) Has violated any of the provision of
this Code, the rules promulgate pursuant thereto,
or any order of the Commission of which the
issuer has notice in connection with the offering
for which a registration statement has been filed;
(iii) Has been or is engaged or is about to engage
in fraudulent transactions; (iv) Has made any
false or misleading representation of material
facts in any prospectus concerning the issuer or
its securities; (v) Has failed to comply with any
requirements that the Commission may impose
as a condition for registration of the security for
which the registration statement has been filed;
or (b) The registration statement is on its face
incomplete or inaccurate in any material respect
or includes any untrue statements of a material
fact required to be stated therein or necessary to
make the statement therein not misleading; or (c)
The issuer, any officer, director or controlling
person performing similar functions, or any under
writer has been convicted, by a competent
judicial or administrative body, upon plea of
guilty, or otherwise, of an offense involving moral
turpitude and /or fraud or is enjoined or
restrained by the Commission or other competent
or administrative body for violations of securities,
commodities, and other related laws.
Devices and practices on manipulation of
security
prices
identified
under
the
Securities Regulation Code:
provides that: It shall be unlawful for any person
acting for himself or through a dealer or broker,
directly or indirectly: (a) To create a false or
misleading appearance of active trading in any
listed security traded in an Exchange of any other
trading market (hereafter referred to purposes of
this Chapter as "Exchange"): (i) By effecting any
transaction in such security which involves no
change in the beneficial ownership thereof; (ii) By
entering an order or orders for the purchase or
sale of such security with the knowledge that a
simultaneous order or orders of substantially the
same size, time and price, for the sale or
purchase of any such security, has or will be
entered by or for the same or different parties; or
(iii) By performing similar act where there is no
change in beneficial ownership. (b) To affect,
alone or with others, a securities or transactions
in securities that: (I) Raises their price to induce
51

Corporation Code
the purchase of a security, whether of the same
or a different class of the same issuer or of
controlling, controlled, or commonly controlled
company by others; or (iii) Creates active trading
to induce such a purchase or sale through
manipulative devices such as marking the close,
painting the tape, squeezing the float, hype and
dump, boiler room operations and such other
similar devices. (c) To circulate or disseminate
information that the price of any security listed in
an Exchange will or is likely to rise or fall because
of manipulative market operations of any one or
more persons conducted for the purpose of
raising or depressing the price of the security for
the purpose of inducing the purpose of sale of
such security. (d) To make false or misleading
statement with respect to any material fact,
which he knew or had reasonable ground to
believe was so false or misleading, for the
purpose of inducing the purchase or sale of any
security listed or traded in an Exchange. (e) To
effect, either alone or others, any series of
transactions for the purchase and/or sale of any
security traded in an Exchange for the purpose of
pegging, fixing or stabilizing the price of such
security; unless otherwise allowed by this Code or
by rules of the Commission.
provides that: No person shall use or employ, in
connection with the purchase or sale of any
security any manipulative or deceptive device or
contrivance. Neither shall any short sale be
effected nor any stop-loss order be executed in
connection with the purchase or sale of any
security except in accordance with such rules and
regulations as the Commission may prescribe as
necessary or appropriate in the public interest for
the protection of investors.
Acts that are considered unlawful with
respect to the purchase and sale of
securities:
Sec. 26 of the Securities Regulation Code
states that: It shall be unlawful for any person,
directly or indirectly, in connection with the
purchase or sale of any securities to: 1. Employ
any device, scheme, or artifice to defraud; 2.
Obtain money or property by means of any
untrue statement of a material fact of any
omission to state a material fact necessary in
order to make the statements made, in the light
of the circumstances under which they were
made, not misleading; or 3. Engage in any act,
transaction, practice or course of business which
operates or would operate as a fraud or deceit
upon any person.
Duties of an insider in case of trading
securities:

states that: It shall be unlawful for an insider to
sell or buy a security of the issuer, while in
possession of material information with respect to
the issuer or the security that is not generally
available to the public, unless: (a) The insider
proves that the information was not gained from
such relationship; or (b) If the other party selling
to or buying from the insider (or his agent) is
identified, the insider proves: (I) that he disclosed
the information to the other party, or (ii) that he
had reason to believe that the other party
otherwise is also in possession of the information.
A purchase or sale of a security of the issuer
made by an insider defined in Subsection 3.8, or
such insiders spouse or relatives by affinity or
consanguinity
within
the
second
degree,
legitimate or common-law, shall be presumed to
have been effected while in possession of
material non-public information if transacted after
such information came into existence but prior to
dissemination of such information to the public
and the lapse of a reasonable time for market to
absorb such information: Provided, however, That
this presumption shall be rebutted upon a
showing by the purchaser or seller that he was
aware of the material non-public information at
the time of the purchase or sale.
*Q: What is the prohibition imposed on insiders
regarding material non-public information?
Code states that: It shall be unlawful for any
insider to communicate material non-public
information about the issuer or the security to
any person who, by virtue of the communication,
becomes an insider as defined in Subsection 3.8,
where the insider communicating the information
knows or has reason to believe that such person
will likely buy or sell a security of the issuer whole
in possession of such information.
Tender Offer
Sec. 19 of the Securities Regulation Code
provides that: Any person or group of persons
acting in concert who intends to acquire at least
15% of any class of any equity security of a listed
corporation of any class of any equity security of
a corporation with assets of at least fifty million
pesos
(50,000,000.00)
and
having
two
hundred(200) or more stockholders at least one
hundred shares each or who intends to acquire at
least thirty percent(30%) of such equity over a
period of twelve months(12) shall make a tender
offer to stockholders by filling with the
Commission a declaration to that effect; and
furnish the issuer, a statement containing such of
the information required in Section 17 of this
Code as the Commission may prescribe. Such
person or group of persons shall publish all
request or invitations or tender offer or
requesting such tender offers subsequent to the
initial solicitation or request shall contain such
52

Corporation Code
information as the Commission may prescribe,
and shall be filed with the Commission and sent
to the issuer not alter than the time copies of
such materials are first published or sent or given
to security holders. (a) Any solicitation or
recommendation to the holders of such a security
to accept or reject a tender offer or request or
invitation for tenders shall be made in
accordance with such rules and regulations as
may be prescribe. (b) Securities deposited
pursuant to a tender offer or request or invitation
for tenders may be withdrawn by or on behalf of
the depositor at any time throughout the period
that tender offer remains open and if the
securities deposited have not been previously
accepted for payment, and at any time after sixty
(60) days from the date of the original tender
offer to request or invitation, except as the
Commission may otherwise prescribe. (c) Where
the securities offered exceed that which person
or group of persons is bound or willing to take up
and pay for, the securities that are subject of the
tender offers shall be taken up us nearly as may
be pro data, disregarding fractions, according to
the number of securities deposited to each
depositor. The provision of this subject shall also
apply to securities deposited within ten (10) days
after notice of increase in the consideration
offered to security holders, as described in
paragraph (e) of this subsection, is first published
or sent or given to security holders. (d) Where
any person varies the terms of a tender offer or
request or invitation for tenders before the
expiration thereof by increasing the consideration
offered to holders of such securities, such person
shall pay the increased consideration to each
security holder whose securities are taken up and
paid for whether or not such securities have been
taken up by such person before the variation of
the tender offer or request or invitation.
*Cemco Holdings, Inc. v National Life Insurance,
the SC held that tender offer rule is applicable in
this case. Rationale: 1. The statute covers not
only direct acquisition but also indirect acquisition
or any type of acquisition; 2. The legislative
intent of Sec. 19 of the Code is to regulate
activities relating to acquisition of control of the
listed company and for the purpose of protecting
the minority stockholders of a listed corporation.
Whatever may be the method by which control of
a public company is obtained, either through the
direct purchase of its stocks or through indirect
means, mandatory tender offer rule applies.
*Q: When is tender offer mandatory?
A: It is mandatory when:
1. A person is required to make a tender
offer for equity shares of a public company
in an amount equal to the number of
shares that the person intends to acquire
in the following circumstances:
a. Any person or a group of persons
acting in concert, intends to acquire
35% or more of equity shares of a

public company pursuant to an
agreement made between or among
the person and one or more sellers;
b. The person or a group of persons
acting in concert, intends to acquire
35% or more of the equity shares of a
public company within a period of 12
months;
c. If any acquisition of even less than
35% would result in ownership of over
51% of the total outstanding equity
securities of a public company, the
acquirer shall be required to make a
tender offer for all the outstanding
equity securities to all remaining
stockholder.
2. In all cases when the rules provide for
mandatory tender offer, the following
rules on sales be complied with:
a. If there is mandatory tender offer, the
sale of the shares pursuant to the
private transaction shall not be
completed prior to the closing and
completion of the tender offer.
b. Transactions with any of the seller/s of
significant blocks of shares with whom
the acquirers may have been in private
negotiations shall close at the same
time and upon the same terms as the
tender offer made to the public.
c. For paragraph (b) above where the
35% is within a period of 12 months,
the last sale meeting the threshold
shall not be consummated until the
closing and completion of the tender
offer.
*Q: When may the SEC exempt a person from the
mandatory tender offer requirement?
A: Upon written application, the SEC may exempt
from the requirement to make a mandatory
tender offer the following proposed purchases of
equity shares of a public company:
a. The purchase of newly issued shares from
unissued capital stock
b. In connection with foreclosure proceeding
involving a duly constituted pledge or
security
arrangement
where
the
acquisition is made by the debtor or
creditor
c. Purchases in connection with privatization
undertaken by the government of the
Philippines
d. Purchases in connection with corporate
rehabilitation under court supervision.
*Q: When is a person presumed to be making
voluntary tender offer?
A: A person will be presumed to be making a
voluntary tender offer where some or all of the
following factors are present:
a. Active and widespread solicitation of
public shareholders for the shares of a
public company
53

Corporation Code
b. Solicitation made for a substantial
percentage of the issuers stock
c. Offer to purchase is made at a premium
over the prevailing market price, at firm
rather than negotiable terms
d. An offer is contingent on the tender of a
fixed number of shares; and/or
e. Offer is only open for a limited period of
time.
Any person making a tender offer shall make a
public announcement of his intention, prior to the
commencement of the offer; Provided, however,
such announcement shall not be made until the
bidder has the resources to implement the offer
in full.
NEGOTIABLE INSTRUMENTS LAW (Act No.

2031)
PRELIMINARY CONSIDERATIONS:
A. Governing Laws
1. The Negotiable Instruments Law
2. The Code of Commerce
3. The New Civil Code
B. Concept of Negotiable Instrument
Negotiable Instruments is a written
contract for the payment of the money
which is intended as a substitute for
54

Corporation Code
money and passes from one person to
another as money, in such a manner as to
give a holder in due course the right to
hold the instrument free from defenses
available to prior parties.
C. Classes of Negotiable Instrument
1. Promissory Note
Sec.
184
of
the
Negotiable
Instruments Law provides that: A
negotiable promissory note within the
meaning of this Act is an unconditional
promise in writing made by one person
to another, signed by the maker,
engaging to pay on demand, or at a
fixed or determinable future time, a
sum certain in money to order or to
bearer. Where a note is drawn to the
makers own order, it is not complete
until indorsed by him.
*Personal engagement on the part of
the maker.
2. Bill of Exchange
Sec.
126
of
the
Negotiable
Instruments Law provides that: A
bill of exchange is an unconditional
order in writing addressed by one
person to another, signed by the
person giving it, requiring the person
to whom it is addressed to pay on
demand or at a fixed or determinable
future time a sum certain in money to
order or to bearer.
*There is only an order directing other
party to pay the instrument.
D. Functions of Negotiable Instrument
1. It operates as a substitute of money
*This is the main function of negotiable
instruments.
*Either negotiable or non-negotiable
instrument, it is a substitute for money.
Both are in lieu of money.
*relate this with legal tender
2. It is a means of creating and
transferring credit
3. It facilitates the sale of goods
4. It increases the purchasing medium in
circulation
Q: Which one is the best or better
substitute for money? Why?
A: Negotiable instrument.
Reasons:
1. Negotiability and
2. Accumulation of secondary contracts.
E. Characteristics of Negotiable Instrument
1. Negotiability it is that attribute or
property whereby a bill or note or
check may pass from hand to hand

similar to money, so as to give the
holder in due course the right to hold
the instrument and to collect the sum
payable for himself free from defenses.
*This attribute is very important.
2. Accumulation
of
secondary
contracts secondary contracts are
picked up and carried along with them
as they are negotiated from one
person to another, or in the course of
negotiation of a negotiable instrument,
a series of juridical ties between the
parties thereto arise either by law or
by privity.
*There must be further negotiation for
secondary contracts exist.
*Converted to obligors because of their
indorsements
F.
Negotiable Instruments compared with

other papers (document of title, letter of
credit, certificate of stock, pawn ticket,
postal money order, treasury warrant)
Document of title includes any bill of
lading,
dock
warrant,
quedan,
or
warehouse receipt or order for delivery of
goods, or any other document used in the
ordinary course of business in the sale or
transfer of goods, as proof of possession
or control of goods, or authorizing or
purporting to authorize the possessor of
the document to transfer or receive either
by indorsement or by delivery, goods
represented by such document (Article
1636 of the New Civil Code)
Letter of Credit is an engagement by a
bank or other person made at the request
of a customer that the issuer will honor
drafts or other demands for payment upon
compliance with the conditions specified
in the credit.
Certificate of Stock is a non-negotiable
instrument because it does not contain an
unconditional promise or order to pay a
sum certain in money.
Pawn
Ticket
is
a
non-negotiable
document because it does not represent
money but the pawned articles.
Postal Money Order is a non-negotiable
instrument because it is governed by
postal rules and regulations which may be
inconsistent
with
the
Negotiable
Instruments Law and it can only be
negotiated once.
Treasury Warrant is a non-negotiable
instrument because it is payable out of a
particular fund.
55

Corporation Code
G. Legal tender character

Q: Does negotiable instrument has legal
tender power?
A: NO.
Q: What is legal tender?
A: Legal tender is that kind of money that
the law compels a creditor to accept in
payment of his debt when tendered by the
debtor in the right amount.
*Coins/notes circulated by the Bangko
Sentral ng Pilipinas.
Q: What attribute that legal tender has
that negotiable instrument do not have?
A: Element of compulsion.
FORM
AND
INTERPRETATION
NEGOTIABLE INSTRUMENTS:
OF
A. Requisites of negotiability
Sec. 1 of the Negotiable Instruments
Law provides that: An instrument to be
negotiable must conform to the following
requirements: (a) It must be in writing and
signed by the maker or drawer; (b) must
contain an unconditional promise or order
to pay a sum certain in money; (c) must
be payable on demand, or at a fixed or
determinable future time; (d) must be
payable to order or to bearer; and (e)
where the instrument is addressed to a
drawee, he must be named or otherwise
indicated
therein
with
reasonable
certainty.
Q: What principle do we follow in
determining the instrument as negotiable
or not?
A: Negotiability is shown on the face of
the instrument.
Requisites:
1. Must be in writing and signed by the
maker or drawer
Q: Why should it be in writing?
A: In order for the instrument to be
used for negotiation.
Rationale: For the achievement of the
purpose of the negotiable instrument
law.
*It must be signed by the maker or
drawer. Rationale: To be bound by the
contract.
2. Must contain an unconditional promise
or order to pay a sum certain in money
Rationale why the law requires
that the promise or order be
unconditional: Because no one will
accept the same if the transferee does
not know the certainty of the event
that will happen. Hence, uncertainty
will defeat the very purpose of the

negotiable
instrument
law,
i.e.,
substitute for money.
*Mere
recital
does
not
negate
negotiability of the instrument.
Q: What is a condition?
A: A contingent event, happening of
which is uncertain, event which may or
may not happen.
*In
alternative
obligation,
for
negotiability purposes, the option must
be left in the hands of the creditor for
it to be negotiable.
*If the option is left in the hands of the
debtor, it is non-negotiable.
a. Promise or order to pay must be
unconditional
i.
Reference to transaction
Sec. 3 of the Negotiable
Instrument Law provides
that: An unqualified order
or promise to pay is
unconditional within the
meaning of this Act though
coupled
with:
(a)
An
indication of a particular
fund
out
of
which
reimbursement is to be
made
or
a
particular
account to be debited with
the amount; or (b) A
statement of the transaction
which gives rise to the
instrument. But an order or
promise to pay out of a
particular
fund
is
not
unconditional.
ii.
Source or payment
or
account to be debited
Fund
for Particular
Reimburseme Fund
for
nt
Payment
The drawee
There is only
pays the payee one act the
from his own
drawee
pays
funds
directly
from
afterwards the
the
particular
drawee pays
fund indicated
himself from
the particular
fund
Particular fund Particular fund
indicated is not indicated is the
the
direct direct source of
source
of payment
payment
*Particular fund for payment
depends on the sufficiency
of the funds
56

Corporation Code
*Extrinsic
and
collateral
matter
negates
negotiability.
b. Payable in sum certain in money
i.
Provisions which do not
affect certainty of sum
payable
that: The sum payable is a
sum certain within the
meaning
of
this
Act,
although it is to be paid: (a)
With interest; or (b) By
stated installments; or (c)
By stated installments, with
a provision that, upon
default in payment of any
installment or of interest,
the whole shall become
due; or (d) With exchange,
whether at a fixed rate or at
the current rate; or (e) With
costs of collection or an
attorneys fee, in case
payment shall not be made
at maturity.
ii.
Payment of interest
Q: Why is there a need to
pay interest?
A: For the consumption of
the money owned by a
person but was not used by
him.
iii.
Payment by installments
Stated Installments the
dates of each installment
must be fixed or at least
determinable
and
the
amount to be paid for each
installment must be stated.
Things to be written in
the
negotiable
instrument
regarding
payment by installments:
1. Amount
of
each
instalments
*must be determinable
2. Maturity Date
iv.
Acceleration clause
Acceleration
clause
renders whole debt due and
demandable upon failure of
the obligor to comply with
certain conditions.
*relate to doctrine of
indivisibility of contract.
v.
Payment with exchange
*It must be the prevailing

rate of conversion or fixed
rate that is well known.
*Does
not
affect
the
negotiability
of
the
instrument because the sum
remains certain.
vi.
Payment of attorneys fees
*Due to the default of the
obligor, obligee was forced
to engage the services of a
lawyer.
3. Payable on demand or at a fixed or
determinable future time
a. When payable on demand
Instruments Law provides that:
An instrument is payable on
demand: (a) When it is so
expressed to be payable on
demand, or at sight, or on
presentation; or (b) In which no
time for payment is expressed.
Where an instrument is issued,
accepted,
or
indorsed
when
overdue, it is, as regards the
person so issuing, accepting, or
indorsing it, payable on demand.
*It is the holder of the instrument
that has the call in case the
negotiable instrument is silent, i.e.,
it stated no maturity date.
b. When payable at determinable
future time
Instruments Law provides that:
An instrument is payable at a
determinable future time, within
the meaning of this Act, which is
expressed to be payable: (a) At a
fixed period after date or sight; or
(b) On or before a fixed or
determinable future time specified
therein; or (c) On or at a fixed
period after the occurrence of a
specified event which is certain to
happen, though the time of
happening
be
uncertain.
An
instrument
payable
upon
a
contingency is not negotiable, and
the happening of the event does
not cure the defect.
With
Condition
Uncertain
happen
a
to
With a Period
Certain
to
happen though
the
date
of
57

Corporation Code
happening
is
uncertain
*If the instrument is demandable
based on period the negotiability of
the instrument is still not affected.
*Paragraph (c) is one with a period.
4. Payable to order or bearer
*These are words of negotiability
Q: What is the implication of these
words?
A: There is a proper authorization for
further negotiation by the maker or
drawer.
a. When payable to bearer
Instrument Law provides that:
The instrument is payable to
bearer: (a) When it is expressed to
be so payable; or (b) When it is
payable to a person named therein
or bearer; or (c) When it is payable
to the order of a fictitious or nonexisting person, and such fact was
known to the person making it so
payable; or (d) When the name of
the payee does not purport to be
the name of any person; or (e)
When the only or last indorsement
is an indorsement in blank.
Principle: Once a bearer always a
bearer instrument.
*This principle applies only to an
instrument that was originally
issued as bearer instrument.
i.
Rule when instrument is
payable
to
a
fictitious
person
*Upon its face, it is an order
instrument but because it is
named to fictitious or nonexisting
person
it
is
converted to a bearer
instrument.
*Fictitious person or nonexisting
person
cannot
endorse.
*The person to whose order
the instrument is made
payable may in fact be
existing but he is still
fictitious or non-existent
under Sec. 9(c) of the
negotiable instrument law if
the person making it so
payable does not intend to
pay the specified person.
b. When payable to order
*The payee of instrument payable

to order must be a person in being,
natural or legal, and ascertained at
the time of issue.
i.
To
whose
order
the
instrument may be made
payable
that: The instrument is
payable to order where it is
drawn payable to the order
of a specified person or to
him or his order. It may be
drawn payable to the order
of: (a) A payee who is not
maker, drawer, or drawee;
or (b) The drawer or maker;
or (c) The drawee; or (d)
Two or more payees jointly;
or (e) One or some of
several payees; or (f) The
holder of an office for the
time being. Where the
instrument is payable to
order, the payee must be
named
or
otherwise
indicated
therein
with
reasonable certainty.
A payee who is not
maker,
drawer,
or
drawee
*The payee may be a
juridical person.
Q: How can it be
negotiated further?
A: By indorsement of
the person authorized by
the corporation.
The holder of an office
for the time being
*It is not necessary to
name the person holding
the position since it is
payable to the office
itself and not to the
person holding it.
5. Omissions
that
do
not
affect
negotiability
Sec.
6
of
the
Negotiable
Instrument
Law
provides that: The validity and
negotiable character of an instrument
are not affected by the fact that: (a) it
is not dated; or (b) does not specify
the value given, or that any value had
been given therefor; or (c) does not
specify the place where it is drawn or
58

Corporation Code
the place where it is payable; or (d)
bears a seal; or (e) designates a
particular kind of current money in
which payment is to be made. But
nothing in this section shall alter or
repeal any statute requiring in certain
cases the nature of the consideration
to be stated in the instrument.
Does not specify the value given or
that any value had been given therefor
*Consideration is always presumed.
Basis: Sec. 24 of the Negotiable
Instrument
Law
provides
that:
Every
negotiable
instrument
is
deemed prima facie to have been
issued for a valuable consideration;
and every person whose signature
appears thereon to have become a
party thereto for value.
Does not specify the place where it
is drawn or the place where it is
payable
*The New Civil Code is applied
suppletorily.
Bears a seal
*This is for authentication purposes.
A particular kind of current money
in which payment is to be made
*It is still negotiable because it would
still be considered payable in money.
Foreign currency is convertible to
Philippine money which is legal tender
in the Philippines.
6. Additional provisions not affecting
negotiability
Sec.
5
of
the
Negotiable
Instrument Law provides that: An
instrument which contains an order or
promise to do any act in addition to
the payment of money is not
negotiable.
But
the
negotiable
character of an instrument otherwise
negotiable is not affected by a
provision which: (a) authorizes the sale
of collateral securities in case the
instrument be not paid at maturity; or
(b)
authorizes
a
confession
of
judgment if the instrument be not paid
at maturity; or (c) waives the benefit of
any law intended for the advantage or
protection of the obligor; or (d) gives
the holder an election to require
something to be done in lieu of
payment of money. But nothing in this
section shall validate any provision or
stipulation otherwise illegal.
a. Sale of collateral securities
Q: Is the authority to sale includes

the authority to appropriate for
himself?
A: NO. It constitutes pactum
commissorium. It is an unjust
enrichment.
Q: What is the meaning of sale of
collateral securities?
A: Contemplates securities added
to the obligation to pay.
b. Confession of judgment
*This is void by reason of public
policy but still it is negotiable.
*In effect, such provision is
considered not existing.
*It waives his right to due process;
his right of a day in court.
Case: PNB v Manila Oil Refinery
c. Waiver of benefit
*Pertains to benefits granted by the
Negotiable Instrument Law.
Q: What are the benefits that can
be waived but the negotiability of
the instrument is not affected?
A: 1. Presentment for payment; 2.
Notice of dishonor; 3. Protest
d. Holder is given the option to do
something in lieu of payment of
money
*If it is the obligor or debtor is
given the option to choose what to
be done it is not negotiable
because it is conditional thus
requisites for negotiability is not
complied with.
B. Rules to be followed in interpreting
negotiable instruments
Sec. 17 of the Negotiable Instrument
Law provides that: Where the language
of the instrument is ambiguous or there
are omissions therein, the following rules
of construction apply: (a) Where the sum
payable is expressed in words and also in
figures and there is a discrepancy between
the two, the sum denoted by the words is
the sum payable; but if the words are
ambiguous or uncertain, reference may be
had to the figures to fix the amount; (b)
Where the instrument provides for the
payment of interest, without specifying
the date from which interest is to run, the
interest runs from the date of the
instrument, and if the instrument is
undated, from the issue thereof; (c) Where
the instrument is not dated, it will be
considered to be dated as of the time it
was issued; (d) Where there is a conflict
between
the
written
and
printed
59

Corporation Code
provisions of the instrument, the written
provisions
prevail;
(e)
Where
the
instrument is so ambiguous that there is
doubt whether it is a bill or note, the
holder may treat it as either at his
election; (f) Where a signature is so placed
upon the instrument that it is not clear in
what capacity the person making the
same intended to sign, he is to be deemed
an indorser; (g) Where an instrument
containing the word "I promise to pay" is
signed by two or more persons, they are
deemed to be jointly and severally liable
thereon.
*This rule is applicable only in case of
ambiguity and there is doubt.
NEGOTIATION:
A. Modes of transfer
1. Negotiation an instrument is
negotiated when it is transferred from
one person to another in such manner
as to constitute the transferee the
holder thereof.
2. Assignment
a
method
of
transferring
a
non-negotiable
instrument whereby the assignee is
merely placed in the position of the
assignor and acquires the instrument
subject to all defenses that might have
been set up against the original payee.
*If the instrument is a non-negotiable the
only transfer that can be made is by
assignment.
B. Concept of negotiation; distinguished from
assignment
Law provides that: An instrument is
negotiated when it is transferred from one
person to another in such manner as to
constitute the transferee the holder
thereof. If payable to bearer, it is
negotiated by delivery; if payable to order,
it is negotiated by the indorsement of the
holder and completed by delivery.
Assignment
Pertains
to
contracts in general
Assignee takes the
instrument subject
to
the
defenses
obtaining
among
the original parties
Assignee steps into
the shoes of the
Negotiation
Pertains
to
negotiable
instruments
Holder
in
due
course takes it free
from
personal
defenses available
among the parties
Holder
in
due
course may acquire
assignor and merely

acquires whatever
rights the assignor
may have
Governed by the
Civil Code
a better right than

the right of the
transferor
Governed by the
Negotiable
Instrument Law
C. Ways of negotiation (in case of order or

bearer instrument)
1. If payable to bearer, it is negotiated by
mere delivery
2. If payable to order, it is negotiated by
indorsement and delivery
Q: Why cant indorsement be avoided by
original payee?
A: Because by indorsement, it is the
original payees order to the maker to pay
the transferee.
Q: Why indorsement is not necessary in
bearer instrument?
A: Because the engagement is to pay the
amount of the instrument to holder or to
any subsequent holders.
Q: If the instrument is originally issued as
an order instrument and was subsequently
negotiated, does it always require
indorsement and delivery?
A: IT DEPENDS. If the indorsement is
special, it is necessary that there is
indorsement and delivery, however, if the
indorsement is blank, delivery alone is
sufficient.
D. Concept of delivery
Law provides that: Every contract on a
negotiable instrument is incomplete and
revocable until delivery of the instrument
for the purpose of giving effect thereto. As
between immediate parties and as regards
a remote party other than a holder in due
course, the delivery, in order to be
effectual, must be made either by or
under the authority of the party making,
drawing, accepting, or indorsing, as the
case may be; and, in such case, the
delivery may be shown to have been
conditional, or for a special purpose only,
and not for the purpose of transferring the
property in the instrument. But where the
instrument is in the hands of a holder in
due course, a valid delivery thereof by all
parties prior to him so as to make them
liable to him is conclusively presumed.
And where the instrument is no longer in
the possession of a party whose signature
60

Corporation Code
appears thereon, a valid and intentional
delivery by him is presumed until the
contrary is proved.
Delivery is the transfer of possession of
the instrument by the maker or drawer
with the intention to transfer title to the
payee and recognize him as holder
thereof.
*Delivery
is
always
a
common
requirement.
E. Indorsement
1. Concept
Indorsement is a legal transaction
effected by the writing of ones name
at the back of the instrument or upon
a paper (allonge) attached thereto with
or without additional words specifying
the person whom or to whose order
the instrument is to be payable
whereby one not only transfers legal
title to the paper transferred but
likewise enters into an implied
guaranty that the instrument will be
duly paid.
*This is a mechanical act
2. How made
Sec.
31
of
the
Negotiable
Instrument Law provides that: The
indorsement must be written on the
instrument itself or upon a paper
attached thereto. The signature of the
indorser, without additional words, is a
sufficient indorsement.
Sec.
32
of
the
Negotiable
indorsement must be an indorsement
of
the
entire
instrument.
An
indorsement which purports to transfer
to the indorsee a part only of the
amount payable, or which purports to
transfer the instrument to two or more
indorsees severally, does not operate
as a negotiation of the instrument. But
where the instrument has been paid in
part, it may be indorsed as to the
residue.
3. Kinds
*These words: specified, restrictive,
conditional, qualified are associated
words;
they
can
be
used
interchangeably.
How further negotiation of an order
instrument be made:
a. Special
Instrument Law provides that: A
special indorsement specifies the
person to whom, or to whose order,

the instrument is to be payable,
and the indorsement of such
indorsee is necessary to the further
negotiation of the instrument. An
indorsement in blank specifies no
indorsee, and an instrument so
indorsed is payable to bearer, and
may be negotiated by delivery.
*In
special
indorsement,
indorsement
and
delivery
is
necessary.
Example:
FFr
Front
(Back) Pay to
C
b. Blank
The holder may convert a blank
indorsement
into
a
special
indorsement by writing over the
signature of the indorser in blank
any contract consistent with the
character of the indorsement.
*In
blank
indorsement,
only
delivery is necessary.
Example
Back
Front
(Back)
When is the indorsement effective:

a. Conditional
Sgd B
Where
an
indorsement
is
conditional, the party required to
pay the instrument may disregard
the condition and make payment to
the indorsee or his transferee
whether the condition has been
fulfilled or not. But any person to
whom an instrument so indorsed is
negotiated will hold the same, or
the proceeds thereof, subject to the
rights of the person indorsing
conditionally.
Q: What is suspended?
A: The very indorsement is
suspended thus the right of the
indorsee is made to depend on the
happening of the event.
Example:
A B ---- C
b. Unconditional
What are the liabilities of an
indorser:
61

Corporation Code
a. Qualified
qualified indorsement constitutes
the indorser a mere assignor of the
title to the instrument. It may be
made by adding to the indorser's
signature
the words "without
recourse" or any words of similar
import. Such an indorsement does
not impair the negotiable character
of the instrument.
*This indorsement is confined to
warranties.
*In this kind of indorsement, Sec.
65 of the Negotiable Instrument is
applicable.
b. Unqualified
*Indorsement of this kind makes
the indorsee liable for warranties
and held the indorsee secondarily
liable in case of dishonor.
*Sec.
66
of
the
Negotiable
Instrument Law is applicable in this
kind of consideration.
What are the rights of indorsee:
a. Restrictive
An indorsement is restrictive
which either: (a) Prohibits the
further
negotiation
of
the
instrument; or (b) Constitutes the
indorsee the agent of the indorser;
or (c) Vests the title in the indorsee
in trust for or to the use of some
other persons. But the mere
absence of words implying power
to negotiate does not make an
indorsement restrictive.
*Prohibits the further negotiation of
the instrument
- the beneficial and legal title is
both on the indorser.
*Constitutes the indorsee the agent
of the indorser
- the indorser has the legal title
while the beneficial title remains
with the principal.
-the relationship exists here is
principal-agent relationship.
*Vests the title in the indorsee in
trust for or to the use of some
other persons
-the beneficial title belongs to other
person whereas the legal title
remains with the beneficiary.
-The relationship exists is a trusteetrustor relationship.

restrictive indorsement confers
upon the indorsee the right: (a) to
receive payment of the instrument;
(b) to bring any action thereon that
the indorser could bring; (c) to
transfer his rights as such indorsee,
where the form of the indorsement
authorizes him to do so. But all
subsequent indorsees acquire only
the title of the first indorsee under
the restrictive indorsement.
*It does not follow that if the
instrument is restrictively indorsed
the liability is qualified.
b. Unrestrictive
4. Other rules on indorsement
a. in a representative capacity
Where any person is under
obligation
to
indorse
in
a
representative capacity, he may
indorse in such terms as to
negative personal liability.
b. Presumption
as
to
time
of
indorsement
Except where an indorsement
bears date after the maturity of the
instrument, every negotiation is
deemed prima facie to have been
effected before the instrument was
overdue.
c. Place of indorsement
Except
where
the
contrary
appears, every indorsement is
presumed prima facie to have been
made at the place where the
instrument is dated.
d. Striking out of indorsement
Instrument Law states that: The
holder may at any time strike out
any indorsement which is not
necessary to his title. The indorser
whose indorsement is struck out,
and all indorsers subsequent to
him, are thereby relieved from
liability on the instrument.
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Corporation Code
*The striking of indorsement is
under the discretion of the holder
and not of the indorser.
e. Transfer
indorsement
of
an
instrument payable to bearer
Instrument Law states that:
Where an instrument, payable to
bearer, is indorsed specially, it may
nevertheless be further negotiated
by delivery; but the person
indorsing specially is liable as
indorser to only such holders as
make
title
through
his
indorsement.
Example:
Note payable to bearer
A B C D
B indorsed the instrument to C
Q: Does the indorsement affect the
instrument?
A: NO. Even if there is an
indorsement, it does not change
the fact that the instrument is a
bearer one thus it can be
negotiated by mere delivery.
Q: Is the indorser of the bearer
instrument liable? What is his
liability?
A: YES. He is liable in case of
breach of warranty. He is liable as
indorser for the fact that he
indorses a bearer instrument.
*Indorsement
on
a
bearer
instrument does not affect the
nature of the instrument because a
bearer instrument is always a
bearer instrument.
*This section applies only to
instruments which are originally
payable to bearer.
Example: A issued to B a bearer
note, B wants to negotiate it to C. B
asked you how he can validly
negotiate the bearer instrument?
The answer is by mere delivery.
Q: Is there a change in the
liabilities of a person who indorses
a bearer instrument?
A: YES. He is liable as an indorser
under Sec. 67 of the Negotiable
Instrument Law.
Q: Is there any liability attaches to
the person who negotiates the
instrument by mere delivery?
A: YES. Sec 65 second paragraph
but confined to warranties only.
f. Where instrument is payable to 2
or more persons

Where an instrument is payable to
the order of two or more payees or
indorsees who are not partners, all
must indorse unless the one
indorsing has authority to indorse
for the others.
g. Instrument is drawn or indorsed to
a person as cashier
Where an instrument is drawn or
indorsed to a person as "cashier" or
other fiscal officer of a bank or
corporation, it is deemed prima
facie to be payable to the bank or
corporation of which he is such
officer, and may be negotiated by
either the indorsement of the bank
or corporation or the indorsement
of the officer.
h. Where name of payee or indorsee
is misspelled
Instrument
Law states that:
Where the name of a payee or
indorsee is wrongly designated or
misspelled, he may indorse the
instrument as therein described
adding, if he thinks fit, his proper
signature.
i. Indorsement of an order of
instrument without indorsement
Where the holder of an instrument
payable to his order transfers it for
value without indorsing it, the
transfer vests in the transferee
such title as the transferor had
therein,
and
the
transferee
acquires in addition, the right to
have the indorsement of the
transferor. But for the purpose of
determining whether the transferee
is a holder in due course, the
negotiation takes effect as of the
time when the indorsement is
actually made.
Q: A issued an instrument payable
to the order of B, B wants to
negotiate it to C. How negotiation
be validly made?
A: Indorsement and delivery
Q: A issued an order instrument to
B, B transferred it to C only by
delivery
without indorsing it. Is
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Corporation Code
there any legal implication on the
gesture made by B?
A: YES. Under Sec. 49 of the
Negotiable Instrument, there is an
equitable assignment.
Q: Does the holder of the
instrument has any other right?
A: YES. He has the right to have
the indorsement of the transferor.
This right is applicable only if the
instrument is negotiable. He can
file a case for specific performance.
Q: Why is the date of indorsement
material?
A: To determine the date of due
course holding.
Q:
A
issued
a
negotiable
instrument to B, B negotiated it to
C. The delivery took effect on May
1, 2008 and the indorsement took
effect on June 1, 2008. When was
there a valid negotiation?
A: At the time indorsement was
made. There is no retroactive
effect.
*The requisites of a holder in due
course must be present up to the
actual and valid negotiation took
place.
5. Negotiation by a prior party
Sec.
50
of
the
Negotiable
Instrument Law states that: Where
an instrument is negotiated back to a
prior party, such party may, subject to
the provisions of this Act, reissue and
further negotiable the same. But he is
not entitled to enforce payment
thereof against any intervening party
to whom he was personally liable.
HOLDERS:
A. General concept of holder
Sec.
191
of
the
Negotiable
Instrument Law states that: "Holder"
means the payee or indorsee of a bill or
note who is in possession of it, or the
bearer thereof.
*If payable to bearer, holder means the
person who is in possession thereof.
Q: Can a named payee be called a holder?
A: YES. If the instrument is in his
possession.
Presumption: There was a valid delivery.
Advantage of being a holder in due
course: Can give shelter/protection to the
subsequent holders.
B. Holder in due course

Law
provides that: A holder in due
course is a holder who has taken the
instrument under the following conditions:
(a) That it is complete and regular upon its
face; (b) That he became the holder of it
before it was overdue, and without notice
that it has been previously dishonored, if
such was the fact; (c) That he took it in
good faith and for value; (d) That at the
time it was negotiated to him, he had no
notice of any infirmity in the instrument or
defect in the title of the person
negotiating it.
*Requisites on Sec. 52 boils down to good
faith and innocence of the holder.
*This is equivalent to innocent buyer in
good faith under New Civil Code.
1. Instrument complete and regular
*Complete: all necessary details that
define the necessary rights thereto
and all the requisites of Sec. 1 must be
present.
*Regular: there must be no visible
alterations/changes upon the face of
the instrument.
*These are alterations that are obvious
in the naked eye.
2. Taken before overdue
*If the instrument is overdue, it is also
a notice that it has been dishonored.
*An instrument is overdue after the
date of maturity.
*It is very unusual to negotiate an
instrument that has been matured
because such instrument should have
been discharged.
a. Rule
in
case
of
installment
instruments
*When the instrument contains an
acceleration clause, knowledge of
the holder at the time of
acquisition
thereof
that
one
installment or interest, or both, as
the case may be, is unpaid, is
notice that the instrument is
overdue.
*One who purchases in good faith
an instrument upon which the
interest is overdue is a holder in
due course. But where, by the
terms of the instrument, the
principal was to become due upon
default of the payment of interest,
one who takes the instrument upon
which the interest is overdue is not
a holder in due course.
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Corporation Code
b. Rule
in
case
of
demand
instruments
Where an instrument payable on
demand is negotiated on an
unreasonable length of time after
its issue, the holder is not deemed
a holder in due course.
*In
demand
instrument,
reasonableness test is applied. It is
the usage of trade or business
practice (if any), with respect to
such instruments, and the facts of
the particular case.
3. Notice of infirmity or defect
Sec.
54
of
the
Negotiable
Instrument
Law
provides
that:
Where the transferee receives notice
of any infirmity in the instrument or
defect in the title of the person
negotiating the same before he has
paid the full amount agreed to be paid
therefor, he will be deemed a holder in
due course only to the extent of the
amount therefore paid by him.
*There is defective in the title when
there is error in the indorsement
and/or in delivery.
Q: Even if the instrument suffer
infirmities, is there a possibility that
the holder be a holder in due course?
A: YES. If he has no knowledge of the
infirmity.
Sec.
55
of
the
Negotiable
title of a person who negotiates an
instrument is defective within the
meaning of this Act when he obtained
the instrument, or any signature
thereto, by fraud, duress, or force and
fear, or other unlawful means, or for an
illegal consideration, or when he
negotiates it in breach of faith, or
under such circumstances as amount
to a fraud.
Q: What are the circumstances that
render title defective?
A: When he obtained the instrument
or any signature thereto by: 1. Fraud;
2. Duress; 3. Force and fear; 4. Other
unlawful means; 5. For an illegal
consideration; 6. Negotiate it in breach
of
faith;
and
7.
Under
such
circumstances as amount to a fraud.
Example:
A B C
On the part of A, the issuance of the

instrument is involuntary because of
the presence of any circumstances
mentioned in Sec. 55. thus making Bs
title defective.
Q: Can C still be called a holder in due
course?
A: YES. As long as he has no
knowledge of the defect in the title of
the person negotiating it to him.
Sec.
56
of
the
Negotiable
Instrument Law provides that: To
constitutes notice of an infirmity in the
instrument or defect in the title of the
person negotiating the same, the
person to whom it is negotiated must
have had actual knowledge of the
infirmity or defect, or knowledge of
such facts that his action in taking the
instrument amounted to bad faith.
*Infirmities must include things that
are wrong with the instrument itself.
These are infirmities not visible to the
naked eye.
*As long as he has knowledge of the
infirmity due course holding is not
present.
Q: How can we reconcile the 1 st
requirement and the 4th requirement?
A: The first requirement pertains to
infirmities visible to the naked eye
whereas
the
fourth
requirement
pertains to infirmities not visible to the
naked eye.
Example:
The instrument contains
all
necessary details except
for
the
amount,
A
instructed B to fill the
instrument of the any
amount
but
upto
P50,000 only. B inserted
P80,000. B negotiated it
to C.
Q: Can C detect the infirmity upon its
face?
A: NO
4. Good faith
5. Holder for value
C. Presumption of due course holding
Law
provides that: Every holder is
deemed prima facie to be a holder in due
65

Corporation Code
course; but when it is shown that the title
of any person who has negotiated the
instrument was defective, the burden is on
the holder to prove that he or some
person under whom he claims acquired
the title as holder in due course. But the
last-mentioned rule does not apply in
favor of a party who became bound on the
instrument prior to the acquisition of such
defective title.
*The presumption expressed in this
section arises only in favor of a person
who is a holder in the sense defined in
Law, i. e., a payee or indorsee who is in
possession of the draft, or the bearer
thereof.
Q: How important is the statutory
presumption?
A: The holder of the instrument need not
prove that he is a holder in due course.
*The burden to prove shifted to the other
party.
D. Rights of holders in due course
Law provides that: A holder in due
course holds the instrument free from any
defect of title of prior parties, and free
from defenses available to prior parties
among themselves, and may enforce
payment of the instrument for the full
amount thereof against all parties liable
thereon.
E. Shelter Rule
Law provides that: In the hands of any
holder other than a holder in due course, a
negotiable instrument is subject to the
same defenses as if it were nonnegotiable. But a holder who derives his
title through a holder in due course, and
who is not himself a party to any fraud or
illegality affecting the instrument, has all
the rights of such former holder in respect
of all parties prior to the latter.
Requisites:
1. That the holder derived his title from a
holder in due course.
2. That he himself is not a party to any
fraud or illegality affecting the
instrument.
Example:
A B C D E F
E is a holder in due course
E negotiated the instrument to F who is
not a holder in due course.
To subsequent holder, F is considered to

be a holder in due course because he was
sheltered by E who is a holder in due
course.
*The determination of whether there is
due course holding or not is material only
when there is a personal defense.
Q: Is it worth comparing the holders in
due course and the one who derived title
from the holder in due course?
A: YES.
Advantages:
Holder in due
course
A person derived
title from a holder
in due course
Holder
in
due
course to all prior
parties except to
the
person
who
negotiated
the
instrument to him
Always a holder in
due course to all
prior
parties.
Always
with
freedom
against
defenses
and
defective title
Shelter
rule
is Shelter rule is not
applicable
applicable
General Rule: Equitable defenses can be
interposed against a person not a holder
in due course.
Exception: Shelter rule, i. e., Section 58
of the Negotiable Instrument Law.
LIABILITY OF PARTIES:
Q: What is your understanding of parties liable?
When do you say a party is liable?
A: A person is liable when he in obligated to
perform a particular prestation.
Q: What are the liabilities of the parties according
to its nature?
A: 1. Warranties; 2. Engagement to pay
( primary; secondary)
A. Primary
and
distinguished
Distinction:
Primary Liability
The engagement of
a
party
to
an
instrument that on
its due date he will
accept or pay, or
both,
the
instrument to the
payee or to any one
to
whom
it
is
negotiated
according
to
its
tenor.
secondary
liability,
Secondary
Liability
An engagement by
a
party
to
an
instrument that on
its due presentment
it shall be accepted
or paid or both as
the case may be
according
to
its
tenor and that if it
be dishonored and
the
necessary
proceedings
on
dishonor be duly
66

Corporation Code
taken he will pay
the amount thereof
to the payee or to
whom
it
is
negotiated or to any
subsequent indorser
who
may
be
compelled to pay it.
Conditionally liable
Absolutely liable
B. Liability distinguished from warranty

Warranty
consists
of
a
partys
undertaking that at the time of his
negotiation he had title to the instrument
and it is valid and subsisting.
-This is an affirmation/assertion/admission
that certain things are true.
Q: Are all parties had warranties?
A: YES.
Q: Is engagement to pay common to all
parties?
A: NO.
Distinction:
Liability
It is material to
determine whether
the
person
is
primarily
or
secondarily liable
Warranties
It is immaterial to
know whether the
person is primarily
or secondarily liable
C. Liability and/or warranty of parties

Liability in general
a. Warranty
b. Engagement to pay
Promissory
Note
Maker
General
Indorser
Bill
of
Exchange
Primary
Acceptor
Secondary
General
Indorser
and
drawer
*If the holders cause of action is
primary
engagement,
due
presentment
and
dishonor
proceedings are irrelevant.
breach
of
warranty,
due
presentment
and
dishonor
proceedings are irrelevant.
secondary engagement to pay, due
presentment
and
dishonor
proceedings are relevant.
Q: Is liability on warranties
common to all?
A: YES.
Persons
that
had
no
engagement to pay:
1. Qualified Indorsers
2. Persons negotiating by delivery
Promissory Note
Maker (Sec. 60)
Bill of Exchange
Drawer (Sec. 61)
Acceptor
(Sec.
62)
Indorser
a. General
b. Qualified
Indorser
a. General
(Sec. 66)
b. Qualified
(Sec. 65)
Persons
Persons
negotiating
by negotiating
by
delivery
(Sec. delivery
65)
Q: Can the drawee be forced to be
held liable?
A: NO. As long as he do not
accepts the instrument.
*The drawee cannot be compelled
to
accept
the
negotiable
instrument.
*If the refusal amounted to tortious
act, the drawee may be held liable
but not based on contract.
1. Maker
Sec.
60
of
the
Negotiable
maker of a negotiable instrument, by
making it, engages that he will pay it
according to its tenor, and admits the
existence of the payee and his then
capacity to indorse.
*Maker is primarily liable
2. Drawer
Sec.
61
of
the
Negotiable
drawer by drawing the instrument
admits the existence of the payee and
his then capacity to indorse; and
engages that, on due presentment, the
instrument will be accepted or paid, or
both, according to its tenor, and that if
it be dishonored and the necessary
proceedings on dishonor be duly taken,
he will pay the amount thereof to the
holder or to any subsequent indorser
who may be compelled to pay it. But
the drawer may insert in the
instrument an express stipulation
negativing or limiting his own liability
to the holder.
*Due presentment means not only any
presentment but presentment in
accordance with law.
*Necessary proceedings on dishonor
means proceedings must be one within
accordance with law.
*Drawer is conditionally liable
a. Relationship with drawee
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Corporation Code
b. Relationship with collecting bank
3. Acceptor
Sec.
62
of
the
Negotiable
acceptor, by accepting the instrument,
engages that he will pay it according
to the tenor of his acceptance and
admits: (a) The existence of the
drawer, the genuineness of his
signature, and his capacity and
authority to draw the instrument; and
(b) The existence of the payee and his
then capacity to indorse.
*Acceptor is primarily liable
Sec.
127
of
the
Negotiable
Instrument Law states that: A bill of
itself does not operate as an
assignment of the funds in the hands
of the drawee available for the
payment thereof, and the drawee is
not liable on the bill unless and until he
accepts the same.
4. Indorsers
a. General indorsers
Every indorser who indorses
without qualification, warrants to
all subsequent holders in due
course: (a) The matters and things
mentioned in subdivisions (a), (b),
and (c) of the next preceding
section;
and
(b)
That
the
instrument is, at the time of his
indorsement, valid and subsisting;
And, in addition, he engages that,
on due presentment, it shall be
accepted or paid, or both, as the
case may be, according to its
tenor, and that if it be dishonored
and the necessary proceedings on
dishonor be duly taken, he will pay
the amount thereof to the holder,
or to any subsequent indorser who
may be compelled to pay it.
*General indorsers are liable for
warranties
and
they
are
secondarily liable for engagement
to pay.
b. Qualified indorsers
Every person negotiating an
instrument by delivery or by a
qualified indorsement warrants: (a)
That the instrument is genuine and
in all respects what it purports to
be; (b) That he has a good title to
it; (c) That all prior parties had

capacity to contract; (d) That he
has no knowledge of any fact which
would impair the validity of the
instrument or render it valueless.
But when the negotiation is by
delivery only, the warranty extends
in favor of no holder other than the
immediate
transferee.
The
provisions of subdivision (c) of this
section do not apply to a person
negotiating public or corporation
securities other than bills and
notes.
*Qualified indorsers are liable for
warranties
c. Order of liability
Instrument Law states that: As
respect one another, indorsers are
liable prima facie in the order in
which they indorse; but evidence is
admissible to show that, as
between or among themselves,
they have agreed otherwise. Joint
payees or joint indorsees who
indorse are deemed to indorse
jointly and severally.
5. Parties
negotiating
by
mere
delivery
Sec.
65
of
the
Negotiable
Instrument
Law
provides
that:
Every
person
negotiating
an
instrument by delivery or by a
qualified indorsement warrants: (a)
That the instrument is genuine and in
all respects what it purports to be; (b)
That he has a good title to it; (c) That
all prior parties had capacity to
contract; (d) That he has no knowledge
of any fact which would impair the
validity of the instrument or render it
valueless. But when the negotiation is
by delivery only, the warranty extends
in favor of no holder other than the
immediate transferee. The provisions
of subdivision (c) of this section do not
apply to a person negotiating public or
corporation securities other than bills
and notes.
6. Other cases
a. Irregular indorser
Where a person, not otherwise a
party to an instrument, places
thereon his signature in blank
68

Corporation Code
before delivery, he is liable as
indorser, in accordance with the
following
rules:
(a)
If
the
instrument is payable to the order
of a third person, he is liable to the
payee and to all subsequent
parties.
(b) If the instrument is payable to
the order of the maker or drawer,
or is payable to bearer, he is liable
to all parties subsequent to the
maker or drawer. (c) If he signs for
the accommodation of the payee,
he
is
liable
to
all
parties
subsequent to the payee.
b. Indorser of bearer instrument
Where a person places his
indorsement on an instrument
negotiable by delivery, he incurs all
the liability of an indorser.
c. Accommodation party
Instrument Law states that: An
accommodation party is one who
has signed the instrument as
maker,
drawer,
acceptor,
or
indorser, without receiving value
therefor, and for the purpose of
lending his name to some other
person. Such a person is liable on
the instrument to a holder for
value, notwithstanding such holder,
at the time of taking the
instrument, knew him to be only an
accommodation party.
*The liability of an accommodation
party depends on how they
participate in the instrument.
d. Agents signing in behalf of the
principal
The signature of any party may be
made by a duly authorized agent.
No particular form of appointment
is necessary for this purpose; and
the authority of the agent may be
established as in other cases of
agency.
DEFENSES:
A. Real and Personal Defenses, distinguished
Distinctions:
Real Defense
Personal Defense
Stronger defense
Those that attach to
the instrument itself
and are available
against all holders,
whether
in
due
course or not but
only by the parties
entitled
to
raise
them
(Absolute
defense)
Cannot be enforced
by
the
holder
because there is no
contract to enforce
Weakest defense
Those which are
available
only
against a person
not a holder in due
course
or
a
subsequent holder
who
stands
in
privity
with
him
(Equitable
defense)
Can be enforced
because there is an
existing
contract
but
subject
to
defense
The following are The following are
real defenses:
personal defences:
1. Material
1. Absence or
alteration
failure
of
2. Want
of
consideratio
delivery
of
n
incomplete
2. Want
of
instrument
delivery
of
3. Duress
complete
amounting
instrument
to forgery
3. Insertion of
4. Fraud
in
wrong date
factum
or
in
an
fraud in esse
instrument
contractus
4. Filling up of
5. Minority
blank
6. Insanity
contrary to
7. Ultra
vires
authority
acts
of
a
given or not
corporation
within
8. Want
of
reasonable
authority of
time
agent
5. Fraud
in
9. Illegality
inducement
10. Forgery
6. Duress
or
11. Prescription
fear
7. Illegal
consideratio
n
8. Negotiation
in breach of
faith
9. Mistake
10. Ante-dating
or
post
dating
for
illegal
or
fraudulent
purposes
11. Abuse
of
authority
12. Conditional
delivery
of
complete
instrument
Q: In a creditor-debtor relationship, who is
interested in the existence of a defense?
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Corporation Code
A: Debtor. Reason: Presence of a defense
exonerate the liability of the debtor.
Kinds:
1. Real defense
2. Personal defense
Q: Why are real defenses stronger than
the personal defense?
A: Because there is no contract exists on
his part.
B. Real defenses
1. Minority and ultra vires acts (Sec 22)
Sec.
22
of
the
Negotiable
indorsement or assignment of the
instrument by a corporation or by an
infant passes the property therein,
notwithstanding that from want of
capacity, the corporation or infant may
incur no liability thereon.
Examples:
a. A, a minor, issued a promissory
note to B; B negotiated it to C; C to
D then D to E.
Q: What defense is available to A?
A: Minority
Q: Why is it a real defense?
A: Because of his lack of capacity.
Q: What recourse is available to the
holder?
A: Go after the indorsers
b. A issued a negotiable instrument to
B, a minor.
Q: Can A use minority as a defense?
A: NO. As maker, he admits the
existence of the payee and his then
capacity to indorse.
2. Non-delivery
of
an
incomplete
instrument
Sec.
15
of
the
Negotiable
Instrument
Law
provides
that:
Where an incomplete instrument has
not been delivered, it will not, if
completed and negotiated without
authority, be a valid contract in the
hands of any holder, as against any
person whose signature was placed
thereon before delivery.
3. Fraud in factum
*The person who signs the instrument
lacks knowledge of the character or
essential terms of the instrument. But
the defense is not available if the party
involved had reasonable opportunity to
obtain such knowledge.
4. Forgery and want of authority
Sec.
23
of
the
Negotiable
Instrument
Law
provides
that:
When a signature is forged or made
without the authority of the person

whose signature it purports to be, it is
wholly inoperative, and no right to
retain the instrument, or to give a
discharge therefor, or to enforce
payment thereof against any party
thereto, can be acquired through or
under such signature, unless the party
against whom it is sought to enforce
such right is precluded from setting up
the forgery or want of authority.
*What is inoperative is only the
signature and not the instrument.
Parties precluded from raising
forgery as defense:
1. Person negotiating by delivery
2. Prior parties/indorsers
a. Forgery of makers signature
*Maker cannot be held liable by
any holder.
Reason: The purported maker is
not a party to the instrument as his
forged instrument is inoperative
and no right to retain, enforce or
discharge the note may be
acquired against him.
b. Of indorsers signature
*The indorsement is inoperative
thus it cannot effect any transfer of
any rights to the holder.
Example:
A (maker) B C D E
Bs signature was forged
Q: Can A raise the defense of
Forgery?
A: YES.
Q: Can E go after B?
A: NO.
Recourse: Go after C or D
*Cut-off
rule
is
applicable.
Indorsement is necessary for the
transfer of title.
Example:
XABCDE
Q: Can the acceptor admits the
genuineness of the signature of the
payee?
A: NO.
Q: Can a drawee refuse payment of
a bill of exchange bearing a forged
indorsement?
A: YES. Cut-off rule applies
Cases: Associated Bank v CA;
PNB v CA; Republic v Ebrada
c. Of drawers signature
*In cases involving a forged check,
where the drawers signature is
forged, the drawer can recover
from the drawee bank. No drawee
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Corporation Code
bank has a right to pay a forged
check. If it does, it shall have to recredit the amount of the check to
the account of the drawer.
Reason: The drawee bank is
bound to know the signature of the
drawer since the drawer is its
customer.
Example:
X A (drawer) B C D E
(holder)
Drawers signature was forged
Q: Can drawee accept a bill of
exchange bearing forged signature
of the drawer?
A: NO.
Q: What is the implication of
accepting bill of exchange bearing
a forged signature of the drawer?
A: Sec. 62 of the Negotiable
Instrument Law. Once accepted,
drawee cannot raise forgery as a
defense.
Recourse: Go after the last
holder/collecting bank.
*Collecting bank assumes the role
of an indorser.
Case: Gempesaw v CA
*Cut-off rule is not applicable
General Rule: Drawee bank is
liable for the loss.
Exception:
There
is
fault/negligence on the part of the
drawer
d. Forgery of bearer instruments
*In
bearer
instruments,
the
signature of the payee or holder is
unnecessary to pass title to the
instrument. Hence, where the
indorsement is a forgery, only the
person whose signature is forged
can raise the defense of forgery
against a holder in due course.
5. Material
alteration
(partial
real
defense)
Sec.
124
of
the
Negotiable
Instrument
Law
provides
that:
Where a negotiable instrument is
materially altered without the assent
of all parties liable thereon, it is
avoided, except as against a party who
has himself made, authorized, or
assented to the alteration and
subsequent
indorsers.
But when an instrument has been
materially altered and is in the hands
of a holder in due course not a party to
the alteration, he may enforce
payment thereof according to its

original tenor.
Q: Why is this a partial defense only?
A: Because the holder in due course
may still demand payment but
according to its original tenor.
Sec.
125
of
the
Negotiable
Instrument Law states that: Any
alteration which changes:
(a) The date;
(b) The sum payable, either for
principal or interest;
(c) The time or place of payment:
(d) The number or the relations of the
parties;
(e) The medium or currency in which
payment is to be made;
(f) Or which adds a place of payment
where no place of payment is
specified, or any other change or
addition which alters the effect of the
instrument in any respect, is a material
alteration.
*The underlined phrase is what we call
catch-all clause
Q: What is the condition/term of the
instrument at the time it was altered?
A: The instrument is materially
complete.
6. Extinctive prescription
C. Personal defenses
*Determination of whether the person is a
holder in due course or not is material.
Q: Why this defense is treated as a weak
defense?
A: Because only holders not in due course
can raise these defenses.
1. Ante-dating or post dating
Sec.
12
of
the
Negotiable
instrument is not invalid for the reason
only that it is ante-dated or post-dated,
provided this is not done for an illegal
or fraudulent purpose. The person to
whom an instrument so dated is
delivered acquires the title thereto as
of the date of delivery.
2. Insertion of wrong date
Sec.
13
of
the
Negotiable
Instrument
Law
provides
that:
Where an instrument expressed to be
payable at a fixed period after date is
issued
undated,
or
where
the
acceptance of an instrument payable
at a fixed period after sight is undated,
any holder may insert therein the true
date of issue or acceptance, and the
instrument
shall
be
payable
71

Corporation Code
accordingly. The insertion of a wrong
date does not avoid the instrument in
the hands of a subsequent holder in
due course; but as to him, the date so
inserted is to be regarded as the true
date.
Principle: One who made possible to
the infirmity shall bear the loss
Example:
*It is inequitable for a person to set up

this defense against more innocent
party.
Q: Is there any recourse to the holder?
A: YES. To ran against the indorsers
*Subsequent indorsers cannot put up
the defense of good faith.
Example:
The amount
_______
The true date is June 1, 2008 maturity
10 days after
date will be June 11, 2008
The date inserted is May 25, 2008 the
maturity date will be June 4, 2008
ABCDE
If E is a holder in due course and A is
the maker, though both E and A are
innocent,
A
shall
suffer
the
consequence for he made possible to
the loss
If E is not a holder in due course and A
is the maker, E is not innocent but A is
innocent thus E cannot held A liable.
3. Filling up blanks beyond authority
(Abuse of Authority)
Sec.
14
of
the
Negotiable
the instrument is wanting in any
material particular, the person in
possession thereof has a prima facie
authority to complete it by filling up
the blanks therein. And a signature on
a blank paper delivered by the person
making the signature in order that the
paper may be converted into a
negotiable instrument operates as a
prima facie authority to fill it up as
such for any amount. In order,
however, that any such instrument
when completed may be enforced
against any person who became a
party thereto prior to its completion, it
must be filled up strictly in accordance
with the authority given and within a
reasonable time. But if any such
instrument,
after
completion,
is
negotiated to a holder in due course, it
is valid and effectual for all purposes in
his hands, and he may enforce it as if
it had been filled up strictly in
accordance with the authority given
and within a reasonable time.
The
is authority to fill the amount is upto
P50,000
only
___________
ABCDE
B inserted an amount of P80,000
Q: Is there a defense?
A: YES.
Q: Can it be used?
A: IT DEPENDS. Depending whether
the holder is a holder in due course or
not.
*If holder in due course the defense
cannot be raised.
*If holder not in due course he can use
it as a defense.
Reason: The holder not in due course
is not an innocent party as far as the
maker is concern thus the contract is
avoided.
Recourse: Go after the immediate
transferor in case of bearer instrument
or the indorsers in case of order
instrument.
4. Want of delivery of a complete
instrument
Sec.
16
of
the
Negotiable
Instrument Law states that: Every
contract on a negotiable instrument is
incomplete
and
revocable
until
delivery of the instrument for the
purpose of giving effect thereto. As
between immediate parties and as
regards a remote party other than a
holder in due course, the delivery, in
order to be effectual, must be made
either by or under the authority of the
party making, drawing, accepting, or
indorsing, as the case may be; and, in
such case, the delivery may be shown
to have been conditional, or for a
special purpose only, and not for the
purpose of transferring the property in
the instrument. But where the
instrument is in the hands of a holder
in due course, a valid delivery thereof
by all parties prior to him so as to
make them liable to him is conclusively
presumed. And where the instrument
is no longer in the possession of a
72

Corporation Code
party
whose
signature
appears
thereon, a valid and intentional
delivery by him is presumed until the
contrary is proved.
Example:
A issued a complete instrument but he
has no intention of negotiating it yet
B got the instrument accidentally
B negotiated it to C then C to D and D
to E
E is a holder in due course
Q: Can C be a holder in due course?
knowledge of the infirmity
Q: Between E and A, can A raise the
defense?
A: NO. Because the defense is a
personal defense.
Principle: One who makes the
infirmity possible shall bear the loss.
Recourse: Go after the indorsers
Reason: Breach of warranty, i.e., that
they had good title to the instrument.
5. Absence or failure of consideration
Sec.
28
of
the
Negotiable
Instrument
Law
provides
that:
Absence or failure of consideration is
a matter of defense as against any
person not a holder in due course; and
partial failure of consideration is a
defense pro tanto, whether the failure
is an ascertained and liquidated
amount or otherwise.
*Defense pro tanto means that the
person is not totally exonerated from
liability; he is liable upto the amount
he benefited.
*Partial failure of consideration is a
personal defense and can be raised
against a holder not in due course.
*The general indorser is liable for
breach of warranty, i.e., his warranty
that at the time of his indorsement the
instrument is valid and existing.
*With regard to person negotiating by
delivery and qualified indorser, his
liability depends on whether or not he
has knowledge of the invalidity of the
instrument.
Example:
A issued a promissory note sans
consideration to B.
Q:
Can
B
collect
to
A?
A: NO.
B indorsed the note to C then C to D
and D to E.
Q: Could C be a holder in due course?

knowledge of the fact that there was
infirmity in the instrument.
Q: Is a defense exists in favor of A?
What kind of defense?
A: YES. It is a personal defense
Q: Can A successfully raise it? Why?
A: NO. One who made the infirmity
possible shall bear the loss.
6. Simple fraud, duress, intimidation,
force or fear, illegality of consideration,
breach of faith
Sec.
55
of
the
Negotiable
title of a person who negotiates an
instrument is defective within the
meaning of this Act when he obtained
the instrument, or any signature
thereto, by fraud, duress, or force and
fear, or other unlawful means, or for an
illegal consideration, or when he
negotiates it in breach of faith, or
under such circumstances as amount
to a fraud.
Sec.
56
of
the
Negotiable
Instrument Law states that: To
constitutes notice of an infirmity in the
instrument or defect in the title of the
person negotiating the same, the
person to whom it is negotiated must
have had actual knowledge of the
infirmity or defect, or knowledge of
such facts that his action in taking the
instrument amounted to bad faith.
Sec.
57
of
the
Negotiable
holder in due course holds the
instrument free from any defect of title
of prior parties, and free from defenses
available to prior parties among
themselves, and may enforce payment
of the instrument for the full amount
thereof against all parties liable
thereon.
ENFORCEMENT OF LIABILITY:
A. Parties primarily
secondarily liable
Primarily Liable
Maker
Acceptor
liable
and
parties
Secondarily Liable
Drawer
General Indorsers
Qualified Indorsers
B. General steps in enforcing liability

1. Presentment
2. Dishonor
Promissory Note
73

Corporation Code
1. Presentment for payment must be
made within the required period to
the maker (Sec. 70)
2. Notice of Dishonor (Sec. 89)
Example:
MABCDE
Q: In a case where the cause of action
is for payment, is presentment and
dishonor essential?
A: YES.
Q: If the holder is running after the
indorsement for breach of warranty, is
presentment and dishonour essential?
A: NO.
Bill of Exchange
1. Presentment for acceptance or
negotiation within a reasonable
time after it was acquired (Sec.
143)
2. If dishonored by non-acceptance:
2.1.
Notice of dishonor should be
given to the indorsers and
drawer
2.2.
If the bill is a foreign bill,
there must be a protest for
dishonor by non-acceptance
3. If the bill is accepted:
3.1.
Presentment for payment to
the acceptor should be made
3.2.
If the bill is dishonored upon
presentment for payment:
3.2.1. Notice of dishonor upon
presentment
for
payment
3.2.2. If the bill is a foreign bill,
protest for dishonor by
non-acceptance must be
made
C. Presentment for payment
1. Concept of presentment
Presentment is the production of a
bill of exchange to the drawee for his
acceptance or to the drawee or
acceptor
for
payment
or
the
production of a promissory note to the
party liable for the payment of the
same.
2. Requisites for sufficiency
Sec.
72
of
the
Negotiable
Instrument
Law
provides
that:
Presentment for payment, to be
sufficient, must be made: (a) By the
holder, or by some person authorized
to receive payment on his behalf; (b)
At a reasonable hour on a business
day; (c) At a proper place as herein
defined; (d) To the person primarily
liable on the instrument, or if he is

absent or inaccessible, to any person
found at the place where the
presentment is made.
a. Date of presentment
Where the instrument is not
payable on demand, presentment
must be made on the day it falls
due. Where it is payable on
demand, presentment must be
made within a reasonable time
after its issue, except that in the
case of a bill of exchange,
presentment for payment will be
sufficient
if
made
within
a
reasonable time after the last
negotiation thereof.
i.
Rule
in
determining
maturity date
that:
Every
negotiable
instrument is payable at the
time fixed therein without
grace. When the day of
maturity falls upon Sunday
or
a
holiday,
the
instruments falling due or
becoming
payable
on
Saturday
are
to
be
presented for payment on
the
next
succeeding
business day except that
instruments
payable
on
demand may, at the option
of the holder, be presented
for payment before twelve
o'clock noon on Saturday
when that entire day is not
a holiday.
ii.
Rule in computing time
that: When the instrument
is payable at a fixed period
after date, after sight, or
after that happening of a
specified event, the time of
payment is determined by
excluding the day from
which the time is to begin to
run, and by including the
date of payment.
iii.
Rule in if payable at a bank
74

Corporation Code
Instrument Law states
that: Where the instrument
is payable at a bank,
presentment for payment
must
be
made
during
banking hours, unless the
person to make payment
has no funds there to meet
it at any time during the
day,
in
which
case
presentment at any hour
before the bank is closed on
that day is sufficient.
b. Place of presentment
Presentment for payment is made
at the proper place: (a) Where a
place of payment is specified in the
instrument
and
it
is
there
presented; (b) Where no place of
payment is specified but the
address of the person to make
payment is given in the instrument
and it is there presented; (c) Where
no place of payment is specified
and no address is given and the
instrument is presented at the
usual
place
of
business
or
residence of the person to make
payment; (d) In any other case if
presented to the person to make
payment wherever he can be
found, or if presented at his last
known place of business or
residence.
i.
Rule in if payable at a
special place
that:
Presentment
for
payment is not necessary in
order to charge the person
primarily liable on the
instrument;
but
if
the
instrument is, by its terms,
payable at a special place,
and he is able and willing to
pay it there at maturity,
such ability and willingness
are equivalent to a tender of
payment upon his part. But
except as herein otherwise
provided, presentment for
payment is necessary in
order to charge the drawer

and indorsers.
c. Presentment to the party primarily
liable
i.
How presentment made
that: The instrument must
be exhibited to the person
from whom payment is
demanded, and when it is
paid, must be delivered up
to the party paying it.
ii.
Rule in case party primarily
liable is already dead
that: Where the person
instrument is dead and no
place
of
payment
is
specified, presentment for
payment must be made to
his personal representative,
if such there be, and if, with
the exercise of reasonable
diligence, he can be found.
iii.
Presentment to partners
that: Where the persons
instrument are liable as
partners and no place of
payment
is
specified,
presentment for payment
may be made to any one of
them, even though there
has been a dissolution of
the firm.
iv.
Presentment to joint debtors
that: Where there are
several
persons,
not
partners, primarily liable on
the instrument and no place
of payment is specified,
presentment must be made
to them all.
3. Instances
where
presentment
is
excused
Sec.
79
of
the
Negotiable
Instrument
Law
provides
that:
Presentment for payment is not
required in order to charge the drawer
where he has no right to expect or
75

Corporation Code
require that the drawee or acceptor
will pay the instrument.
Sec.
80
of
the
Negotiable
Instrument
Law
states
that:
Presentment is not required in order
to charge an indorser where the
instrument was made or accepted for
his accommodation and he has no
reason to expect that the instrument
will be paid if presented.
Sec.
82
of
the
Negotiable
Instrument
Law
states
that:
Presentment for payment is excused:
(a) Where, after the exercise of
reasonable diligence, presentment, as
required by this Act, cannot be made;
(b) Where the drawee is a fictitious
person; (c) By waiver of presentment,
express or implied.
4. When delay in presentment excused
Sec.
81
of
the
Negotiable
Instrument
Law
provides
that:
Delay in making presentment for
payment is excused when the delay is
caused by circumstances beyond the
control of the holder and not imputable
to
his
default,
misconduct,
or
negligence. When the cause of delay
ceases to operate, presentment must
be made with reasonable diligence.
D. Notice of dishonor
1. When dishonor of the instrument
occurs:
a. Dishonor by non-payment
instrument is dishonored by nonpayment when: (a) It is duly
presented
for
payment
and
payment is refused or cannot be
obtained; or (b) Presentment is
excused and the instrument is
overdue and unpaid.
Q: What are the implications of the
notices sent to drawer/general
indorsers?
A: Secondary liability
Example:
ABCDE
E sent notice of dishonor to D alone
Q: What is the effect of notice
given to D?
A: Others are discharge.
Principle: Parties not given
a
notice are discharge.
b. Dishonor by non-acceptance
bill
is
dishonored
by
nonacceptance: (a) When it is duly
presented for acceptance and such
an acceptance as is prescribed by
this Act is refused or can not be
obtained; or (b) When presentment
for acceptance is excused and the
bill is not accepted.
2. Who should give notice
a. Holder
The notice may be given by or on
behalf of the holder, or by or on
behalf of any party to the
instrument
who
might
be
compelled to pay it to the holder,
and who, upon taking it up, would
have a right to reimbursement
from the party to whom the notice
is given.
b. Agent
Notice of dishonor may be given
by any agent either in his own
name or in the name of any party
entitled to given notice, whether
that party be his principal or not.
c. Party who may be compelled to pay
The notice may be given by or on
behalf of the holder, or by or on
behalf of any party to the
instrument
who
might
be
compelled to pay it to the holder,
and who, upon taking it up, would
have a right to reimbursement
from the party to whom the notice
is given.
3. Form of Notice
Sec.
96
of
the
Negotiable
notice may be in writing or merely oral
and may be given in any terms which
sufficiently identify the instrument,
and indicate that it has been
dishonored by non-acceptance or nonpayment. It may in all cases be given
by delivering it personally or through
the mails.
4. To whom notice is given
a. Party secondarily liable or agent
Notice of dishonor may be given
76

Corporation Code
either to the party himself or to his
agent in that behalf.
b. Notice where party is dead
When any party is dead and his
death is known to the party giving
notice, the notice must be given to
a personal representative, if there
be one, and if with reasonable
diligence, he can be found. If there
be no personal representative,
notice may be sent to the last
residence or last place of business
of the deceased.
c. Notice to partners
Where the parties to be notified
are partners, notice to any one
partner is notice to the firm, even
though
there
has
been
a
dissolution.
d. Notice to persons jointly liable
Notice to joint persons who are
not partners must be given to each
of them unless one of them has
authority to receive such notice for
the others.
e. Notice to bankrupt
Where a party has been adjudged
a bankrupt or an insolvent, or has
made an assignment for the
benefit of creditors, notice may be
given either to the party himself or
to his trustee or assignee.
5. When notice is excused
Sec.
109
of
the
Negotiable
Instrument
Law
provides
that:
Notice of dishonor may be waived
either before the time of giving notice
has arrived or after the omission to
give due notice, and the waiver may
be expressed or implied.
Sec.
110
of
the
Negotiable
the waiver is embodied in the
instrument itself, it is binding upon all
parties; but, where it is written above
the signature of an indorser, it binds
him only.
Sec.
111
of
the
Negotiable
Instrument Law states that: A
waiver of protest, whether in the case
of a foreign bill of exchange or other

negotiable instrument, is deemed to
be a waiver not only of a formal
protest but also of presentment and
notice of dishonor.
Sec.
112
of
the
Negotiable
Instrument Law states that: Notice
of dishonor is dispensed with when,
after the exercise of reasonable
diligence, it cannot be given to or does
not reach the parties sought to be
charged.
Sec.
114
of
the
Negotiable
Instrument
Law
provides
that:
Notice of dishonor is not required to
be given to the drawer in either of the
following cases:
(a) Where the drawer and drawee are
the same person;
(b) When the drawee is fictitious
person or a person not having capacity
to contract;
(c) When the drawer is the person to
whom the instrument is presented for
payment;
(d) Where the drawer has no right to
expect or require that the drawee or
acceptor will honor the instrument;
(e)
Where
the
drawer
has
countermanded payment.
Sec.
115
of
the
Negotiable
Instrument
Law
provides
that:
Notice of dishonor is not required to
be given to an indorser in either of the
following cases:
(a) When the drawee is a fictitious
person or person not having capacity
to contract, and the indorser was
aware of that fact at the time he
indorsed the instrument;
(b) Where the indorser is the person to
whom the instrument is presented for
payment;
(c) Where the instrument was made or
accepted for his accommodation.
6. When there is delay in giving notice
Sec.
113
of
the
Negotiable
Instrument Law states that: Delay
in giving notice of dishonor is excused
when the delay is caused by
circumstances beyond the control of
the holder and not imputable to his
default, misconduct, or negligence.
When the cause of delay ceases to
operate, notice must be given with
reasonable diligence.
DISCHARGE OF INSTRUMENTS:
77

Corporation Code
A. Concept of Discharge
Discharge means a release of all parties,
whether primary or secondary, from the
obligations arising thereunder. It renders
the instrument without force and effect
and consequently, it can no longer be
negotiated.
*Applies to the instrument or to the source
of liability.
B. How instrument is discharge
Sec.
119
of
the
Negotiable
negotiable instrument is discharged: (a)
By payment in due course by or on behalf
of the principal debtor; (b) By payment in
due course by the party accommodated,
where the instrument is made or accepted
for his accommodation; (c) By the
intentional cancellation thereof by the
holder; (d) By any other act which will
discharge a simple contract for the
payment of money; (e) When the principal
debtor becomes the holder of the
instrument at or after maturity in his own
right.
1. Payment in due course
Sec.
88
of
the
Negotiable
Instrument
Law
provides
that:
Payment is made in due course when
it is made at or after the maturity of
the payment to the holder thereof in
good faith and without notice that his
title is defective.
a. By the principal debtor
Sec. 119 (a) of the Negotiable
negotiable
instrument
is
discharged: (a) By payment in due
course by or on behalf of the
principal debtor; x x x
b. By the accommodated party
Sec. 119 (b) of the Negotiable
negotiable
instrument
is
discharged: x x x (b) By payment in
due
course
by
the
party
accommodated,
where
the
instrument is made or accepted for
his accommodation; x x x
2. Intentional cancellation
a. Rule in case of unintentional
cancellation
cancellation made unintentionally
or under a mistake or without the
authority
of
the
holder,
is
inoperative
but
where
an
instrument
or
any
signature
thereon appears to have been
cancelled, the burden of proof lies
on the party who alleges that the
cancellation
was
made
unintentionally or under a mistake
or without authority.
3. Any
act
that
discharge
simple
contracts
*The law on Obligations and Contracts
will apply.
Article 1231 of the New Civil Code
provides
that:
Obligations
are
extinguished: (1) By payment or
performance: (2) By the loss of the
thing due: (3) By the condonation or
remission of the debt; (4) By the
confusion or merger of the rights of
creditor
and
debtor;
(5)
By
compensation; (6) By novation. Other
causes
of
extinguishment
of
obligations,
such
as
annulment,
rescission, fulfillment of a resolutory
condition,
and
prescription,
are
governed elsewhere in this Code.
*Although these ways discharge the
instrument as between immediate
parties, they will not do so in the
hands of a holder in due course.
4. Principal debtor becomes a holder
C. Discharge of persons secondarily liable
Sec.
120
of
the
Negotiable
Instrument Law provides that: A person
secondarily liable on the instrument is
discharged: (a) By any act which
discharges the instrument; (b) By the
intentional cancellation of his signature by
the holder; (c) By the discharge of a prior
party; (d) By a valid tender or payment
made by a prior party; (e) By a release of
the principal debtor unless the holder's
right of recourse against the party
secondarily liable is expressly reserved; (f)
By any agreement binding upon the holder
to extend the time of payment or to
postpone the holder's right to enforce the
instrument unless made with the assent of
the party secondarily liable or unless the
right of recourse against such party is
expressly reserved.
CHECKS:
A. Checks defined
Sec.
185
of
the
Negotiable
Instrument Law provides that: A check
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Corporation Code
is a bill of exchange drawn on a bank
payable on demand. Except as herein
otherwise provided, the provisions of this
Act applicable to a bill of exchange
payable on demand apply to a check.
*Checks need not be presented for
acceptance
*Checks are always payable on demand
*Checks are always drawn against a bank
*In case of refusal by drawee bank, payee
or holder cannot compel drawee bank to
pay because there is no privity of contract.
Recourse: Serve notice of dishonour to
drawer; ran after the drawer
B. Distinguished from Draft
Other Bill of
Exchange
Not drawn on a
deposit. It is not
necessary that a
drawer of a Bill of
Exchange
should
have funds in the
hands
of
the
drawee.
Exist for circulation
Death of the drawer
of a Bill of Exchange
with the knowledge
of the bank, does
not
revoke
the
authority
of
the
banker to pay.
May be presented
for payment within
a reasonable time
after
its
last
negotiation.
Check
It is necessary that
a check is drawn on
a previous deposit.
Otherwise,
there
would
be
fraud.
Always bank as a
drawee, need not
be presented for
acceptance.
Exist
for
immediate
payment
Death of the drawer
of a check, with the
knowledge by the
bank, revokes the
authority
of
the
banker to pay.
Must be presented
for payment within
a reasonable time
after
its
issue.
Checks
become
stale after 6 months
from issue.
C. Relationship between drawer, drawee and

payee
Drawer is a secondarily liable; admits
the existence of a payee and his capacity
to indorse and engages that the
instrument will be accepted or paid by the
party primarily liable and engages that if
the instrument is dishonored and proper
proceedings are brought he will pay to the
party entitled to be paid.
Drawee primarily liable; engages to pay
according to the tenor of his acceptance;
admits the existence of the drawer, the
genuineness of his signature and his
capacity and authority to draw the
instrument and admits the existence of

the payee and his capacity to indorse.
Payee the person who is named to
received the payment. The one who can
indorse for further negotiation.
D. Kinds of check
1. Cashiers and managers check a
bill of exchange drawn by a bank upon
itself, and is accepted by its issuance.
*Treated as good as cash.
*The drawee and the drawer are one
and the same.
BSP Circular 259 series of 2000
provides that: Pursuant to Monetary
Board Resolution No. 1494 dated 1
September 2000, additional antimoney
laundering
rules
and
regulations for banks are hereby
issued as follows: Section 1. Issuance
of Cashiers, Managers or Certified
Checks.
Banks
shall
not
issue
cashiers,
managers
or
certified
checks or other similar instruments
payable to cash, bearer, fictitious
payee or numbered account. When the
person
purchasing
the
abovementioned instruments is not a regular
bank client, the issuing bank shall
require the purchaser to present
his/her proof of residence together
with his/her drivers license, passport,
employment I.D. or other photo
identification card. A register for
cashiers,
managers
or
certified
checks issued shall be maintained by
the bank. Section 2. Sanction. Any
violations of the provision of this
Circular shall be subject to a fine of
P30,000 per transaction.
BSP Circular No. 291 series 2001
provides that: The Monetary Board, in
its Resolution No. 707 dated 10 May
2001 decided to authorize
the
issuance of cashiers, managers or
certified checks or other similar
instruments in blank or payable to
cash, bearer or numbered account as
an exception from the provisions of
Circular no. 259, subject to the
following conditions: a. That the
amount of each check shall not exceed
P10,000.00; b. That the buyer of the
check is properly identified as required
under Circular No. 259 dated 29
September; c. That a register of said
checks shall be maintained with the
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Corporation Code
following minimum information: 1.
Date issued; 2. Amount; 3. Name of
buyer; 4. Date paid; 5. If the aggregate
instruments purchased by the same
person within any thirty (30) day
period amounts to at least fifty
thousand pesos (P50,000), the purpose
of the buyer should be stated.; d. That
banks which issue as well as those
which accept as deposits, said
cashiers,
managers
or
certified
checks or other similar instruments
issued in blank or payable to cash,
bearer or numbered account shall take
such measure(s) as may be necessary
to ensure that said instruments are not
being used/resorted to by the buyer or
depositor in furtherance of a moneylaundering activity;
e.
That the
deposit of said instruments shall be
subject
to
the
same
requirements/scrutiny applicable to
cash deposits; f. That transactions
involving said instruments should be
accordingly reported to the Bangko
Sentral ng Pilipinas if there is
reasonable ground to suspect that said
transactions are being used to launder
funds of illegitimate origin.
2. Certified check one drawn by a
depositor upon funds to his credit in a
bank which a proper officer of the bank
certifies will be paid when duly
presented for payment.
*There is a guarantee that upon
presentment it will be accepted.
*It is accepted in advance.
*Certification
is
equivalent
to
acceptance.
*It is forbidden to issue a stop order
payment.
Sec.
187
of
the
Negotiable
Instrument
Law
provides
that:
Where a check is certified by the bank
on which it is drawn, the certification is
equivalent to an acceptance.
Sec.
188
of
the
Negotiable
Instrument
Law
provides
that:
Where the holder of a check procures
it to be accepted or certified, the
drawer
and
all
indorsers
are
discharged from liability thereon.
Sec.
189
of
the
Negotiable
check of itself does not operate as an
assignment of any part of the funds to
the credit of the drawer with the bank,
and the bank is not liable to the holder

unless and until it accepts or certifies
the check.
3. Crossed Check done by writing two
parallel lines diagonally on the left top
portion of the checks.
Article 541 of the Code of
Commerce provides that: The maker
of any legal holder of a check shall be
entitled to indicate therein that it be
paid to a certain banker or institution,
which he shall do by writing across the
face the name of said banker or
institution, or only the words "and
company".
a. Effects of crossing a check
1. The
check
may
not
be
encashed but only deposited in
the bank
2. The check may be negotiated
only once to one who has an
account with the bank
3. The act of crossing serves as a
warning to the holder that the
check has been issued for a
definite purpose so that he may
inquire if he has received the
check pursuant to that purpose.
4. Memorandum and travellers check
Memorandum Check is in the form of
an ordinary check, with the word
memorandum, memo or mem
written across its face, signifying that
the maker or drawer engages to pay
the bona fide holder absolutely,
without any condition concerning its
presentment. Such check is an
evidence of debt against the drawer,
and although it may not be intended to
be presented, has the same effect as
an ordinary check, and if passed to a
third person, will be valid in his hands
like any other check.
Travellers
Check
instruments
purchased
from
banks,
express
companies, or the like, in various
denominations, which can be used like
cash upon second signature by the
purchaser. It has the characteristics of
a cashiers check of the issuer. It
requires the signature of the purchaser
at the time he buys it and also at the
time he uses it that is when he
obtains the check from the bank and
also at the time he delivers the same
to the establishment that will be paid
thereby.
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Corporation Code
E. When required to be presented for
payment
Sec.
186
of
the
Negotiable
Instrument Law provides that: A check
must be presented for payment within a
reasonable time after its issue or the
drawer will be discharged from liability
thereon to the extent of the loss caused
by the delay.
F.
Effect of death of drawer

*In case of death of the drawer, the bank
may refuse payment provided that there
was a proper notice of the death of the
drawer given to bank.
G. Pertinent
Philippine
Corporation rules
Clearing
House
imported and warehoused on the dock,

upon the faith of the bills of lading, as a
recognition of his title to the goods.
CONCEPT OF WAREHOUSING BUSINESS
Main transaction: For deposit
*Warehousing is for safe keeping; storage and
preservation of goods.
Q: What does warehousing business consists of?
A: An establishment with facilities used for
safekeeping
Q: What relationship is created?
A: Bailor-bailee relationship
Purposes:
1. To regulate the business of receiving
commodities for storage in order;
2. To protect persons who may want to avail
themselves of warehouse facilities; and
3. To encourage the establishment of more
warehouses.
To achieve this purpose, any person who
wants to engage in the business of
receiving commodities for storage is
required by the Act to first secure a
license therefore from the Department of
Trade and Industry.
WAREHOUSE RECEIPTS LAW
Any warehouseman receiving commodities for

storage, milling, or commingling must:
Document of Title to Goods includes any bill of

lading, dock warrant, quedan, or warehouse
receipt or order for delivery of goods, or any
other document used in the ordinary course of
business in the sale or transfer of goods, as proof
of possession or control of the goods, or
authorizing or purporting to authorize the
possessor of the document to transfer or receive
either by indorsement or by delivery, goods
represented by such document.
*This document of title to goods is issued by
operator of warehousing business.
*Civil Code is applied in suppletory manner.
*Document of title to goods facilitates sale of
goods; it also facilitates the transfer of title to
goods.
*It is the delivery of the thing that transfers
ownership to the buyer.
Principle: Title follows where the document is.
1. obtain prior license from the Bureau of

Commerce;
2. file a bond in an amount equivalent to 33 1/3%
of the capacity of the warehouse against
which bond depositors may sue directly (pour
autrui);
3. open to the public; no discrimination allowed;
4. liable for double market value should he
accept if goods are damaged or destroyed.
a warehouse accepting tobacco for flueing
is covered by law.
Itinerant miller of palay who keeps palay
in process of milling under a camalig falls
within the law.
A mill which must store palay temporarily
must still get the license from the Bureau.
Kinds:
1. Bill of Lading is a document that serves
as evidence of receipt of goods for
shipment issued by a common carrier.
2. Warehouse Receipt is a document of
title which is issued by a warehouseman.
3. Quedan is a warehouse receipt that
covers sugar.
4. Dock Warrant is a warrant given by
dock-owners to the owner of merchandise
DUTIES OF A WAREHOUSEMAN
Warehouseman means a person lawfully
engaged in the business of storing goods for
profit.
Duties:
1. Included in the business of receiving
commodity for storage (Sec. 2)
2. It includes entering into any contract or
transaction wherein:
a. the warehouseman is obligated to
return the very same commodity
delivered to him or to pay its value;
b. commodity delivered to him or to pay
its value;
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Corporation Code
c. the commodity delivered is to be
milled for the owner thereof;
d. the
commodity
delivered
is
commingled with the commodity
belonging to other persons, and the
warehouseman is obligated to return
commodity of the same kind or to pay
its value.
WAREHOUSE RECEIPTS
A. Functions
1. It is a contract
2. Evidence of receipt of goods proof of
title/document of title
3. Represents the goods and therefore
operates as transferable document
that carries with it control over the
goods. It is used to pass title to the
goods.
Q: May warehouse receipts be treated as
negotiable instrument? Why?
A: NO. Because it is not payable in sum
certain in money. Warehouse receipts
represent goods.
Commercial Value: Transfer of title is
possible
*Delivery of warehouse receipt represents
constructive delivery.
Controlling element: warehouse receipt
B. Forms of Receipts
Sec. 2 of the Warehouse Receipt Law
states that: Warehouse receipts need not
be in any particular form but every such
receipt must embody within its written or
printed terms: (a)
The location of the
warehouse where the goods are stored,
(b) The date of the issue of the receipt,
(c)
The consecutive number of the
receipt, (d)
A statement whether the
goods received will be delivered to the
bearer, to a specified person or to a
specified person or his order, (e)
The
rate of storage charges, (f) A description
of the goods or of the packages containing
them, (g)
The signature of the
warehouseman which may be made by his
authorized agent, (h)
If the receipt is
issued
for
goods
of
which
the
warehouseman is owner, either solely or
jointly or in common with others, the fact
of such ownership, and (i) A statement
of the amount of advances made and of
liabilities
incurred
for
which
the
warehouseman claims a lien. If the
precise amount of such advances made or
of such liabilities incurred is, at the time of
the
issue
of,
unknown
to
the
warehouseman or to his agent who issues

it, a statement of the fact that advances
have been made or liabilities incurred and
the purpose thereof is sufficient.
A warehouseman shall be liable to any
person injured thereby for all damages
caused by the omission from a negotiable
receipt of any of the terms herein
required.
*The date of the issue of the receipt
pertains to the time when the contract
was perfected.
*The purpose for the description of the
goods or of the packages containing them
is for identification.
states that: A warehouseman may insert
in a receipt issued by him any other terms
and conditions provided that such terms
and conditions shall not: (a) Be contrary
to
the
provisions
of
this
Act.
(b) In any wise impair his obligation to
exercise that degree of care in the safekeeping of the goods entrusted to him
which is reasonably careful man would
exercise in regard to similar goods of his
own.
C. Kinds of Warehouse receipts
1. Negotiable
Sec. 5 of the Warehouse Receipt
Law states that: A receipt in which it
is stated that the goods received will
be delivered to the bearer or to the
order of any person named in such
receipt is a negotiable receipt.
No provision shall be inserted in a
negotiable receipt that it is nonnegotiable. Such provision, if inserted
shall be void.
*Goods are deliverable to order or
bearer.
2. Non-negotiable
Law states that: A receipt in which it
is stated that the goods received will
be delivered to the depositor or to any
other specified person is a nonnegotiable receipt.
*Goods
are
deliverable
to
the
depositor
or
specified
person.
Example: consignee
Distinction between Negotiable and
Non-negotiable Warehouse Receipts:
Negotiable
Warehouse
Non-Negotiable
Warehouse
Receipt
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Corporation Code
Receipt
Negotiation (Sec.
41)
Title to the goods
of
the
person
negotiating
the
receipt and title of
the
person
to
whose order the
goods were to be
delivered.
Direct obligation of
the warehouseman
to hold possession
of the goods for
him as if the
warehouseman
directly contracted
with him (Sec. 41)
Negotiation defeats
the lien of the seller
of the goods. (Sec.
25)
Cannot unless in
proper circumstances
Transfer
or
Assignment
Title of the
goods, as against
the transferor
(merely steps
into the shoes)
Transferee
acquires title
The
title
is
conditional
Right to notify
the
warehouseman of
the transfer and
acquire the direct
obligation of the
warehouseman to
hold the goods
for him. (Sec. 42)
In case of double
sale or lien on the
supply,
before
notification, title
of the transferee
may
still
be
defeated
Can be subject to
such
Q: Regardless of the forms of the warehouse

receipt, are the functions of the warehouse
receipts still applicable?
A: YES.
*The importance of knowing whether the
warehouse receipt is a negotiable one or not lies
to what kind of protection is given to the buyer.
Example:
W A(depositor) B(buyer)
W issued a negotiable warehouse receipt to
depositor
Q: What are the legal contemplations of the
issuance of such warehouse receipt?
A: 1. Transfer of title is possible assuming that
the transferor has legal title to the goods; 2.
Warehousemans direct obligation; 3. those
provided in Sec. 25 of the Warehouse Receipts
Law; and Sec. 49 of the Warehouse Receipt Law.
*By negotiation, transferee acquires title to the
goods.
*Sec. 49 of the Warehouse Receipts Law
substantially provides that the sellers recourse is
to look for any other properties in case the goods
is not sufficient to cover his lien.
NEGOTIATION OF RECEIPTS
a. Bearer and order receipts
Negotiation
by
Delivery
(Bearer
Receipt)
Law provides that: A negotiable receipt
may be negotiated by delivery: (a)
Where, by terms of the receipt, the
warehouseman undertakes to deliver the
goods to the bearer, or (b)
Where, by
the
terms
of
the
receipt,
the
warehouseman undertakes to deliver the
goods to the order of a specified person,
and such person or a subsequent indorsee
of the receipt has indorsed it in blank or to
bearer.
Where, by the terms of a negotiable
receipt, the goods are deliverable to
bearer or where a negotiable receipt has
been indorsed in blank or to bearer, any
holder may indorse the same to himself or
to any other specified person, and, in such
case, the receipt shall thereafter be
negotiated only by the indorsement of
such indorsee.
*Sec. 37 (a) where, by terms of the
receipt, the warehouseman undertakes to
deliver the goods to the bearer;
negotiation takes place by mere delivery.
Example: Q: W, warehouseman, issued a
warehouse receipt to A or bearer. A wants
to negotiate it to B. How can A negotiate it
to B?
A: By delivery since it is a bearer
warehouse receipt.
Q: B wants to negotiate it to C, how can
negotiation be made? And C wants to
negotiate it further to D, how can C
negotiate it to D?
A: By delivery.
*Sec. 37 (b) where, by the terms of the
receipt, the warehouseman undertakes to
deliver the goods to the order of a
specified person, and such person or a
subsequent indorsee of the receipt has
indorsed it in blank or to bearer;
Indorsement is essential in transferring
title to the transferee and then delivery
Example: Q: W, warehouseman, issued a
warehouseman to A or order. A wants to
negotiate it to B, how can he effectively
negotiate it to B?
A: A must indorse and deliver it to B
Q: B wants to negotiate it further to C,
how can he do it?
A: It depends on what kind of indorsement
was made by A. If the indorsement made
by A was a special indorsement, then B
can negotiate it to C by indorsing the
warehouse receipt and coupled with
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Corporation Code
delivery. If the indorsement was blank, he
can negotiate it by delivery.
*A bearer document of title is not always
a bearer document in the sense that a
special indorsement has the effect of
converting the bearer instrument into an
order instrument.
Example: A negotiable document of title
states that the goods are to be delivered
to A or bearer. A delivered the document
to B, who in turn specially indorsed the
same to C. C cannot negotiate the
document by mere delivery thereafter and
indorsement
is
necessary
for
its
negotiation.
b. Effects of negotiation
1. Sec. 41 of the Warehouse Receipt
Law states that: A person to whom a
negotiable
receipt
has
been
duly
negotiated acquires thereby: (a)
Such
title to the goods as the person
negotiating the receipt to him had or had
ability to convey to a purchaser in good
faith for value, and also such title to the
goods as the depositor or person to whose
order the goods were to be delivered by
the terms of the receipt had or had ability
to convey to a purchaser in good faith for
value, and (b)
The direct obligation of
the warehouseman to hold possession of
the goods for him according to the terms
of the receipt as fully as if the
warehouseman and contracted directly
with him.
Law states that: A person who, for value,
negotiates or transfers a receipt by
indorsement or delivery, including one
who assigns for value a claim secured by a
receipt, unless a contrary intention
appears, warrants: (a) That the receipt is
genuine, (b) That he has a legal right to
negotiate or transfer it, (c) That he has
knowledge of no fact which would impair
the validity or worth of the receipt, and
(d)
That he has a right to transfer the
title to the goods and that the goods are
merchantable or fit for a particular
purpose whenever such warranties would
have been implied, if the contract of the
parties had been to transfer without a
receipt of the goods represented thereby.
*Sec. 44 of the Warehouse Receipt Law is
similar to Sec. 65 of the Negotiable
Instrument Law on warranties of a
qualified indorser.
Example:
W A (depositor) B (buyer)
A negotiates the warehouse receipt to B
Q: Is A still liable to B?
A: YES. A is still liable to B. He is liable in
case of breach of warranties.
Recourse: In case there is breach of
warranty, the buyer can always go after
the depositor.
Law states that: The indorsement of a
receipt shall not make the indorser liable
for any failure on the part of the
warehouseman or previous indorsers of
the receipt to fulfill their respective
obligations.
Law states that: Where a negotiable
receipt has been issued for goods, no
seller's lien or right of stoppage in transitu
shall defeat the rights of any purchaser for
value in good faith to whom such receipt
has been negotiated, whether such
negotiation be prior or subsequent to the
notification to the warehouseman who
issued such receipt of the seller's claim to
a lien or right of stoppage in transitu. Nor
shall the warehouseman be obliged to
deliver or justified in delivering the goods
to an unpaid seller unless the receipt is
first surrendered for cancellation.
Law states that: If goods are delivered
to a warehouseman by the owner or by a
person whose act in conveying the title to
them to a purchaser in good faith for value
would bind the owner, and a negotiable
receipt is issued for them, they can not
thereafter, while in the possession of the
warehouseman,
be
attached
by
garnishment or otherwise, or be levied
upon under an execution unless the
receipt be first surrendered to the
warehouseman
or
its
negotiation
enjoined. The warehouseman shall in no
case be compelled to deliver up the actual
possession of the goods until the receipt is
surrendered to him or impounded by the
court.
c. Negotiation by fraud, mistake or duress
Law provides that: The validity of the
negotiation of a receipt is not impaired by
the fact that such negotiation was a
breach of duty on the part of the person
making the negotiation or by the fact that
the owner of the receipt was induced by
fraud, mistake or duress or to entrust the
possession or custody of the receipt to
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Corporation Code
such person, if the person to whom the
receipt was negotiated or a person to
whom the receipt was subsequently
negotiated paid value therefor, without
notice of the breach of duty, or fraud,
mistake or duress.
states
that:
The
validity
of
the
negotiation of a negotiable document of
title is not impaired by the fact that the
negotiation was a breach of duty on the
part of the person making the negotiation,
or by the fact that the owner of the
document was deprived of the possession
of the same by loss, theft, fraud, accident,
mistake, duress, or conversion, if the
person to whom the document was
negotiated or a person to whom the
document was subsequently negotiated
paid value therefor in good faith without
notice of the breach of duty, or loss, theft,
fraud, accident, mistake, duress or
conversion.
TRANSFER
THEREOF
OF
RECEIPTS
AND
EFFECTS
Sec. 39 of the Warehouse Receipt Law states

that: A receipt which is not in such form that it
can be negotiated by delivery may be transferred
by the holder by delivery to a purchaser or
donee. A non-negotiable receipt can not be
negotiated, and the indorsement of such a receipt
gives the transferee no additional right.
provides that: A person to whom a receipt has
been transferred but not negotiated acquires
thereby, as against the transferor, the title of the
goods subject to the terms of any agreement with
the transferor. If the receipt is non-negotiable,
such person also acquires the right to notify the
warehouseman of the transfer to him of such
receipt and thereby to acquire the direct
obligation of the warehouseman to hold
possession of the goods for him according to the
terms of the receipt. Prior to the notification of
the warehouseman by the transferor or
transferee of a non-negotiable receipt, the title of
the transferee to the goods and the right to
acquire the obligation of the warehouseman may
be defeated by the levy of an attachment or
execution upon the goods by a creditor of the
transferor
or
by
a
notification
to
the
warehouseman by the transferor or a subsequent
purchaser from the transferor of a subsequent
sale of the goods by the transferor.
LIABILITIES OF INDORSER OR TRANSFEROR

provides that: A person who, for value,
negotiates or transfers a receipt by indorsement
or delivery, including one who assigns for value a
claim secured by a receipt, unless a contrary
intention appears, warrants: (a) That the receipt
is genuine, (b)
That he has a legal right to
negotiate or transfer it, (c)
That he has
knowledge of no fact which would impair the
validity or worth of the receipt, and (d) That he
has a right to transfer the title to the goods and
that the goods are merchantable or fit for a
particular purpose whenever such warranties
would have been implied, if the contract of the
parties had been to transfer without a receipt of
the goods represented thereby.
*Sec. 44(b) of the Warehouse Receipt Law
provides that: That he has a legal right to
negotiate or transfer it example of which is if the
receipt was stolen by someone.
*Sec. 44(c) of the Warehouse Receipt Law
provides that: That he has knowledge of no fact
which would impair the validity or worth of the
receipt example of which is the absence or
illegality of consideration.
*Sec. 44(c) of the Warehouse Receipt Law
guarantees that the goods are merchantable and
fit.
*Transferor has the same liabilities as if there was
a valid negotiation.
provides that: The indorsement of a receipt shall
not make the indorser liable for any failure on the
part of the warehouseman or previous indorsers
of the receipt to fulfill their respective
obligations.
*Under the General Bonded Warehouse Law,
warehouseman is mandated to post a bond for
purposes of security in case there was damage to
the goods.
WAREHOUSEMANS
ENFORCEMENT
LIEN
AND
ITS

provides that: Subject to the provisions of
section thirty, a warehouseman shall have a lien
on goods deposited or on the proceeds thereof in
his hands, for all lawful charges for storage and
preservation of the goods; also for all lawful
claims for money advanced, interest, insurance,
transportation, labor, weighing, coopering and
other charges and expenses in relation to such
goods, also for all reasonable charges and
expenses for notice, and advertisements of sale,
and for sale of the goods where default had been
made in satisfying the warehouseman's lien.
provides that: A warehouseman loses his lien
upon goods: (a)
By surrendering possession
thereof, or (b) By refusing to deliver the goods
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Corporation Code
when a demand is made with which he is bound
to comply under the provisions of this Act.
that: A warehouseman's lien for a claim which
has become due may be satisfied as follows: (a)
An itemized statement of the warehouseman's
claim, showing the sum due at the time of the
notice and the date or dates when it becomes
due, (b) A brief description of the goods against
which the lien exists, (c)
A demand that the
amount of the claim as stated in the notice of
such further claim as shall accrue, shall be paid
on or before a day mentioned, not less than ten
days from the delivery of the notice if it is
personally delivered, or from the time when the
notice shall reach its destination, according to the
due course of post, if the notice is sent by mail,
(d)
A statement that unless the claim is paid
within the time specified, the goods will be
advertised for sale and sold by auction at a
specified time and place. In accordance with the
terms of a notice so given, a sale of the goods by
auction may be had to satisfy any valid claim of
the warehouseman for which he has a lien on the
goods. The sale shall be had in the place where
the lien was acquired, or, if such place is
manifestly unsuitable for the purpose of the claim
specified in the notice to the depositor has
elapsed, and advertisement of the sale,
describing the goods to be sold, and stating the
name of the owner or person on whose account
the goods are held, and the time and place of the
sale, shall be published once a week for two
consecutive weeks in a newspaper published in
the place where such sale is to be held. The sale
shall not be held less than fifteen days from the
time of the first publication. If there is no
newspaper published in such place, the
advertisement shall be posted at least ten days
before such sale in not less than six conspicuous
places therein. From the proceeds of such sale,
the warehouseman shall satisfy his lien including
the reasonable charges of notice, advertisement
and sale. The balance, if any, of such proceeds
shall be held by the warehouseman and delivered
on demand to the person to whom he would have
been bound to deliver or justified in delivering
goods. At any time before the goods are so sold,
any person claiming a right of property or
possession therein may pay the warehouseman
the amount necessary to satisfy his lien and to
pay the reasonable expenses and liabilities
incurred in serving notices and advertising and
preparing for the sale up to the time of such
payment. The warehouseman shall deliver the
goods to the person making payment if he is a
person entitled, under the provision of this Act, to
the possession of the goods on payment of
charges thereon. Otherwise, the warehouseman
shall retain the possession of the goods according
to the terms of the original contract of deposit.
that: If goods are of a perishable nature, or by
keeping will deteriorate greatly in value, or, by
their order, leakage, inflammability, or explosive
nature, will be liable to injure other property , the

warehouseman may give such notice to the
owner or to the person in whose names the goods
are stored, as is reasonable and possible under
the circumstances, to satisfy the lien upon such
goods and to remove them from the warehouse
and in the event of the failure of such person to
satisfy the lien and to receive the goods within
the time so specified, the warehouseman may
sell the goods at public or private sale without
advertising. If the warehouseman, after a
reasonable effort, is unable to sell such goods, he
may dispose of them in any lawful manner and
shall incur no liability by reason thereof. The
proceeds of any sale made under the terms of
this section shall be disposed of in the same way
as the proceeds of sales made under the terms of
the preceding section.
that: The remedy for enforcing a lien herein
provided does not preclude any other remedies
allowed by law for the enforcement of a lien
against personal property nor bar the right to
recover so much of the warehouseman's claim as
shall not be paid by the proceeds of the sale of
the property.
Warehousemans defences for non-delivery
or misdelivery:
1. Loss or destruction of the goods without
the fault of the bailee.
2. Failure to surrender the negotiable
document of title.
3. Lack
of
willingness
to
sign
acknowledgment.
4. Receipt by the bailee of a request by or on
behalf of the person lawfully entitled to a
right of property or possession in the
goods, not to make such delivery.
5. The bailee has information that the
delivery about to be made was to one not
lawfully entitled to the possession of the
goods.
6. Delivery to a claimant with better right.
7. Attachment or levy of the goods by a
creditor
where
the
document
is
surrendered or its negotiation is enjoined
or the document is impounded.
8. Where the document of title is attached by
a creditor.
ADVERSE CLAIMS
provides that: If more than one person claims
the title or possession of the goods, the
warehouseman may, either as a defense to an
action brought against him for non-delivery of the
goods or as an original suit, whichever is
appropriate, require all known claimants to
interplead.
provides that: If someone other than the
depositor or person claiming under him has a
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Corporation Code
claim to the title or possession of goods, and the
warehouseman has information of such claim, the
warehouseman shall be excused from liability for
refusing to deliver the goods, either to the
depositor or person claiming under him or to the
adverse claimant until the warehouseman has
had a reasonable time to ascertain the validity of
the adverse claim or to bring legal proceedings to
compel claimants to interplead.
provides that: Except as provided in the two
preceding sections and in sections nine and
thirty-six, no right or title of a third person shall
be a defense to an action brought by the
depositor or person claiming under him against
the warehouseman for failure to deliver the goods
according to the terms of the receipt.
TRUST RECEIPTS LAW

Trust Receipt is a security transaction intended
to aid in financing importers or dealers in
merchandize by allowing them to obtain delivery
of goods under certain covenants.
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Corporation Code
Q: Who executes trust receipt?
A: Buyer/Entrustee (Borrower) in favor of the
lender /entrustor (Bank)
Q: What are the relationships created?
A: 1. Entruster-entrustee; 2. Seller-buyer
Q: What is the objective of the trust receipts?
A: To release the goods in favor of the entruster.
*Trust Receipt Law does not infringe the
Philippine Constitution on non-imprisonment for
non-payment of contractual debt because what
the trust receipt law punishes is the abuse made
by the entrustee.
collection or renewal. The sale of goods,

documents or instruments by a person in the
business of selling goods, documents or
instruments for profit who, at the outset of the
transaction, has, as against the buyer, general
property rights in such goods, documents or
instruments, or who sells the same to the buyer
on credit, retaining title or other interest as
security for the payment of the purchase price,
does not constitute a trust receipt transaction
and is outside the purview and coverage of this
Decree.
TRUST RECEIPT TRANSACTION
FORM OF TRUST RECEIPT
Sec. 4 of the Trust Receipt Law provides that:

A trust receipt transaction, within the meaning
of this Decree, is any transaction by and between
a person referred to in this Decree as the
entruster, and another person referred to in this
Decree as entrustee, whereby the entruster, who
owns or holds absolute title or security interests
over certain specified goods, documents or
instruments, releases the same to the possession
of the entrustee upon the latter's execution and
delivery to the entruster of a signed document
called a "trust receipt" wherein the entrustee
binds himself to hold the designated goods,
documents or instruments in trust for the
entruster and to sell or otherwise dispose of the
goods, documents or instruments with the
obligation to turn over to the entruster the
proceeds thereof to the extent of the amount
owing to the entruster or as appears in the trust
receipt or the goods, documents or instruments
themselves if they are unsold or not otherwise
disposed of, in accordance with the terms and
conditions specified in the trust receipt, or for
other purposes substantially equivalent to any of
the following: 1.
In the case of goods or
documents, (a) to sell the goods or procure their
sale; or (b) to manufacture or process the goods
with the purpose of ultimate sale: Provided, That,
in the case of goods delivered under trust receipt
for the purpose of manufacturing or processing
before its ultimate sale, the entruster shall retain
its title over the goods whether in its original or
processed form until the entrustee has complied
fully with his obligation under the trust receipt; or
(c) to load, unload, ship or tranship or otherwise
deal with them in a manner preliminary or
necessary to their sale; or 2.
In the case of
instruments, (a) to sell or procure their sale or
exchange; or (b) to deliver them to a principal; or
(c) to effect the consummation of some
transactions involving delivery to a depository or
register; or (d) to effect their presentation,

A trust receipt need not be in any particular
form, but every such receipt must substantially
contain (a) a description of the goods, documents
or instruments subject of the trust receipt; (2) the
total invoice value of the goods and the amount
of the draft to be paid by the entrustee; (3) an
undertaking or a commitment of the entrustee (a)
to hold in trust for the entruster the goods,
documents or instruments therein described; (b)
to dispose of them in the manner provided for in
the trust receipt; and (c) to turn over the
proceeds of the sale of the goods, documents or
instruments to the entruster to the extent of the
amount owing to the entruster or as appears in
the trust receipt or to return the goods,
documents or instruments in the event of their
non-sale within the period specified therein. The
trust receipt may contain other terms and
conditions agreed upon by the parties in addition
to those hereinabove enumerated provided that
such terms and conditions shall not be contrary
to the provisions of this Decree, any existing
laws, public policy or morals, public order or good
customs.
PARTIES TO A TRUST RECEIPT TRANSACTION
1. Entruster release the possession of the
goods to the entrustee upon the latters
execution of the trust receipt.
2. Entrustee Sec. 9 of the Trust Receipt
Law provides that: The entrustee shall
(1) hold the goods, documents or
instruments in trust for the entruster and
shall
dispose
of
them
strictly
in
accordance with the terms and conditions
of the trust receipt; (2) receive the
proceeds in trust for the entruster and
turn over the same to the entruster to the
extent of the amount owing to the
entruster or as appears on the trust
receipt; (3) insure the goods for their total
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Corporation Code
value against loss from fire, theft,
pilferage or other casualties; (4) keep said
goods or proceeds thereof whether in
money or whatever form, separate and
capable of identification as property of the
entruster; (5) return the goods, documents
or instruments in the event of non-sale or
upon demand of the entruster; and (6)
observe all other terms and conditions of
the trust receipt not contrary to the
provisions of this Decree.
3. Seller of the Goods - Not strictly and
actually a party to the trust receipt
transaction; but merely a party to the
contract of sale with the buyer/importer
(entrustee).
RIGHTS OF THE ENTRUSTER
The entruster shall be entitled to the proceeds
from the sale of the goods, documents or
instruments released under a trust receipt to the
entrustee to the extent of the amount owing to
the entruster or as appears in the trust receipt, or
to the return of the goods, documents or
instruments in case of non-sale, and to the
enforcement of all other rights conferred on him
in the trust receipt provided such are not contrary
to the provisions of this Decree. The entruster
may cancel the trust and take possession of the
goods, documents or instruments subject of the
trust or of the proceeds realized therefrom at any
time upon default or failure of the entrustee to
comply with any of the terms and conditions of
the trust receipt or any other agreement between
the entruster and the entrustee, and the
entruster in possession of the goods, documents
or instruments may, on or after default, give
notice to the entrustee of the intention to sell,
and may, not less than five days after serving or
sending of such notice, sell the goods, documents
or instruments at public or private sale, and the
entruster may, at a public sale, become a
purchaser. The proceeds of any such sale,
whether public or private, shall be applied (a) to
the payment of the expenses thereof; (b) to the
payment of the expenses of re-taking, keeping
and storing the goods, documents or instruments;
(c) to the satisfaction of the entrustee's
indebtedness to the entruster. The entrustee shall
receive any surplus but shall be liable to the
entruster for any deficiency. Notice of sale shall
be deemed sufficiently given if in writing, and
either personally served on the entrustee or sent
by post-paid ordinary mail to the entrustee's last
known business address.
*In Rosario Textile v Home Bankers, the SC

held that ownership of the entruster of the goods
is only a fiction. The one really owns the goods
are the entrustee.
*Entruster is entitled to deficiency.
*Entrustee is entitled to receive surplus.
The entruster holding a security interest shall
not, merely by virtue of such interest or having
given the entrustee liberty of sale or other
disposition of the goods, documents or
instruments under the terms of the trust receipt
transaction be responsible as principal or as
vendor under any sale or contract to sell made by
the entrustee.
Sec. 12 of the Trust Receipt Law provides
that: The entruster's security interest in goods,
documents, or instruments 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.
OBLIGATIONS/LIABILITIES
ENTRUSTEE
OF
THE
Sec. 9 of the Trust Receipt Law states that:

The entrustee shall (1) hold the goods,
documents or instruments in trust for the
entruster and shall dispose of them strictly in
accordance with the terms and conditions of the
trust receipt; (2) receive the proceeds in trust for
the entruster and turn over the same to the
entruster to the extent of the amount owing to
the entruster or as appears on the trust receipt;
(3) insure the goods for their total value against
loss from fire, theft, pilferage or other casualties;
(4) keep said goods or proceeds thereof whether
in money or whatever form, separate and capable
of identification as property of the entruster; (5)
return the goods, documents or instruments in
the event of non-sale or upon demand of the
entruster; and (6) observe all other terms and
conditions of the trust receipt not contrary to the
provisions of this Decree.
*Failure to return the proceeds or failure to return
the goods in case of non-sale is equivalent to
estafa.
Sec. 10 of the Trust Receipt Law states that:
The risk of loss shall be borne by the entrustee.
Loss of goods, documents or instruments which
are the subject of a trust receipt, pending their
disposition, irrespective of whether or not it was
due to the fault or negligence of the entrustee,
shall not extinguish his obligation to the entruster
for the value thereof.
*In Landl & Co. (Phil.) v Metrobank, the SC held
that the entrustee is still liable to pay the
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Corporation Code
entruster (bank) even if the goods were returned
to the latter.
Reason why entrustee is obligated to return
the goods to the entruster: To put the goods
in the disposal of the entruster (bank)
RIGHTS OF PURCHASER
that: Any purchaser of goods from an entrustee
with right to sell, or of documents or instruments
through their customary form of transfer, who
buys the goods, documents, or instruments for
value and in good faith from the entrustee,
acquires said goods, documents or instruments
free from the entruster's security interest.
PENALTIES
that: The failure of an entrustee to turn over the
proceeds of the sale of the goods, documents or
instruments covered by a trust receipt to the
extent of the amount owing to the entruster or as
appears in the trust receipt or to return said
goods, documents or instruments if they were not
sold or disposed of in accordance with the terms
of the trust receipt shall constitute the crime of
estafa, punishable under the provisions of Article
Three hundred and fifteen, paragraph one (b) of
Act Numbered Three thousand eight hundred and
fifteen, as amended, otherwise known as the
Revised Penal Code. If the violation or offense is
committed by a corporation, partnership,
association or other juridical entities, the penalty
provided for in this Decree shall be imposed upon
the directors, officers, employees or other
officials or persons therein responsible for the
offense, without prejudice to the civil liabilities
arising from the criminal offense.
*The criminal liability does not infringe the
Constitution because what the law punishes is the
abuse in the use of the commercial facility made
by the entrustee.
*This is not a dacion en pago because the liability
of the entrustee is not extinguished from the
moment the goods are returned to the entruster.
INSURANCE CODE (P.D. 1460 as amended)

INTRODUCTION:
A. Laws governing Insurance
Insurance Code primary law
New Civil Code applied suppletorily
specifically on law on obligations and
contracts
GSIS Act
Property Insurance Law
Act 1498
B. General Concept of Insurance
Contract of Insurance is an agreement
whereby
one
undertakes
for
a
consideration
to
indemnify
another
against loss, damage or liability arising
from an unknown or contingent event.
(Sec. 2 par. 2)
*It is a contract of assumption of risk
Q: Who will take the risk?
A: Insurer
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Corporation Code
Q: Who will be exposed to the risk?
A: Insured
C. Characteristics
1. Risk Distributing Device the
device of insurance serves to distribute
the risk of economic loss among as
many as possible to those who are
subject to the same kind of risk.
*The risk is distributed to the group of
persons having the same risk.
Q: Why is it a risk distribution device?
A: Insurer has different policyholders
that contribute to a common fund for
the same risk. The common fund will
indemnify the person who suffers loss
for the same risk.
Catch: not all policyholders will suffer
the same risk at the same time.
2. Contract of Adhesion Insurance is
a contract of adhesion considering that
most of the terms of the contract do
not result from mutual negotiations
between the parties as they are
prescribed by the insurer in printed
form to which the insured may
adhere if he chooses but which he
cannot change.
*Insurer always comes up with already
made contract.
Q: Is there a contract?
A: YES.
Importance of knowing whether
the contract is one of adhesion: In
case of doubt, the contract shall be
interpreted strictly against the insurer
and liberally in favor of the insured.
Q: is this rule unfair?
A: NO. Because the contract was
already prepared by the insurer, the
only thing that the insured can do is
either take it wholly or leave it.
3. Aleatory The obligation of the
insurer to pay the proceeds of the
insurance arises only upon the
happening of an event which is
uncertain, or which is to occur at an
indeterminate time. (Article 2010 NCC)
*The insurer becomes liable upon the
happening of the peril insured against.
*One or both parties are reciprocally
bound to give or do something for
consideration upon the happening of
an event which is uncertain or to which
is to occur at an indeterminate time.
4. Contract of Indemnity - The insured
who has insurable interest over a
property is only entitled to recover the
amount of actual loss sustained and
the burden is upon him to establish the

amount of such loss.
*It is the basis of all property
insurance.
*Life insurance is not a contract of
indemnity. Life is not subject to
pecuniary estimation; Life is precious.
General Rule: Insurance contract is a
contract of indemnity.
Exception: Life insurance
5. Uberrimae Fides Contract/Utmost
Good Faith The contract of
insurance is one of perfect good faith
not for the insured alone but equally so
for the insurer; in fact, it is more so for
the
latter
since
its
dominant
bargaining position carries with it
stricter responsibility.
*Since there was an assumption of risk
on the part of the insurer, it is their
duty to make an intelligent estimates
that is the reason why it requires the
parties to the contract of insurance to
disclose conditions affecting the risk of
which he is aware, or material fact,
which the applicant knows, and those,
which he ought to know.
*Material facts are facts needed by the
insurer for the determination of
whether he will assume or not the risk.
D. Elements of Insurance
1. Existence of an insurable interest
Sec. 12 of the Insurance Code
provides that: The interest of a
beneficiary in a life insurance policy
shall be forfeited when the beneficiary
is the principal, accomplice, or
accessory in willfully bringing about
the death of the insured; in which
event, the nearest relative of the
insured shall receive the proceeds of
said insurance if not otherwise
disqualified.
provides that: Every interest in
property, whether real or personal, or
any relation thereto, or liability in
respect thereof, of such nature that a
contemplated peril might directly
damnify the insured, is an insurable
interest.
provides that: An insurable interest in
property may consist in:
(a) An existing interest;
(b) An inchoate interest founded on an
existing interest; or
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Corporation Code
2.
3.
4.
5.
(c) An expectancy, coupled with an

existing interest in that out of which
the expectancy arises.
Risk of loss
Sec. 51 paragraph g of the
Insurance Code provides that: A
policy of insurance must specify: x x x
(g) The period during which the
insurance is to continue.
Assumption of risks
Sec. 2 of the Insurance Code states
that: xxx (1) A contract of insurance
is
an
agreement
whereby
one
undertakes for a consideration to
indemnify
another
against
loss,
damage or liability arising from an
unknown or contingent event.
Scheme to distribute losses
Payment of premiums
states that: An insurer is entitled to
payment of the premium as soon as
the thing insured is exposed to the
peril insured against. Notwithstanding
any agreement to the contrary, no
policy or contract of insurance issued
by an insurance company is valid and
binding unless and until the premium
thereof has been paid, except in the
case of a life or an industrial life policy
whenever the grace period provision
applies.
E. Right of Subrogation
*This principle is a normal incident of
indemnity property insurance as a legal
effect of payment; it inures to the insurer
without any formal assignment or any
express stipulation to that effect in the
policy. Said right is not dependent upon
nor does it grow out of any privity of
contract. Payment to the insured makes
the insurer an assignee in equity.
*The insurer can only recover from the
third person what the insured could have
recovered. Thus, there can be no recovery
if the insurer voluntarily paid even if the
loss is not covered by the policy.
*The insured can no longer recover from
the offending party what was paid to him
by the insurer but he can recover any
deficiency, that is, if his damages is more
than what was paid. The deficiency is not
covered by the right of subrogation.
Cases when there is no right of
subrogation:
1. The insured by his own act releases

the wrongdoer/third person liable for
the loss
2. Where the insurer pays the insured for
a loss or risk not covered by the policy
3. In life insurance
4. For recovery of loss in excess of
insurance coverage
CONTRACT OF INSURANCE:
A. Requisites of a contract of Insurance
1. A subject matter in which the insured
has an insurable interest
2. Event or peril insured against which
may be any future contingent or
unknown event, past or future and a
duration for the risk thereof
3. A promise to pay or indemnify in a
fixed or ascertainable amount
4. A consideration known as premium
5. Meeting of the minds of the parties
B. Perfection
*An insurance contract is consensual
contract and is therefore perfected the
moment there is a meeting of minds with
respect to the object and the cause or
consideration.
*What is being followed in insurance
contracts is what is known as the
Cognition Theory.
Q: What is the crucial point?
A: The point wherein there must be an
actual communication to the insured of
the approval of the application.
*In Great Pacific Life Assurance
Corporation v CA, the SC held that the
insured is the one making the offer by
submitting an application to the insurer
and the latter accepts the offer by
approving the application. Thus, mere
submission of the application without the
corresponding approval of the policy does
not result in the perfection of the contract
of insurance.
C. Parties to a contract of Insurance
that:
Every
person,
partnership,
association, or corporation duly authorized
to
transact
insurance
business
as
elsewhere provided in this code, may be
an insurer.
that: Anyone except a public enemy may
be insured.
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Corporation Code
Beneficiary person designated to
receive proceeds of policy when risk
attaches.
General Rule: When one insures his own
life, he may designate any person as the
beneficiary, whether or not the beneficiary
has an insurable interest in the life of the
insured.
Exceptions: Persons specified in Article
739 in re Article 2012 of the New Civil
Code.
*The designation of persons mentioned in
Article 739 is void but the policy is
binding.
*In property insurance, the beneficiary
must have insurable interest on the
property.
that: The insured shall have the right to
change the beneficiary he designated in
the policy, unless he has expressly waived
this right in said policy. *The designation
is revocable unless the right to revoke is
expressly waived in the policy.
that: The interest of a beneficiary in a life
insurance policy shall be forfeited when
the
beneficiary
is
the
principal,
accomplice, or accessory in willfully
bringing about the death of the insured; in
which event, the nearest relative of the
insured shall receive the proceeds of said
insurance if not otherwise disqualified.
*In life or health insurance, the insured
cannot assign the policy if the designation
of the beneficiary is irrevocable. Reason:
The irrevocable beneficiary has vested
right.
*If the insured refuses to pay the
premiums, the designated irrevocable
beneficiary may continue the policy by
paying premiums that are due. (Article
1236 NCC)
Q: Despite irrevocable designation, may
the insured revoke the beneficiary?
A: YES. Under Article 42 of the Family
Code, Article 43 (4) of the Family Code,
Article 50 of the Family Code and Article
64 of the Family Code.
1. Rule on minors
that: Any minor of the age of eighteen
years or more, may, notwithstanding
such minority, contract for life, health
and accident insurance, with any
insurance company duly authorized to
do business in the Philippines,
provided the insurance is taken on his
own life and the beneficiary appointed

is the minor's estate or the minor's
father, mother, husband, wife, child,
brother or sister.
*This portion is repealed by RA 6809.
Under RA 6809, minors are no longer
allowed to enter into insurance
contracts. This rule is absolute.
2. Rule on married women
provides that: The married woman or
the minor herein allowed to take out
an insurance policy may exercise all
the rights and privileges of an owner
under a policy.
*Under RA 7192, married women can
enter into insurance contracts without
the assistance of their husbands.
D. Subject matter of Insurance
that: Any contingent or unknown event,
whether past or future, which may
damnify a person having an insurable
interest, or create a liability against him,
may be insured against, subject to the
provisions of this chapter.
that: The preceding section does not
authorize an insurance for or against the
drawing of any lottery, or for or against
any chance or ticket in a lottery drawing a
prize.
E. Insurance not a wagering contract
that: The preceding section does not
authorize an insurance for or against the
drawing of any lottery, or for or against
any chance or ticket in a lottery drawing a
prize.
*Wagering contract is not allowed because
it is against public policy.
Reason: The insured should not be happy
because of the loss he suffered.
Q: What prevents insurance policy from
being a wagering contract?
A: Insurable interest.
INSURABLE INTEREST:
A. Concept of Insurable Interest in
General
*A person has an insurable interest in the
subject matter if he is so connected, so
situated, so circumstanced, so related,
that by the preservation of the same he
shall derive pecuniary benefit, and by its
93

Corporation Code
destruction he shall suffer pecuniary loss,
damage or prejudice.
*Insurable interest does not exist by legal
relationship or by virtue of law.
B. Reason for the requirement of
insurable interest
*A policy issued to a person without the
requisite insurable interest in the subject
matter is a mere wager policy or contract,
hence, it is VOID.
Evil sought to be avoided: Temptation
to destroy the thing insured.
Reason: He has nothing to lose but
everything to gain.
C. Insurable interest in Life Insurance
Sec. 10 of the Insurance Code provides
that: Every person has an insurable
interest in the life and health:
(a) Of himself, of his spouse and of his
children; (b) Of any person on whom he
depends wholly or in part for education or
support, or in whom he has a pecuniary
interest;
(c) Of any person under a legal obligation
to him for the payment of money, or
respecting property or services, of which
death or illness might delay or prevent the
performance; and
(d) Of any person upon whose life any
estate or interest vested in him depends.
Q: May warehouseman insure the goods
deposited in his warehouse?
A: YES. In case of loss of the goods the
warehouseman is liable to the owner of
the goods.
Q: May bottomry lender insures the
hypothecated vessel?
A: YES. There is an insurable interest up
to the amount covered by the bottomry.
Q: Who gets the proceeds of the
insurance?
A: The insured and the beneficiary.
*In life insurance, persons prohibited to
make donation to each other are also
prohibited to become beneficiaries of each
other.
*For disqualification purposes, what is
needed is only a preponderance of
evidence.
D. Insurable
interest
in
Property
Insurance
that: Every interest in property, whether
real or personal, or any relation thereto, or
liability in respect thereof, of such nature
that a contemplated peril might directly
damnify the insured, is an insurable

interest.
that: An insurable interest in property
may consist in:
(a) An existing interest;
(b) An inchoate interest founded on an
existing interest; or
(c) An expectancy, coupled with an
existing interest in that out of which the
expectancy arises.
*In general, a person has an insurable
interest in the property, if he derives
pecuniary benefit or advantage from its
preservation or would suffer pecuniary
loss, damage or prejudice by its
destruction whether he has or has no title
in, or lien upon, or possession of the
property.
*Existence of insurable interest is a matter
of public policy, hence, the principle of
estoppels cannot be invoked.
*In order for hope or expectancy to be
insurable, it must be coupled with existing
interest out of which the expectancy
arises. It must be founded on an actual
right to the thing or upon a valid contract.
that: An interest in property insured must
exist when the insurance takes effect, and
when the loss occurs, but not exist in the
meantime; and 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.
that: Except in the cases specified in the
next four sections, and in the cases of life,
accident, and health insurance, a change
of interest in any part of a thing insured
unaccompanied
by
a
corresponding
change in interest in the insurance,
suspends the insurance to an equivalent
extent, until the interest in the thing and
the interest in the insurance are vested in
the same person.
that: Every stipulation in a policy of
insurance for the payment of loss whether
the person insured has or has not any
interest in the property insured, or that
the policy shall be received as proof of
such interest, and every policy executed
by way of gaming or wagering, is void.
1. Insurable interest in case of
mortgaged property
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Corporation Code
that: Unless the policy otherwise
provides, where a mortgagor of
property effects insurance in his own
name providing that the loss shall be
payable to the mortgagee, or assigns a
policy of insurance to a mortgagee, the
insurance is deemed to be upon the
interest of the mortgagor, who does
not cease to be a party to the original
contract, and any act of his, prior to
the loss, which would otherwise avoid
the insurance, will have the same
effect, although the property is in the
hands of the mortgagee, but any act
which, under the contract of insurance,
is to be performed by the mortgagor,
may be performed by the mortgagee
therein named, with the same effect as
if it had been performed by the
mortgagor.
a. Standard or Union Mortgage
Clause subsequent acts of the
mortgagor cannot affect the rights
of the assignee.
b. Open or Loss Payable Clause
acts of the mortgagor affect the
mortgagee.
Reason: Mortgagor does not cease
to be a party to the contract.
Basis: Sec. 8 of the Insurance
Code states that: Unless the
policy otherwise provides, where a
mortgagor of property effects
insurance in his own name
providing that the loss shall be
payable to the mortgagee, or
assigns a policy of insurance to a
mortgagee,
the
insurance
is
deemed to be upon the interest of
the mortgagor, who does not cease
to be a party to the original
contract, and any act of his, prior
to the loss, which would otherwise
avoid the insurance, will have the
same effect, although the property
is in the hands of the mortgagee,
but any act which, under the
contract of insurance, is to be
performed by the mortgagor, may
be performed by the mortgagee
therein named, with the same
effect as if it had been performed
by the mortgagor.
states that: If an insurer assents
to the transfer of an insurance from
a mortgagor to a mortgagee, and,

at the time of his assent, imposes
further obligation on the assignee,
making a new contract with him,
the act of the mortgagor cannot
affect the rights of said assignee.
2. Effect of change of interest in the
thing insured
states that: Except in the cases
specified in the next four sections, and
in the cases of life, accident, and
health insurance, a change of interest
in any part of a thing insured
unaccompanied by a corresponding
change in interest in the insurance,
suspends
the
insurance
to
an
equivalent extent, until the interest in
the thing and the interest in the
insurance are vested in the same
person.
states that: A change in interest in a
thing insured, after the occurrence of
an injury which results in a loss, does
not affect the right of the insured to
indemnity for the loss.
states that: A change of interest in
one or more several distinct things,
separately insured by one policy, does
not avoid the insurance as to the
others.
*This is a divisible policy.
states that: A change on interest, by
will or succession, on the death of the
insured, does not avoid an insurance;
and his interest in the insurance
passes to the person taking his
interest in the thing insured.
*This is by operation of law.
states that: A transfer of interest by
one of several partners, joint owners,
or owners in common, who are jointly
insured, to the others, does not avoid
an insurance even though it has been
agreed that the insurance shall cease
upon an alienation of the thing
insured.
provides that: A policy may be so
framed that it will inure to the benefit
of
whomsoever,
during
the
continuance of the risk, may become
the owner of the interest insured.
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Corporation Code
*The policy follows where the interest
is.
provides that: The mere transfer of a
thing insured does not transfer the
policy, but suspends it until the same
person becomes the owner of both the
policy and the thing insured.
provides that: The contracting parties
may
establish
such
stipulations,
clauses, terms and conditions as they
may deem convenient, provided they
are not contrary to law, morals, good
customs, public order, or public policy.
As
to
measure
As to time
when
insurable
interest
must exist
As
to
expectation
of benefit to
Insurable
Interest
in
Property
Limited to
the actual
value
of
the
interest in
the
property.
The
insurable
interest
exists
when the
insurance
takes
effect and
when the
loss occurs
but
not
need exist
in
the
meantime.
There
must be a
legal
Insurable
Interest in
Life
General
Rule:
Insurable
Interest in
life
is
unlimited.
Exception:
In
life
insurance
effected by
a creditor
on the life
of
the
debtor.
General
Rule: It is
enough
that
the
insurable
interest
exists
at
the
time
the policy
takes effect
and
need
not exist at
the time of
the loss.
Exception:
Obligee
must have
insurable
interest at
the
time
the policy
took effect
and at the
time
of
loss.
The
expectation
of
the
be derived
basis.
benefit to
be derived
need
not
have
any
legal basis.
As to the The
General
beneficiary beneficiar
Rule: The
s interest
y
must beneficiary
have
need
not
insurable
have
interest
insurable
over
the interest
thing
over
the
insured.
life of the
The policy insured
if
is
still the insured
valid, only himself
the
secured the
designatio policy.
n
was Exception:
avoided
If the life
because
insurance
the
was
beneficiar
obtained
y has no by
the
insurable
beneficiary,
interest.
the
latter
must have
insurable
interest
over
the
life of the
insured.
Q: In case where the designated
beneficiary cannot claim the proceeds
due to the fact that such designation
was void, who can claim the proceeds?
A: Insured.
DEVICES
FOR
ASCERTAINING
CONTROLLING RISK AND LOSS:
AND
*Concealment and representation are devices

that are related to the formation of the contract
whereas warranties and condition are devices
that are related to the execution of the contract.
A. Concealment
1. Concept
Q: When is there concealment?
provides
that:
A
neglect
to
communicate that which a party knows
and ought to communicate, is called a
concealment.
2. Duty to Communicate
states that: Each party to a contract
of insurance must communicated to
the other, in good faith, all facts within
his knowledge which are material to
the contract and as to which he makes
96

Corporation Code
no warranty, and which the other has
not the means of ascertaining.
3. Test of Materiality
provides that: 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 the communication is due, in
forming
his
estimate
of
the
disadvantages
of
the
proposed
contract, or in making his inquiries.
*The fact disclosed may not be the
proximate cause of the loss still there
is breach because there is a vitiation of
consent, the contract is voidable.
4. Effect of Concealment
provides that: A concealment whether
intentional or unintentional entitles the
injured party to rescind a contract of
insurance.
provides that: An intentional and
fraudulent omission, on the part of one
insured, to communicate information
of matters proving or tending to prove
the falsity of a warranty, entitles the
insurer to rescind.
*It vitiates the contract and entitles
the insurer to rescind, even if the
death or loss is due to a cause not
related to the concealed matter.
5. Matters
which
need
not
be
communicated
provides that: Neither party to a
contract of insurance is bound to
communicate
information
of
the
matters following, except in answer to
the inquiries of the other:
(a) Those which the other knows;
(b) Those which, in the exercise of
ordinary care, the other ought to know,
and of which the former has no reason
to suppose him ignorant;
(c) Those of which the other waives
communication;
(d) Those which prove or tend to prove
the existence of a risk excluded by a
warranty, and which are not otherwise
material; and
(e) Those which relate to a risk
excepted from the policy and which
are not otherwise material.
*Things need not be disclosed.
provides that: Each party to a
contract of insurance is bound to know

all the general causes which are open
to his inquiry, equally with that of the
other, and which may affect the
political
or
material
perils
contemplated; and all general usages
of trade.
provides that: Information of the
nature or amount of the interest of one
insured need not be communicated
unless in answer to an inquiry, except
as prescribed by section fifty-one.
provides that: Neither party to a
contract of insurance is bound to
communicate, even upon inquiry,
information of his own judgment upon
the matters in question.
6. Waiver of Information
provides that: The right to information
of material facts may be waived, either
by the terms of the insurance or by
neglect to make inquiry as to such
facts, where they are distinctly implied
in other facts of which information is
communicated.
B. Representation
1. Concept
Representations
are
factual
statements made by the insured at the
time of or prior to the issuance of the
policy to give information to the
insurer and otherwise induce him to
enter into the insurance contract.
*Representation per se is not wrong as
long as such representation is true.
*The false representation may still be
corrected as long as it is made before
the issuance of the policy.
2. Kinds of Representation
provides that: A representation may
be oral or written.
provides that: representation may be
made at the time of, or before,
issuance of the policy.
provides that: A representation as to
the future is to be deemed a promise,
unless it appears that it was merely a
statement of belief or expectation.
provides that: . A representation must
97

Corporation Code
3.
4.
5.
6.
7.
be presumed to refer to the date on

which the contract goes into effect.
Test of Materiality
provides that: The materiality of a
representation is determined by the
same rules as the materiality of a
concealment.
*Facts
that
may
probably
and
reasonably influence the other party in
forming his estimate.
Effect of Alteration or Withdrawal
provides that: A representation may
be altered or withdrawn before the
insurance
is
effected,
but
not
afterwards.
Time to which representation
refers
states that: A representation must be
presumed to refer to the date on which
the contract goes into effect.
Effect when representation is
obtained from third persons
provides that: When a person insured
has no personal knowledge of a fact,
he
may
nevertheless
repeat
information which he has upon the
subject, and which he believes to be
true, with the explanation that he does
so on the information of others; or he
may submit the information, in its
whole extent, to the insurer; and in
neither case is he responsible for its
truth, unless it proceeds from an agent
of the insured, whose duty it is to give
the information.
When presumed false; effect of
falsity
provides that: A representation is to
be deemed false when the facts fail to
correspond with its assertions or
stipulations.
states that: If a representation is false
in a material point, whether affirmative
or promissory, the injured party is
entitled to rescind the contract from
the time when the representation
becomes false. The right to rescind
granted by this Code to the insurer is
waived by the acceptance of premium
payments despite knowledge of the
ground for rescission.
C. Remedies
available
in
case
of
Concealment or False Representation
1. When rescission by the insurer
may be exercised
states that: Whenever a right to
rescind a contract of insurance is given
to the insurer by any provision of this
chapter, such right must be exercised
previous to the commencement of an
action on the contract.
After a policy of life insurance made
payable on the death of the insured
shall have been in force during the
lifetime of the insured for a period of
two years from the date of its issue or
of its last reinstatement, the insurer
cannot prove that the policy is void ab
initio or is rescindible by reason of the
fraudulent
concealment
or
misrepresentation of the insured or his
agent.
General Rule: Prescriptive period:
Any time before the commencement of
a court action on the contract.
Exception: In case of life insurance
made payable on the death of the
insured.
Q: How rescission is made?
A: By sending notice of cancellation or
rescission to the insured.
Even if there is a court action, the
insurer may raise concealment or
representation
as
an
affirmative
defense.
2. When
Life
insurance
policy
becomes incontestable
states that: Whenever a right to
rescind a contract of insurance is given
to the insurer by any provision of this
chapter, such right must be exercised
previous to the commencement of an
action on the contract.
After a policy of life insurance made
payable on the death of the insured
shall have been in force during the
lifetime of the insured for a period of
two years from the date of its issue or
of its last reinstatement, the insurer
cannot prove that the policy is void ab
initio or is rescindible by reason of the
fraudulent
concealment
or
misrepresentation of the insured or his
agent.
a. Requisites for incontestability
98

Corporation Code
1. The insurance is a life insurance
policy payable on the death of
the insured.
2. It has been in force during the
lifetime of the insured for at
least 2 years from its date of
issue
or
of
its
last
reinstatement. The period of 2
years may be shortened but it
cannot
be
extended
by
stipulation.
*The
defense
should
be
misrepresentation
or
concealment
only.
*If the insured dies within 2 year
period, the insurer may still rescind the
contract. If the insured died after the 2
year period, the insurer cannot rescind
the contract.
b. Theory
and
Object
of
incontestability
After a policy of life insurance
made payable on the death of the
insured shall have been in force
during the lifetime of the insured
for a period of 2 years from the
date of its issue or of its last
reinstatement, the insurer cannot
prove that the policy is void ab
initio or is rescindable by reason of
the fraudulent concealment or
misrepresentation of the insured or
his agent.
c. Defenses
not
barred
by
incontestability
1. The
person
taking
the
insurance
lacked
insurable
interest as required by law
2. The cause of the death of the
insured is an excepted risk
3. The premiums have not been
paid
4. The conditions of the policy
relating to military or naval
service have been violated
5. The fraud is of a particularly
vicious type
6. The beneficiary failed to furnish
proof of death or to comply with
any condition imposed by the
policy after the loss has
happened
7. The action was not brought
within the time specified.
8.
D. Warranties
1. Concept;
distinguished
from
representation
Warranty is a statement or promise

set forth in the policy or by reference
incorporated therein, the untruth or
non-fulfillment of which in any respect,
and without reference to whether
insurer was in fact prejudiced by such
untruth or non-fulfillment , renders the
policy voidable.
Condition is a provision wherein
certain things are mandated by the
insurer to be complied with by the
insured in order for the latter to
recover.
Examples:
1. Filing of the claim on time
2. Notice of loss
3. Proof of loss
*The condition may be complied with
before or after the loss.
Warranty
Part
of
the
contract
Written on the
policy or in a
valid
rider
or
attachment
Generally
conclusively
presumed to be
material
The
fact
warranted must
be
strictly
complied with
Representation
A
collateral
inducement
Need
not
be
written
Should
be
established to be
material
Requires only to be
substantially true
2. Kinds of Warranties
1. Express
2. Implied warranties that are
deemed included in the contract
although not expressly mentioned.
3. Affirmative
asserts
the
existence of a fact or condition at
the time it is made.
4. Promissory
the
insured
stipulates that certain facts or
conditions shall exists or thing shall
be done or omitted.
3. Time to which warranty refers
provides that: A warranty may relate
to the past, the present, the future, or
to any or all of these.
4. Effect of Breach
states that: The violation of a material
warranty, or other material provision of
a policy, on the part of either party
thereto, entitles the other to rescind.
99

Corporation Code
states that: A policy may declare that
a violation of specified provisions
thereof shall avoid it, otherwise the
breach of an immaterial provision does
not avoid the policy.
states that: A breach of warranty
without fraud merely exonerates an
insurer from the time that it occurs, or
where it is broken in its inception,
prevents the policy from attaching to
the risk.
POLICY OF INSURANCE:
A. Definition and Form
that: The written instrument in which a
contract of insurance is set forth, is called
a policy of insurance.
that: The policy shall be in printed form
which may contain blank spaces; and any
word, phrase, clause, mark, sign, symbol,
signature, number, or word necessary to
complete the contract of insurance shall
be written on the blank spaces provided
therein. Any rider, clause, warranty or
endorsement purporting to be part of the
contract of insurance and which is pasted
or attached to said policy is not binding on
the insured, unless the descriptive title or
name of the rider, clause, warranty or
endorsement is also mentioned and
written on the blank spaces provided in
the policy. Unless applied for by the
insured or owner, any rider, clause,
warranty or endorsement issued after the
original policy shall be countersigned by
the
insured
or
owner,
which
countersignature shall be taken as his
agreement to the contents of such rider,
clause, warranty or endorsement. Group
insurance and group annuity policies,
however, may be typewritten and need
not be in printed form.
*Contract of insurance may be made in
any form but the policy of insurance must
be in writing.
B. Fine Print Rule
Insurance is a contract of adhesion
considering that most of the terms of the
contract do not result from mutual
negotiations between the parties as they
are prescribed by the insurer in printed
form to which the insured may adhere if

he chooses but which he cannot change.
C. Contents of the Policy
that: A policy of insurance must specify:
(a) The parties between whom the
contract is made;
(b) The amount to be insured except in the
cases of open or running policies;
(c) The premium, or if the insurance is of a
character where the exact premium is only
determinable upon the termination of the
contract, a statement of the basis and
rates upon which the final premium is to
be determined;
(d) The property or life insured;
(e) The interest of the insured in property
insured, if he is not the absolute owner
thereof;
(f) The risks insured against; and
(g) The period during which the insurance
is to continue.
D. Papers attached to the policy and
their binding effect (rider, warranties,
clause, endorsement)
Rider is an attachment to an insurance
policy that modifies the conditions of the
policy by expanding or restricting its
benefits or excluding certain conditions
from the coverage.
*Riders, together with other attachments
to the policy like clause, warranty or
endorsements, are not binding on the
insured unless the descriptive title or
name thereof is mentioned and written on
the blank spaces provided in the policy.
Purpose: To modify the conditions or
provisions.
Interpretation: In case of doubt, riders
prevail over the policy.
*Riders and the like shall be countersigned
by the insured or owner unless he was the
one who applied for the rider, clause, and
warranty.
*When the requirements for a rider are
complied with including clause, warranty
or endorsement, it is considered part of
the policy.
*It is a part of the original policy which is
in the nature of a conditional obligation.
E. Kinds of Policy
1. Open
states that: An open policy is one in
which the value of the thing insured is
100

Corporation Code
not agreed upon, but is left to be
ascertained in case of loss.
*To put a threshold for purposes of
premium.
Advantage: actual valuation; the final
valuation is accurate value of the
property
Disadvantage: hassle
Example:
Warehouse valued for P1M
At the time of loss the actual valuation
of the warehouse is P800,000
The insured can only recover P800,000
2. Valued
provides that: A valued policy is one
which expresses on its face an
agreement that the thing insured shall
be valued at a specific sum.
Example:
a. Warehouse valued for P1M
Agreed valuation is P1M
The insured can recover the whole P1M
without proving the actual value of the
property.
b. Warehouse valued for P1.5M
Agreed valuation is P1M
The insurer can only recover P1M
3. Running
provides that: A running policy is one
which
contemplates
successive
insurances, and which provides that
the object of the policy may be from
time to time defined, especially as to
the subjects of insurance, by additional
statements or indorsements.
*Usually covers stock and goods in
warehouse
Purpose: Avoidance of over and under
insurance.
F. Cover Notes
that: Cover notes may be issued to bind
insurance
temporarily
pending
the
issuance of the policy. Within sixty days
after the issue of the cover note, a policy
shall be issued in lieu thereof, including
within its terms the identical insurance
bound under the cover note and the
premium therefor. Cover notes may be
extended or renewed beyond such sixty
days with the written approval of the
Commissioner if he determines that such
extension is not contrary to and is not for
the purpose of violating any provisions of
this Code.
The Commissioner may
promulgate
rules
and
regulations
governing such extensions for the purpose

of preventing such violations and may by
such rules and regulations dispense with
the requirement of written approval by
him in the case of extension in compliance
with such rules and regulations.
*This is a preliminary contract of
insurance.
*The protection is temporary; limited to 60
days only
*In Pacific Timber Export Corporation
v CA, the SC held that no separate
premium is required for the cover note. As
an exception, the parties may agree
otherwise.
G. Cancellation of Policy
that: No policy of insurance other than
life shall be cancelled by the insurer
except upon prior notice thereof to the
insured, and no notice of cancellation shall
be effective unless it is based on the
occurrence, after the effective date of the
policy, of one or more of the following:
(a) non-payment of premium;
(b) conviction of a crime arising out of acts
increasing the hazard insured against;
(c) discovery of fraud or material
misrepresentation;
(d) discovery of willful or reckless acts or
omissions increasing the hazard insured
against;
(e) physical changes in the property
insured which result in the property
becoming uninsurable; or
(f) a determination by the Commissioner
that the continuation of the policy would
violate or would place the insurer in
violation of this Code.
Prescriptive Period:
Oral = 6 years; written= 10 years
that:
All
notices
of
cancellation
mentioned in the preceding section shall
be in writing, mailed or delivered to the
named insured at the address shown in
the policy, and shall state (a) which of the
grounds set forth in section sixty-four is
relied upon and (b) that, upon written
request of the named insured, the insurer
will furnish the facts on which the
cancellation is based.
that: In case of insurance other than life,
unless the insurer at least forty-five days
in advance of the end of the policy period
mails or delivers to the named insured at
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Corporation Code
the address shown in the policy notice of
its intention not to renew the policy or to
condition its renewal upon reduction of
limits or elimination of coverages, the
named insured shall be entitled to renew
the policy upon payment of the premium
due on the effective date of the renewal.
Any policy written for a term of less than
one year shall be considered as if written
for a term of one year. Any policy written
for a term longer than one year or any
policy with no fixed expiration date shall
be considered as if written for successive
policy periods or terms of one year.
H. Time to commence action on the
policy; effect of stipulation
Q: When cause of action accrues?
A: From the denial of the claim.
that:
A
condition,
stipulation,
or
agreement in any policy of insurance,
limiting the time for commencing an
action thereunder to a period of less than
one year from the time when the cause of
action accrues, is void.
PREMIUM:
A. Concept
Premium is the consideration paid to an
insurer for undertaking to indemnify the
insured against a specified peril.
Q:
Who
pays
the
premium?
A: Insured
Q:
What
is
the
consideration?
A: Insured: premium; Insurer: Assumption
of risk
B. Effect of non-payment of premium;
exceptions Sec. 77 of the Insurance
Code states that: . An insurer is entitled
to payment of the premium as soon as the
thing insured is exposed to the peril
insured against.
Notwithstanding any
agreement to the contrary, no policy or
contract of insurance issued by an
insurance company is valid and binding
unless and until the premium thereof has
been paid, except in the case of a life or
an industrial life policy whenever the
grace period provision applies.
*This is called as Cash and Carry Rule
that: An acknowledgment in a policy or
contract of insurance or the receipt of
premium is conclusive evidence of its
payment, so far as to make the policy
binding, notwithstanding any stipulation

therein that it shall not be binding until the
premium is actually paid.
General Rule: No insurance policy issued
or renewal is valid and binding until actual
payment of premium. Any agreement to
the contrary is void. (Cash and Carry Rule)
Exceptions:
1. In case of life and industrial life
whenever the grace period provision
applies (Sec. 77);
Requisites:
a. Life and industrial life insurance
b. There is a grace period
c. Grace period still exists
2. Where there is an acknowledgment in
the contract or policy of insurance that
the premium had already been paid
(Sec. 78);
Conclusive effect: the validity of the
contract/policy and its binding effect.
*No conclusive effect as to the
payment of premium.
*Acknowledgment results to estoppel
3. The rule laid down in Makati Tuscany
Condominium v CA to the effect that
Sec. 77 may not apply if the parties
have agreed to the payment of the
premium in installments and partial
payment has been made at the time of
the loss;
*By express agreement
Q: What was agreed upon?
A: Payment by instalment plan
4. Where a credit term was agreed upon
like the agreement in UCPB General
Insurance,
Inc.
v
Masagana
Telemart where the insurer granted a
60-90 day credit term for the payment
of the premiums despite full awareness
of Sec.77;
*By previous conduct/practice
*Insured = principle of equity; insurer
= estoppel.
5. Where the parties are barred by
estoppels
Article 1306 of the : New Civil Code
states that: The contracting parties may
establish such stipulations, clauses, terms
and conditions as they may deem
convenient, provided they are not contrary
to law, morals, good customs, public
order, or public policy.
C. When insured entitled to return of
premiums Sec. 79 of the Insurance
Code states that: A person insured is
entitled to a return of premium, as follows:
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Corporation Code
(a) To the whole premium if no part of his
interest in the thing insured be exposed to
any of the perils insured against;
(b) Where the insurance is made for a
definite period of time and the insured
surrenders his policy, to such portion of
the premium as corresponds with the
unexpired time, at a pro rata rate, unless a
short period rate has been agreed upon
and appears on the face of the policy,
after deducting from the whole premium
any claim for loss or damage under the
policy which has previously accrued;
Provided, That no holder of a life insurance
policy may avail himself of the privileges
of this paragraph without sufficient cause
as otherwise provided by law.
that: If a peril insured against has
existed, and the insurer has been liable for
any period, however short, the insured is
not entitled to return of premiums, so far
as that particular risk is concerned.
that: A person insured is entitled to
return of the premium when the contract
is voidable, on account of fraud or
misrepresentation of the insurer, or of his
agent, or on account of facts, the
existence of which the insured was
ignorant without his fault; or when by any
default of the insured other than actual
fraud, the insurer never incurred any
liability under the policy.
that: In case of an over-insurance by
several insurers, the insured is entitled to
a ratable return of the premium,
proportioned to the amount by which the
aggregate sum insured in all the policies
exceeds the insurable value of the thing at
risk.
PERSONS ENTITLED TO RECOVER ON THE
POLICY AND CONDITIONS TO RECOVERY:
A. Beneficiary
that: The insured shall have the right to
change the beneficiary he designated in
the policy, unless he has expressly waived
this right in said policy.
that: The interest of a beneficiary in a life
insurance policy shall be forfeited when
the
beneficiary
is
the
principal,
accomplice, or accessory in willfully
bringing about the death of the insured; in

which event, the nearest relative of the
insured shall receive the proceeds of said
insurance if not otherwise disqualified.
that: The insurance proceeds shall be
applied exclusively to the proper interest
of the person in whose name or for whose
benefit it is made unless otherwise
specified in the policy.
that: When the description of the insured
in a policy is so general that it may
comprehend any person or any class of
persons, only he who can show that it was
intended to include him can claim the
benefit of the policy.
that: A policy may be so framed that it
will inure to the benefit of whomsoever,
during the continuance of the risk, may
become the owner of the interest
insured.
Q: Who receives the proceeds?
A: General Rule: Beneficiary
Exception: In case the designated
beneficiary is disqualified, it is the insured
who receive the proceeds.
General Rule: The designation of the
beneficiary is revocable.
Exception: Irrevocable
In irrevocable designation, the general
rule is that the designated beneficiary
cannot be changed.
Exceptions:
1. The beneficiary consented to the
change
2. Under Art. 45 of the Family Code which
substantially
provides
that
the
innocent spouse has the authority to
revoke
the
designation
of
his
beneficiary
3. In cases where the marriage is
declared void ab initio
4. In cases of annulment
5. In cases of legal separation
B. Limitations on the appointment of
beneficiary Article 2012 of the New
Civil Code states that: Any person who
is forbidden from receiving any donation
under Article 739 cannot be named
beneficiary of a life insurance policy by the
person who cannot make any donation to
him, according to said article.
*The prohibition applies only to life
insurance policy.
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Corporation Code
*Under Article 1236 of the New Civil Code,
the beneficiary may pay the premium
even against the will of the insurer.
Reason: Beneficiary has interest over the
insurance policy.
states that: The following donations shall
be void:
(1) Those made between persons who
were guilty of adultery or concubinage at
the time of the donation;
(2) Those made between persons found
guilty of the same criminal offense, in
consideration thereof;
(3) Those made to a public officer or his
wife, descendants and ascendants, by
reason of his office.
In the case referred to in No. 1, the action
for declaration of nullity may be brought
by the spouse of the donor or donee; and
the guilt of the donor and donee may be
proved by preponderance of evidence in
the same action.
C. Rule where insurance is made by an
agent or trustee
that: When an insurance contract is
executed with an agent or trustee as the
insured, the fact that his principal or
beneficiary is the real party in interest
may be indicated by describing the
insured as agent or trustee, or by other
general words in the policy.
D. Rule where insurance if made by
partner or part owner
that: To render an insurance effected by
one partner or part-owner, applicable to
the interest of his co-partners or other
part-owners, it is necessary that the terms
of the policy should be such as are
applicable to the joint or common interest.
E. Notice and proof of loss

that: In case of loss upon an insurance
against fire, an insurer is exonerated, if
notice thereof be not given to him by an
insured, or some person entitled to the
benefit
of
the
insurance,
without
unnecessary delay.
that: When a preliminary proof of loss is
required by a policy, the insured is not
bound to give such proof as would be
necessary in a court of justice; but it is
sufficient for him to give the best evidence

which he has in his power at the time.
that: All defects in a notice of loss, or in
preliminary proof thereof, which the
insured might remedy, and which the
insurer omits to specify to him, without
unnecessary
delay,
as
grounds
of
objection, are waived.
that: Delay in the presentation to an
insurer of notice or proof of loss is waived
if caused by any act of him, or if he omits
to take objection promptly and specifically
upon that ground.
that: If the policy requires, by way of
preliminary proof of loss, the certificate or
testimony of a person other than the
insured, it is sufficient for the insured to
use reasonable diligence to procure it, and
in case of the refusal of such person to
give it, then to furnish reasonable
evidence to the insurer that such refusal
was not induced by any just grounds of
disbelief in the facts necessary to be
certified or testified.
DOUBLE INSURANCE:
A. Definition and requisites
that: A double insurance exists where the
same person is insured by several insurers
separately in respect to the same subject
and interest.
Requisites:
1. The person insured is the same
2. There are two or more insurers
insuring separately
3. The subject matter is the same
4. The interest insured is also the same
5. The risk or peril insured against is
likewise the same
B. Distinguished from Over-insurance
Distinctions:
Double Insurance
There may be no
over-insurance
as
when the sum total
of the amounts of
the policies issued
does not exceed the
insurable interest of
the insured
There are always
Over-Insurance
When the amount of
the insurance
is
beyond the value of
the
insureds
insurable interest
There may only be
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Corporation Code
several insurers
one insurer involved
*There is over-insurance if the total

amount exceeds the value of the thing
insured.
Example:
In Fire Insurance, A insured his property to
X for 500,000, to Y for 1M and to Z for 1M
totalling to P2.5M. The property valued
only for 1M. In this situation there is overinsurance.
C. Stipulation against double insurance
Q: Is double insurance legally prohibited?
Exception: If prohibited by an other
insurance clause.
Basis: Sec. 75 of the Insurance Code
which provides that: A policy may declare
that a violation of specified provisions
thereof shall avoid it, otherwise the breach
of an immaterial provision does not avoid
the policy.
D. Rules for payment where there is
over-insurance by double insurance
that: Where the insured is over-insured
by double insurance:
(a) The insured, unless the policy
otherwise provides, may claim payment
from the insurers in such order as he may
select, up to the amount for which the
insurers are severally liable under their
respective contracts;
(b) Where the policy under which the
insured claims is a valued policy, the
insured must give credit as against the
valuation for any sum received by him
under any other policy without regard to
the actual value of the subject matter
insured;
(c) Where the policy under which the
insured claims is an unvalued policy he
must give credit, as against the full
insurable value, for any sum received by
him under any policy;
(d) Where the insured receives any sum in
excess of the valuation in the case of
valued policies, or of the insurable value in
the case of unvalued policies, he must
hold such sum in trust for the insurers,
according to their right of contribution
among themselves;
(e) Each insurer is bound, as between
himself and the other insurers, to
contribute ratably to the loss in proportion
to the amount for which he is liable under
his contract.
Formula:
Insurance Policy
--------------------------- x Amount of loss
Total of Policy taken
X =
500000
--------- x 1M = 200,000
2.5M
Y =
1M
-------- x 1M = 400,000
2.5M
Z =
1M
-------- x 1M = 400,000
2.5M
*The balance shall be returned.

*As far as the excess payment is concern,
the excess shall be held in trust by the
insured.
REINSURANCE:
*This is called a Liability Insurance
A. Definition
that: A contract of reinsurance is one by
which an insurer procures a third person to
insure him against loss or liability by
reason of such original insurance.
Example:
In fire insurance, A insured his property
against fire to X, X reinsured his obligation
to Y.
Q: Can A recover to the reinsurer?
A: General Rule: NO
Reason: No privity of contract
Exception: Stipulation stating that the
policy is taken for the benefit of the
insured of the first contract of insurance.
(Stipulation pour autrui)
Q: Can X recover from Y even if X has not
yet pay A?
A: YES. Immediately arises from the time
the liability of X has occur.
B. Nature
that: A reinsurance is presumed to be a
contract of indemnity against liability, and
not merely against damage.
that: The original insured has no interest
in a contract of reinsurance.
Q: Is reinsurance mandatory?
A: General Rule: NO
Exceptions:
1. Sec. 215 of the Insurance Code
which provides that: No insurance
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Corporation Code
company other than life, whether
foreign or domestic, shall retain any
risk on any one subject of insurance in
an amount exceeding twenty per
centum of its net worth. For purposes
of this section, the term "subject of
insurance" shall include all properties
or risks insured by the same insurer
that customarily are considered by
non-life company underwriters to be
subject to loss or damage from the
same occurrence of any hazard insured
against.
Reinsurance ceded as authorized
under the succeeding title shall be
deducted in determining the risk
retained. As to surety risk, deduction
shall also be made of the amount
assumed by any other company
authorized to transact surety business
and the value of any security
mortgage, pledged, or held subject to
the surety's control and for the surety's
protection.
2. Sec. 275 of the Insurance Code
which provides that: Every foreign
insurance
company
desiring
to
withdraw from the Philippines shall,
prior to such withdrawal, discharge its
liabilities to policyholders and creditors
in this country. In case of its policies
insuring residents of the Philippines, it
shall cause the primary liabilities under
such policies to be reinsured and
assumed
by
another
insurance
company
authorized
to
transact
business in the Philippines. In the case
of such policies as are subject to
cancellation
by
the
withdrawing
company, it may cancel such policies
pursuant to the terms thereof in lieu of
such reinsurance and assumption of
liabilities.
C. Distinguished from double insurance
Distinctions:
Reinsurance
Insurance
of
different interests
Insurer becomes an
insured in relation to
reinsurer
Original insured has
no
interest
in
reinsurance contract
Subject of insurance
Double Insurance
Involves
same
interest
Insurer remains in
such capacity
Insured in the 1st
contract is a party
in interest in the 2nd
contract
Subject
of
is
the
original
insurers risk
Consent of original
insured,
not
necessary
insurance
is
property
Insured has to give
his consent
D. Duty of reinsured to disclose facts

that:
Where
an
insurer
obtains
reinsurance, except under automatic
reinsurance
treaties,
he
must
communicate all the representations of
the original insured, and also all the
knowledge and information he possesses,
whether
previously
or
subsequently
acquired, which are material to the risk.
MARINE INSURANCE:
A. Definition
Marine Insurance includes policies that
covers risks connected with navigation, to
which a ship, cargo, freightage, profits or
other insurable interest in movable
property, may be exposed during a certain
voyage or a fixed period of time.
Basis: Sec. 99 of the Insurance Code.
B. Scope of marine insurance
that: Marine Insurance includes:
(1) Insurance against loss of or damage to:
(a) Vessels, craft, aircraft, vehicles, goods,
freights, cargoes, merchandise, effects,
disbursements, profits, moneys, securities,
choses in action, evidences of debts,
valuable
papers,
bottomry,
and
respondentia interests and all other kinds
of property and interests therein, in
respect to, appertaining to or in
connection with any and all risks or perils
of navigation, transit or transportation, or
while being assembled, packed, crated,
baled, compressed or similarly prepared
for shipment or while awaiting shipment,
or
during
any
delays,
storage,
transhipment, or reshipment incident
thereto, including war risks, marine
builder's risks, and all personal property
floater risks;
(b) Person or property in connection with
or appertaining to a marine, inland
marine,
transit
or
transportation
insurance, including liability for loss of or
damage arising out of or in connection
with the construction, repair, operation,
maintenance or use of the subject matter
of such insurance (but not including life
insurance or surety bonds nor insurance
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Corporation Code
against loss by reason of bodily injury to
any person arising out of ownership,
maintenance, or use of automobiles);
(c) Precious stones, jewels, jewelry,
precious metals, whether in course of
transportation or otherwise;
(d)
Bridges,
tunnels
and
other
instrumentalities of transportation and
communication (excluding buildings, their
furniture and furnishings, fixed contents
and supplies held in storage); piers,
wharves, docks and slips, and other aids
to navigation and transportation, including
dry docks and marine railways, dams and
appurtenant facilities for the control of
waterways.
(2) "Marine protection and indemnity
insurance," meaning insurance against, or
against legal liability of the insured for
loss, damage, or expense incident to
ownership,
operation,
chartering,
maintenance, use, repair, or construction
of any vessel, craft or instrumentality in
use of ocean or inland waterways,
including liability of the insured for
personal injury, illness or death or for loss
of or damage to the property of another
person.
*In Roque v IAC, the SC held that cargo
can be the subject of marine insurance,
and once it is entered into, the implied
warranty of seaworthiness immediately
attaches to whoever is insuring the cargo,
whether he be the shipowner or not.
Although he has no control over the
vessel, the shipper has control in the
choice of vessel.
C. Risks or losses covered in marine
insurance
1. Perils of the sea vs. perils of the
ship
Perils of the
Sea
Include
only
those casualties
due
to
the
unusual violence
or extraordinary
causes
connected
with
navigation. It has
been
said
to
include only such
losses as are of
extraordinary
nature or arise
from
some
Perils of the Ship

Is a loss which is in
the ordinary course
of events, results:
1. From
the
ordinary,
natural and
inevitable
action
of
the sea;
2. From
ordinary
wear
and
tear of the
ship; and
overwhelming
power
which
cannot
be
guarded against
by the ordinary
exertion
of
human skill or
prudence,
as
distinguished
from the ordinary
wear and tear of
the voyage and
from
injuries
suffered by the
vessel
in
consequence of
her not being
unseaworthy.
Extraordinary
perils
3. From
the
negligent
failure
of
the
ships
owner
to
provide the
vessel with
the proper
equipment
to
convey
the
cargo
under
ordinary
conditions.
Usual
perils
attendant
to
navigation
*Only perils of the sea are assumed by
the insurer.
2. all risks marine insurance policy
means that all risks are covered unless
expressly excepted. The burden rests
on the insurer to prove that the loss is
caused by a risk that is excluded.
D. Insurable
interest
in
marine
insurance
1. Ship owners insurable interest
provides that: The owner of a ship has
in all cases an insurable interest in it,
even when it has been chartered by
one who covenants to pay him its
value in case of loss: Provided, That in
this case the insurer shall be liable for
only that part of the loss which the
insured cannot recover from the
charterer.
*The
insurable
interest
of
the
shipowner is over the value of the
vessel and over expected freightage.
Measurement: Ownership
*It does not matter whether the ship
was mortgaged or chartered.
a. Rule where vessel is chartered
states that: The owner of a ship
has in all cases an insurable
interest in it, even when it has
been chartered by one who
covenants to pay him its value in
case of loss: Provided, That in this
case the insurer shall be liable for
only that part of the loss which the
insured cannot recover from the
charterer.
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Corporation Code
Q: What is a charter party?
A: A contract where the owner
lends his whole vessel to a
charterer for a particular voyage.
*Indemnity Principle applies
b. Rule
where
vessel
hypothecated by bottomry
which provides that: The insurable
interest of the owner of the ship
hypothecated by bottomry is only
the excess of its value over the
amount secured by bottomry.
*Principle of Indemnity applies.
Q:
What
is
bottomry?
A: it is a contract of loan which
said loan is used for the repair of
the vessel. The payment of which is
conditional.
*The owners insurable interest is
the amount in excess of the value
of the ship over the amount
secured by the bottomry
*Owner incurs loss due to the
damage of the vessel but at the
same time he receives gain due to
the extinguishment of his loan
obligation.
c. Insurable interest in freightage
states that: Freightage, in the
sense of a policy of marine
insurance, signifies all the benefits
derived by the owner, either from
the chartering of the ship or its
employment for the carriage of his
own goods or those of others.
provides that: The owner of a ship
has an insurable interest in
expected
freightage
which
according to the ordinary and
probable course of things he would
have
earned
but
for
the
intervention of a peril insured
against or other peril incident to
the voyage.
*Supposed
earnings
may
be
subject to marine insurance.
2. Charterers insurable
provides that: The charterer of a ship
has an insurable interest in it, to the
extent that he is liable to be damnified
by its loss.
E. Concealment
1. Meaning of concealment in marine
insurance
*Definition of concealment in marine

insurance is the same as what defined
in Sec. 26 of the Insurance Code.
*However, concealment under the
marine insurance is more strict than
the ordinary insurance
Reason: Unpredictable risk
*In marine insurance, opinions and
expectations of third persons are
considered,
whereas
in
ordinary
insurance as a general rule, opinions
of third persons are not necessary.
Exception: expert opinion.
2. Duty to communicate
which provides that: In marine
insurance each party is bound to
communicate, in addition to what is
required by section twenty-eight, all
the information which he possesses,
material to the risk, except such as is
mentioned in Section thirty, and to
state the exact and whole truth in
relation to all matters that he
represents, or upon inquiry discloses or
assumes to disclose.
3. Opinions or expectations of third
persons
which provides that: In marine
insurance, information of the belief or
expectation of a third person, in
reference to a material fact, is
material.
4. When
concealment
does
not
vitiate the entire contract
states that: A concealment in a
marine insurance, in respect to any of
the following matters, does not vitiate
the entire contract, but merely
exonerates the insurer from a loss
resulting from the risk concealed:
(a) The national character of the
insured;
(b) The liability of the thing insured to
capture and detention;
(c) The liability to seizure from breach
of foreign laws of trade;
(d) The want of necessary documents;
(e) The use of false and simulated
papers.
F. Representations
1. Effect of false representation by
the insured
states that: If a representation by a
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Corporation Code
person insured by a contract of marine
insurance, is intentionally false in any
material respect, or in respect of any
fact on which the character and nature
of the risk depends, the insurer may
rescind the entire contract.
2. Effect of false representation as to
expectation
provides that: The eventual falsity of
a representation as to expectation
does not, in the absence of fraud,
avoid a contract of marine insurance.
G. Implied
warranties
in
marine
insurance
1. Seaworthiness
provides that: In every marine
insurance upon a ship or freight, or
freightage, or upon any thing which is
the subject of marine insurance, a
warranty is implied that the ship is
seaworthy.
*Charterer is also subject to warranty
on seaworthiness because he has
control in the selection of the ship to
be leased.
*Bottomry lender is also subject to
warranty on seaworthiness because he
has also the control in the selection of
the vessel.
a. What
constitutes
seaworthiness
states that: A ship is seaworthy
when reasonably fit to perform the
service and to encounter the
ordinary perils of the voyage
contemplated by the parties to the
policy.
Q:
What
makes
a
vessel
seaworthy?
A: Sec. 114. Fitness of the vessel is
the general test.
*Warranty on the condition of the
ship
Example:
Shipowner insured his vessel with X
insurer.
On the part of the insurer, the
inured warrants that his vessel is
ship worthy. The burden falls on the
shipowner/insured
of
proving
otherwise.
*Seaworthiness depends on the
transaction
entered
into
or
undertaken by the ship.
states that:
A warranty of
seaworthiness extends not only to

the condition of the structure of the
ship itself, but requires that it be
properly laden, and provided with a
competent master, a sufficient
number of competent officers and
seamen,
and
the
requisite
appurtenances and equipment,
such as ballasts, cables and
anchors, cordage and sails, food,
water, fuel and lights, and other
necessary or proper stores and
implements for the voyage.
Requisites:
1. Condition of the structure of the
ship
2. Properly laden and provided
with a competent master
3. Sufficient number of competent
officers and seamen
4. Requisite appurtenances and
equipment
*In Delsan Transport case, the
SC held that the issuance of
certificate of seaworthiness is not
enough to prove seaworthiness of
the ship.
Example:
Cargo owner insured his cargo
Q: Does that implied warranty on
seaworthiness apply to cargo
owner?
A: YES. The cargo owner has the
control in the selection of the
vessel where his cargoes to be
shipped.
provides that: A ship which is
seaworthy for the purpose of an
insurance upon the ship may,
nevertheless, by reason of being
unfitted to receive the cargo, be
unseaworthy for the purpose of the
insurance upon the cargo.
b. When
complied
with;
exceptions
provides that: An implied warranty
of seaworthiness is complied with if
the ship be seaworthy at the time
of the of commencement of the
risk, except in the following cases:
(a) When the insurance is made for
a specified length of time, the
implied
warranty
is
not
complied with unless the ship
be
seaworthy
at
the
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Corporation Code
commencement
of
every
voyage it undertakes during
that time; (Time Policy)
Example:
The transaction is covered for
one year from January 1, 2007
to December 31, 2007.
The ship will undertake 5
different voyages.
The ship must be seaworthy at
the commencement of each
and every voyage.
(b) When the insurance is upon the
cargo which, by the terms of
the policy, description of the
voyage, or established custom
of
the
trade,
is
to
be
transhipped at an intermediate
port, the implied warranty is not
complied with unless each
vessel upon which the cargo is
shipped, or transhipped, be
seaworthy
at
the
commencement
of
each
particular
voyage.
(Cargo
Policy)
Controlling: There must be
transhipment
*The ship must be seaworthy in
each particular voyage.
provides that: Where different
portions
of
the
voyage
contemplated by a policy differ in
respect to the things requisite to
make the ship seaworthy therefor,
a warranty of seaworthiness is
complied
with
if,
at
the
commencement of each portion,
the
ship
is
seaworthy
with
reference to that portion. (Voyage
Policy)
*There is a single ship that
completes the voyage however,
the ship will undergo different
degree of perils.
*The ship must be seaworthy upon
commencement of each level of
peril.
General Rule: The ship must be
seaworthy at the time of the
commencement of the risk.
Exceptions:
1. Time policy
2. Cargo policy
3. Voyage policy
*In time policy, seaworthiness
commenced in every voyage.
*In voyage policy, no transhipment.

The voyage has different stages to
go through. Every stage of voyage
the ship must be seaworthy.
c. Rule
where
ship
becomes
unseaworthy in the course of
the voyage
provides that: When the ship
becomes unseaworthy during the
voyage to which an insurance
relates, an unreasonable delay in
repairing the defect exonerates the
insurer on ship or shipowner's
interest from liability from any loss
arising therefrom.
2. Warranty
that
necessary
documents are carried
states that: Where the nationality or
neutrality of a ship or cargo is
expressly warranted, it is implied that
the ship will carry the requisite
documents to show such nationality or
neutrality and that it will not carry any
documents which cast reasonable
suspicion thereon.
3. Warranty
against
improper
deviation
a. Meaning of deviation
states that: Deviation is a
departure from the course of the
voyage insured, mentioned in the
last
two
sections,
or
an
unreasonable delay in pursuing the
voyage or the commencement of
an entirely different voyage.
*Deviation is either proper or
improper.
*There is breach of warranty if the
deviation is improper.
b. When proper
provides that: A deviation is
proper:
(a) When caused by circumstances
over which neither the master nor
the owner of the ship has any
control;
(b) When necessary to comply with
a warranty, or to avoid a peril,
whether or not the peril is insured
against;
*Whether or not the peril is
covered by the policy is immaterial.
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Corporation Code
(c) When made in good faith, and
upon reasonable grounds of belief
in its necessity to avoid a peril; or
(d) When made in good faith, for
the purpose of saving human life or
relieving
another
vessel
in
distress.
*Warranty is against improper
deviation.
*Whether or not improper deviation
contributed
to
the
loss
is
immaterial because there was
already a breach of implied
warranty.
states that: An insurer is not liable
for any loss happening to the thing
insured subsequent to an improper
deviation.
H. Loss
1. Kinds of losses
a. Actual
provides that: An actual total loss
is cause by:
(a) A total destruction of the thing
insured;
(b) The irretrievable loss of the
thing by sinking, or by being
broken up;
(c) Any damage to the thing which
renders it valueless to the owner
for the purpose for which he held
it; or
(d)
Any
other
event
which
effectively deprives the owner of
the possession, at the port of
destination, of the thing insured.
states that: An actual loss may be
presumed from the continued
absence of a ship without being
heard of. The length of time which
is
sufficient
to
raise
this
presumption
depends
on the
circumstances of the case.
b. Constructive
provides that: A constructive total
loss is one which gives to a person
insured a right to abandon, under
Section one hundred thirty-nine.
2. Right to payment upon an actual
total loss
states that: Upon an actual total loss,
a person insured is entitled to payment
without notice of abandonment.
3. Scope of insurance against actual

total loss
states that: An insurance confined in
terms to an actual loss does not cover
a constructive total loss, but covers
any loss, which necessarily results in
depriving
the
insured
of
the
possession, at the port of destination,
of the entire thing insured.
4. When
constructive
total
loss/partial loss exists
provides that: A person insured by a
contract of marine insurance may
abandon the thing insured, or any
particular portion thereof separately
valued by the policy, or otherwise
separately insured, and recover for a
total loss thereof, when the cause of
the loss is a peril insured against:
(a) If more than three-fourths thereof
in value is actually lost, or would have
to be expended to recover it from the
peril;
(b) If it is injured to such an extent as
to reduce its value more than threefourths;
(c) If the thing insured is a ship, and
the contemplated voyage cannot be
lawfully performed without incurring
either an expense to the insured of
more than three-fourths the value of
the thing abandoned or a risk which a
prudent man would not take under the
circumstances; or
(d) If the thing insured, being cargo or
freightage, and the voyage cannot be
performed, nor another ship procured
by the master, within a reasonable
time and with reasonable diligence, to
forward the cargo, without incurring
the like expense or risk mentioned in
the preceding sub-paragraph. But
freightage cannot in any case be
abandoned unless the ship is also
abandoned.
Test: The loss is more than but less
than 1.
*If there is partial loss, only partial can
be claimed.
*The extent of damage in constructive
loss is so severe.
*This is not automatic.
*There is an option either to abandon it
or to recover only the partial loss.
5. Concept of abandonment and its
requisites
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Corporation Code
Definition:
states that: Abandonment, in marine
insurance, is the act of the insured by
which, after a constructive total loss,
he declares the relinquishment to the
insurer of his interest in the thing
insured.
*It is necessary to abandon the
surviving part of the thing.
Formula:
Constructive total loss + Abandonment
= Total loss
If there is only constructive total loss
there is only partial loss.
Requisites:
1. There
must
be
an
actual
relinquishment by the person
insured of his interest in the thing
insured.
2. There must be a constructive total
loss
3. The abandonment be neither
partial nor conditional
4. It must be made within a
reasonable time after receipt of
reliable information of the loss
5. It must be factual and reasonable
6. It must be made by giving notice
thereof to the insurer which may be
done orally or in writing
7. The notice of abandonment must
be explicit and must specify the
particular
cause
of
the
abandonment
*The residual part is abandoned.
Reason: Principle of Indemnity
*If the requisites are satisfied the
insurance company cannot refuse to
accept the abandonment.
6. Average
Average is any extraordinary or
accidental expense incurred during the
voyage for the preservation of the
vessel, cargo, or both, and all damages
to the vessel and cargo from the time
it
is
loaded
and
the
voyage
commenced until it ends and the cargo
unloaded.
*Expenses for maritime transaction.
a. Kinds of average:
i.
Particular
Sec. 136 of the Insurance
Code provides that: Where
it has been agreed that an
insurance upon a particular
thing, or class of things,
shall be free from particular
average, a marine insurer is
not liable for any particular

average loss not depriving
the
insured
of
the
possession, at the port of
destination, of the whole of
such thing, or class of
things, even though it
becomes entirely worthless;
but such insurer is liable for
his proportion of all general
average loss assessed upon
the thing insured.
- Includes all damages
and expenses caused to
the vessel or to her
cargo which have not
inured to the common
benefit and profit of all
persons interested in the
vessel and her cargo.
It refers to those losses
which occur under such
circumstances as do not
entitle the unfortunate
owners
to
receive
contribution from other
owners concerned in the
venture as where a
vessel accidentally runs
aground and goes to
pieces after the cargo is
saved.
Recourse: Go after the insurer
*Stipulation exempting the insurer
for a particular average loss is
possible and valid.
ii.
General
- Includes damages and
expenses
which
are
deliberately caused by
the master of the vessel
or upon his authority, in
order to save the vessel,
her cargo, or both at the
same time from a real or
known risk.
- It must be borne equally
by all of the interests
concerned
in
the
venture.
b. Requisites of general average
1. There must be a common
danger to the vessel or cargo
2. Part of the vessel or cargo was
sacrificed deliberately
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Corporation Code
3. The sacrifice must be for the
common safety of for the
benefit of all
4. It must be made by the master
or upon his authority
5. It must be successful, i.e.,
resulted in the saving of the
vessel or cargo
6. It must be necessary
c. Insurers liability for general
average
The insurer of the vessel or cargo
that are saved is liable for general
average contribution and not for
particular average. Only the insurer
of the damaged cargo or vessel is
liable for particular average if
covered by the policy.
Q: If there is a stipulation
exempting the insurer for a
particular average loss, does it
extend to general average loss?
A: NO.
Basis: Article 859 of the Code of
Commerce; Article 812 of the Code
of Commerce
Reason: Equity
Q: Are there a mandatory co-insurance in marine
insurance?
A: YES.
Basis: Sec. 157 of the Insurance Code
provides that: A marine insurer is liable upon a
partial loss, only for such proportion of the
amount insured by him as the loss bears to the
value of the whole interest of the insured in the
property insured.
*There is a co-insurance when the property is
insured for less than its value, the insured is
considered a co-insurer for the difference
between the amount of insurance and the value
of the property.
Requisites:
1. The loss is partial
2. The amount of insurance is less than the
value of the property insured.
Formula:
Loss
------- x Insurance = Insurers Liability
Value
Example:
As insurable interest = P500,000
Insured Amount = P300,000
Loss = P300,000
Q: Would the whole P300,000 be recovered from
the insurer?
A: NO. Only 180,000 will be recovered and the
balance of 120,000 will be suffered by the insured
as a co-insurer.
Computation:
300,000
----------- x 300,000 = 180,000
500,000
If the loss is 500,000, the insured can recover the
whole 300,000 because there is a total loss and
not partial loss.
*In fire insurance, there has to be an express
stipulation to that effect.
FIRE INSURANCE:
A. Definition and scope of fire insurance
provides that: As used in this Code, the
term "fire insurance" shall include
insurance against loss by fire, lightning,
windstorm, tornado or earthquake and
other allied risks, when such risks are
covered by extension to fire insurance
policies or under separate policies.
B. Risks or losses covered
Q: What are allied risks?
A: lightning, windstorm, tornado or
earthquake, tsunami.
Q: What are direct losses?
A: Direct losses are losses that pertain to
the physical destruction of the thing
insured.
Q: What are indirect losses?
A: Indirect losses pertain to consequential
losses.
Q: Are consequential losses compensable?
A: General Rule: NO in standard fire
policy
Except: If there is an agreement
*The liability of the insurer is to pay for
direct losses only
Friendly Fire fire that burns in a place
where it is supposed to burn.
Hostile Fire fire that escapes and burns
in a place where it is not supposed to be.
C. Effect of alteration in the thing
provides that: 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.
that: An alteration in the use or condition
of a thing insured from that to which it is
limited by the policy, which does not
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Corporation Code
increase the risk, does not affect a
contract of fire insurance.
Q: If the policy is silent as to the use or
condition of the thing insured, are there
implied warranty in fire insurance?
A: General Rule: YES. The insured has
the insurable interest in the thing insured.
Exception: If the policy expressly
provides for the use of condition of the
thing insured.
D. Measure of indemnity
provides that: If there is no valuation in
the policy, the measure of indemnity in an
insurance against fire is the expense it
would be to the insured at the time of the
commencement of the fire to replace the
thing lost or injured in the condition in
which at the time of the injury; but if there
is a valuation in a policy of fire insurance,
the effect shall be the same as in a policy
of marine insurance.
1. Open
Policy:
only
the
expense
necessary to replace the thing lost or
injured in the condition it was at the
time of the injury.
2. Valued Policy: the parties are bound by
the valuation, in the absence of fraud
or mistake.
E. Co-insurance clause
General Rule: Applies primarily to marine
insurance.
Exception: Co-insurance applies to fire
insurance if expressly agreed upon.
CASUALTY INSURANCE:
A. Concept
that: Casualty insurance is insurance
covering loss or liability arising from
accident or mishap, excluding certain
types of loss which by law or custom are
considered as falling exclusively within the
scope of other types of insurance such as
fire or marine. It includes, but is not
limited to, employer's liability insurance,
motor vehicle liability insurance, plate
glass insurance, burglary and theft
insurance, personal accident and health
insurance as written by non-life insurance
companies, and other substantially similar
kinds of insurance.
Q: What is the subject matter of the
casualty insurance?
A: Life, property, liability and health
brought by accident.
B. Third Party Liability Insurance

*Casualty insurance ay provide for third
party liability in the nature of stipulation
pour autrui for personal injury and even
damage to property, in which case, the
third party may directly sue the insurer
upon the occurrence of the loss. However,
the insurer is not solidarily liable with the
insured or the tortfeasor for the latters
obligation.
*Insurance against specified perils which
may give rise to liability on the part of the
insured for claims for injuries to or
damage to property of others.
*If there is no stipulation in favor of third
person but the insurance is an insurance
against liability to third persons, any third
person who might be injured may not sue
the insurer.
- Liable for actual loss, the third party has
no direct recourse with the insurer but
only to the insured. The insured has
recourse to the insurer.
C. Insurable interest
*Insurable interest is based on the interest
of the insured in the safety of persons and
their property, who may maintain an
action against him in case of their injury or
destruction, respectively.
D. Meaning
of
accident
and
accidental in casualty insurance
*The terms accident and accidental as
used in insurance contracts, have not
acquired any technical meaning. They are
construed by the courts in the ordinary
and common acceptation. Thus, the terms
have been taken to mean that which
happens by chance or fortuitously, without
intention or design, which is unexpected,
unusual and unforeseen. The terms do
not, without qualification, exclude events
resulting in damage or loss due to fault,
recklessness or negligence of third parties.
*It is something that the insured did not
foresee or though foreseen cannot be
avoided.
*Accident or not, it must be taken from the
viewpoint of the victim.
E. Basis and extent of insurers liability
*The beneficiary is not designated, the
proceeds will be given to the victims.
*The third party has direct recourse
against the insurer. The insurer is purely
liable.
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Corporation Code
SURETYSHIP:
A. Definition
that: A contract of suretyship is an
agreement whereby a party called the
surety guarantees the performance by
another party called the principal or
obligor of an obligation or undertaking in
favor of a third party called the obligee. It
includes
official
recognizances,
stipulations, bonds or undertakings issued
by any company by virtue of and under
the provisions of Act No. 536, as amended
by Act No. 2206.
B. Nature of Liability of surety
provides that: The liability of the surety
or sureties shall be joint and several with
the obligor and shall be limited to the
amount of the bond. It is determined
strictly by the terms of the contract of
suretyship in relation to the principal
contract between the obligor and the
obligee.
C. Distinctions between suretyship and
property insurance
Suretyship
Accessory contract
There
are
three
parties:
surety,
obligor and oblige
Credit
accommodation
Surety can recover
from principal
Bond
can
be
cancelled only with
consent of obligee,
Commissioner,
or
court
Requires acceptance
of obligee to be
valid
Risk-shifting device,
premium paid being
in the nature of a
service fee
Property
Insurance
Principal Contract
There
are
two
parties: insurer and
insured
Contract
of
indemnity
Insurer has no such
right; only right of
subrogation
May be cancelled
unilaterally either
by
insured
or
insurer on grounds
provided by law
No
need
of
acceptance by any
third party
Risk-distributing
device,
premium
paid as a ratable
contribution to a
common fund
LIFE INSURANCE:
A. Definition
Sec. 179 of
provides that:
the Insurance Code

. Life insurance is
insurance on human lives and insurance

appertaining
thereto
or
connected
therewith.
that: An insurance upon life may be
made payable on the death of the person,
or on his surviving a specified period, or
otherwise contingently on the continuance
or cessation of life.
Every contract or pledge for the payment
of endowments or annuities shall be
considered a life insurance contract for
purpose of this Code.
In the absence of a judicial guardian, the
father, or in the latter's absence or
incapacity, the mother, or any minor, who
is an insured or a beneficiary under a
contract of life, health or accident
insurance, may exercise, in behalf of said
minor, any right under the policy, without
necessity of court authority or the giving
of a bond, where the interest of the minor
in the particular act involved does not
exceed twenty thousand pesos. Such right
may include, but shall not be limited to,
obtaining a policy loan, surrendering the
policy, receiving the proceeds of the
policy, and giving the minor's consent to
any transaction on the policy.
B. Kinds of Life Insurance
1. Ordinary Life, General Life or Old
Line Policy insured pays a fixed
premium every year until he dies.
Surrender value after 3 years.
2. Group Life essentially a single
insurance contract that provides
courage for money individuals.
3. Limited Payment Policy insured
pays premium for a limited period. If
he dies within the period, his
beneficiary is paid; if he outlives the
period, he does not get anything.
4. Endowment Policy pays premium
for specified period. If he outlives the
period, the face value of the policy is
paid to him; if not, his beneficiaries
receive the benefit.
5. Term Insurance insurer pays once
only, and he is insured for a specified
period. If he dies within the period, his
beneficiaries benefits. If he outlives the
period, no person benefits from the
insurance.
6. Industrial Life life insurance
entitling the insured to pay premiums
weekly, or where premiums are
payable monthly or oftener.
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Corporation Code
C. Liability of insurer in case of suicide

Sec. 180-A of the Insurance Code
states that: The insurer in a life insurance
contract shall be liable in case of suicides
only when it is committed after the policy
has been in force for a period of two years
from the date of its issue or of its last
reinstatement, unless the policy provides
a shorter period: Provided, however, That
suicide committed in the state of insanity
shall be compensable regardless of the
date of commission.
*Recovery of the proceeds depends on the
commission of the suicide.
*In case of suicide, the insured may
recover only after two years from the date
the
policy
was
issued
or
last
reinstatement.
*In case of suicide committed in the state
of insanity, it is compensable regardless of
the date of the commission.
D. Right to assign life insurance policy
that: A policy of insurance upon life or
health may pass by transfer, will or
succession to any person, whether he has
an insurable interest or not, and such
person may recover upon it whatever the
insured might have recovered.
that: Notice to an insurer of a transfer or
bequest thereof is not necessary to
preserve the validity of a policy of
insurance upon life or health, unless
thereby expressly required.
E.
Measure of indemnity
that: Unless the interest of a person
insured is susceptible of exact pecuniary
measurement, the measure of indemnity
under a policy of insurance upon life or
health is the sum fixed in the policy.
General Rule: Life policy is always valued
Exception: If the creditor insured the life
of the debtor.
COMPULSORY
INSURANCE:
MOTOR
VEHICLE
LIABILITY
A. Reason for the requirement

Purpose: To give immediate financial
assistance to victims of motor vehicle
accidents
and/or
their
dependents,
especially if they are poor regardless of
the financial capability of motor vehicle
owners or operators responsible for the

accident sustained.
Q: What is the mandatory reason for this
type of insurance?
A: To allow the registration or renewal of
registration of any motor vehicle.
B. Scope of coverage required
that: It shall be unlawful for any land
transportation operator or owner of a
motor vehicle to operate the same in the
public highways unless there is in force in
relation thereto a policy of insurance or
guaranty in cash or surety bond issued in
chapter to indemnify the death, bodily
injury, and/or damage to property of a
third-party or passenger, as the case may
be, arising from the use thereof.
that:
The
Land
Transportation
Commission
shall
not
allow
the
registration or renewal of registration of
any motor vehicle without first requiring
from the land transportation operator or
motor vehicle owner concerned the
presentation and filing of a substantiating
documentation in a form approved by the
Commissioner evidencing that the policy
of insurance or guaranty in cash or surety
bond required by this chapter is in effect.
C. Persons subject to the requirement
provides that: Every land transportation
operator and every owner of a motor
vehicle shall, before applying for the
registration or renewal of registration of
any motor vehicle, at his option, either
secure an insurance policy or surety bond
issued by any insurance company
authorized by the Commissioner or make
a cash deposit in such amount as herein
required as limit of liability for purposes
specified in section three hundred
seventy-four.
(1) In the case of a land transportation
operator, the insurance guaranty in cash
or surety bond shall cover liability for
death or bodily injuries of third-parties
and/or passengers arising out of the use of
such vehicle in the amount not less than
twelve thousand pesos per passenger or
third party and an amount, for each of
such categories, in any one accident of not
less than that set forth in the following
scale:
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Corporation Code
(a) Motor vehicles with an authorized
capacity
of
twenty-six
or
more
passengers: Fifty thousand pesos;
(b) Motor vehicles with an authorized
capacity of from twelve to twenty-five
passengers: Forty thousand pesos;
(c) Motor vehicles with an authorized
capacity of from six to eleven passengers:
Thirty thousand pesos;
(d) Motor vehicles with an authorized
capacity of five or less passengers: Five
thousand
pesos
multiplied
by
the
authorized capacity.
Provided, however, That such cash deposit
made to, or surety bond posted with, the
Commissioner shall be resorted to by him
in cases of accidents the indemnities for
which to third-parties and/or passengers
are not settled accordingly by the land
transportation operator and, in that event,
the said cash deposit shall be replenished
or such surety bond shall be restored with
sixty days after impairment or expiry, as
the case may be, by such land
transportation operator, otherwise, he
shall secure the insurance policy required
by this chapter. The aforesaid cash deposit
may be invested by the Commissioner in
readily marketable government bonds
and/or securities.
(2) In the case of an owner of a motor
vehicle, the insurance or guaranty in cash
or surety bond shall cover liability for
death or injury to third parties in an
amount not less than that set forth in the
following scale in any one accident:
I. Private Cars
(a) Bantam : Twenty thousand pesos;
(b) Light : Twenty thousand pesos;
(c) Heavy : Thirty thousand pesos;
II. Other Private Vehicles
(a) Tricycles, motorcyles, and scooters :
Twelve thousand pesos;
(b) Vehicles with an unladen weight of
2,600 kilos or less : Twenty thousand
pesos;
(c) Vehicles with an unladen weight of
between 2,601 kilos and 3,930 kilos :
Thirty thousand pesos;
(d) Vehicles with an unladen weight over
3,930 kilos : Fifty thousand pesos.
The Commissioner may, if warranted, set
forth schedule of indemnities for the
payment of claims for death or bodily
injuries with the coverages set forth
herein.
D. No-Fault indemnity claim

provides that: Any claim for death or
injury to any passenger or third party
pursuant to the provisions of this chapter
shall be paid without the necessity of
proving fault or negligence of any kind;
Provided, That for purposes of this section:
(i)
The total indemnity in respect of
any person shall not exceed fifteen
thousand pesos;
(ii)
The following proofs of loss, when
submitted under oath, shall be
sufficient evidence to substantiate
the claim: (a) Police report of
accident; and
(b) Death certificate and evidence
sufficient to establish the proper
payee; or (c) Medical report and
evidence of medical or hospital
disbursement in respect of which
refund is claimed;
(iii)
Claim may be made against one
motor vehicle only. In the case of
an occupant of a vehicle, claim
shall lie against the insurer of the
vehicle in which the occupant is
riding, mounting or dismounting
from. In any other case, claim shall
lie against the insurer of the
directly offending vehicle. 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.
Q: How does the law protects the victim?
A: By the provision under the NO FAULT
INDEMNITY CLAUSE.
*No fault clause applies only to bodily
physical injuries or death not to property
damage.
Q: From whom should the injured recover?
A: (a) In the case of an occupant of a
vehicle, claim shall lie against the insurer
of the vehicle in which the occupant is
riding, mounting or dismounting from; (b)
If not an occupant, claim shall lie against
the insurer of the directly offending
vehicle; (c) In all cases, the right of the
party paying the claim to recover against
the owner of the vehicle responsible for
the accident shall be maintained.
Examples:
a. A passenger rode Y taxi cab. The taxi
cab is insured by X company under the
compulsory motor vehicle liability
insurance. The taxi collided against a
MERALCO post.
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Corporation Code
The passenger can claim against X
company without proving fault or
negligence. Only documents that
prove the happening of the incident.
b. Passenger 1 received P15,000 under
the no fault clause. His actual
expenses amount to P50,000.
Q: Can he still recover the balance?
From whom?
A: YES. Against the offending vehicle
but this time he is required to prove
fault or negligence.
E. Notice of claim
that: Any person having any claim upon
the policy issued pursuant to this Chapter
shall, without any unnecessary delay,
present to the insurance company
concerned a written notice of claim setting
forth the nature, extent and duration of
the injuries sustained as certified by a duly
licensed physician. Notice of claim must
be filed within six months from date of
accident, otherwise, the claim shall be
deemed waived. Action or suit for recovery
of damage due to loss or injury must be
brought, in proper cases, with the
Commissioner or the Courts within one
year from denial of the claim, otherwise,
the claimant's right of action shall
prescribe.
CLAIMS SETTLEMENT:
A. Unfair claim settlement practices
that: (1) No insurance company doing
business in the Philippines shall refuse,
without just cause, to pay or settle claims
arising under coverages provided by its
policies, nor shall any such company
engage in unfair claim settlement
practices. Any of the following acts by an
insurance company, if committed without
just cause and performed with such
frequency as to indicate a general
business practice, shall constitute unfair
claim settlement practices:
(a)
knowingly
misrepresenting
to
claimants pertinent facts or policy
provisions relating to coverage at issue;
(b) failing to acknowledge with reasonable
promptness pertinent communications
with respect to claims arising under its
policies;
(c) failing to adopt and implement
reasonable standards for the prompt
investigation of claims arising under its

policies;
(d) not attempting in good faith to
effectuate prompt, fair and equitable
settlement of claims submitted in which
liability has become reasonably clear; or
(e) compelling policyholders to institute
suits to recover amounts due under its
policies by offering without justifiable
reason substantially less than the amounts
ultimately recovered in suits brought by
them.
(2) Evidence as to numbers and types of
valid and justifiable complaints to the
Commissioner
against
an
insurance
company,
and
the
Commissioner's
complaint experience with other insurance
companies
writing
similar
lines
of
insurance shall be admissible in evidence
in an administrative or judicial proceeding
brought under this section.
(3) If it is found, after notice and an
opportunity to be heard, that an insurance
company has violated this section, each
instance
of
non-compliance
with
paragraph (1) may be treated as a
separate violation of this section and shall
be considered sufficient cause for the
suspension or revocation of the company's
certificate of authority.
General Rule: Upon maturity of the
policy
Exception: Annuities payment
B. Claims for life insurance policies
provides that: The proceeds of a life
insurance policy shall be paid immediately
upon maturity of the policy, unless such
proceeds
are
made
payable
in
installments or as an annuity, in which
case the installments, or annuities shall be
paid as they become due: Provided,
however, That in the case of a policy
maturing by the death of the insured, the
proceeds thereof shall be paid within sixty
days after presentation of the claim and
filing of the proof of the death of the
insured. Refusal or failure to pay the claim
within the time prescribed herein will
entitle the beneficiary to collect interest
on the proceeds of the policy for the
duration of the delay at the rate of twice
the ceiling prescribed by the Monetary
Board, unless such failure or refusal to pay
is based on the ground that the claim is
fraudulent.
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Corporation Code
The proceeds of the policy maturing by
the death of the insured payable to the
beneficiary shall include the discounted
value of all premiums paid in advance of
their due dates, but are not due and
payable at maturity.
C. Claims for non-life insurance policies
that: The amount of any loss or damage
for which an insurer may be liable, under
any policy other than life insurance policy,
shall be paid within thirty days after proof
loss is received by the insurer and
ascertainment of the loss or damage is
made either by agreement between the
insured and the insurer or by arbitration;
but if such ascertainment is not had or
made within sixty days after such receipt
by the insurer of the proof of loss, then the
loss or damage shall be paid within ninety
days after such receipt. Refusal or failure
to pay the loss or damage within the time
prescribed herein will entitle the assured
to collect interest on the proceeds of the
policy for the duration of the delay at the
rate of twice the ceiling prescribed by the
Monetary Board, unless such failure or
refusal to pay is based on the ground that
the claim is fraudulent.
D. Delay in payment of claims
provides that: In case of any litigation for
the enforcement of any policy or contract
of insurance, it shall be the duty of the
Commissioner or the Court, as the case
may be, to make a finding as to whether
the payment of the claim of the insured
has
been
unreasonably
denied
or
withheld; and in the affirmative case, the
insurance company shall be adjudged to
pay damages which shall consist of
attorney's fees and other expenses
incurred by the insured person by reason
of such unreasonable denial or withholding
of payment plus interest of twice the
ceiling prescribed by the Monetary Board
of the amount of the claim due the
insured, from the date following the time
prescribed in section two hundred fortytwo or in section two hundred forty-three,
as the case may be, until the claim is fully
satisfied; Provided, That the failure to pay
any such claim within the time prescribed
in said sections shall be considered prima
facie evidence of unreasonable delay in

payment.
TRANSPORTATION LAW
PRELIMINARY CONSIDERATIONS:
A. Governing Laws
1. New Civil Code Primary law
2. Warsaw Convention for international
transportation by air
3. Code
of
Commerce
governs
suppletorily; it governs maritime
transaction
4. Carriage of Goods by Sea Act for
transportation
by
sea;
governs
suppletorily
5. Salvage Law
6. Public Service Act
7. Article XII Sec 11 on operation of public
convenience of the 1987 Philippine
Constitution
B. Concept of Public Utility & public
service
Sec. 13 (b) of the Public Service Act
provides that: The term 'public service'
includes every person that now or
hereafter may own, operate, manage, or
control in the Philippines, for hire or
compensation, with general or limited
clientele, whether permanent, occasional
or accidental, and done for general
business purposes, any common carrier,
railroad, street railway, traction railway,
sub-way motor vehicle, either for freight or
passenger, or both with or without fixed
route
and
whatever
may
be
its
classification, freight or carrier service of
any class, express service, steamboat, or
steamship line, pontines, ferries, and
water craft, engaged in the transportation
of passengers or freight or both, shipyard,
marine railway, marine repair shop, wharf
or dock, ice plant, ice-refrigeration plant,
canal, irrigation system, gas electric light,
heat and power, water supply and power,
petroleum, sewerage system, wire or
119

Corporation Code
wireless communications system, wire or
wireless broadcasting stations and other
similar public services: Provided, however,
That a person engaged in agriculture, not
otherwise a public service, who owns a
motor vehicle and uses it personally
and/or enters into a special contract
whereby said motor vehicle is offered for
hire or compensation to a third party or
third engaged in agriculture, not itself or
themselves a public service, for operation
by the latter for a limited time and for a
specific purpose directly connected with
the cultivation of his or their farm, the
transportation, processing, and marketing
of agricultural products of such third party
or third parties shall not be considered as
operating a public service for the purposes
of this Act.
Public utilities are privately owned and
operated business whose services are
essential to the general public.
Case: National Development Company
v CA
C. Constitutional
limitations
on
operation of public utilities
Sec. 11 of Article XII of the 1987
Constitution states that: No franchise,
certificate, or any other form of
authorization for the operation of a public
utility shall be granted except to citizens
of the Philippines or to corporations or
associations organized under the laws of
the Philippines, at least sixty per centum
of whose capital is owned by such citizens;
nor shall such franchise, certificate, or
authorization be exclusive in character or
for a longer period than fifty years. Neither
shall any such franchise or right be
granted except under the condition that it
shall be subject to amendment, alteration,
or repeal by the Congress when the
common good so requires. The State shall
encourage equity participation in public
utilities by the general public. The
participation of foreign investors in the
governing body of any public utility
enterprise shall be limited to their
proportionate share in its capital, and all
the executive and managing officers of
such corporation or association must be
citizens of the Philippines.
*The corporation must be a domestic
corporation and that 60% of the capital
must be owned by Filipino citizens.
Sec. 18 of Article XII of the 1987

Constitution provides that: The State
may, in the interest of national welfare or
defense, establish and operate vital
industries and, upon payment of just
compensation,
transfer
to
public
ownership utilities and other private
enterprises to be operated by the
Government.
Q: What are the bases/reasons for
regulation of public utilities?
A: Basis: Police Power
Justification: Common good
D. Regulatory agencies
1. Land
Transportation
Franchising
Regulatory Board (LTFRB) land
transportation
2. Land Transportation Office issue
license to drivers
3. Maritime Industry Authority (MARINA)
water transportation
4. National
Telecommunications
Commission communication utilities
and services, radio communications
systems, wire or wireless telephone
and telegraph systems, radio and
television broadcasting systems and
other similar public utilities
5. Energy Regulatory Board electric or
power companies
6. National Water Resources Council
water resources
7. Civil
Aeronautics
Board
air
transportation
Q: What conditions must concur in the
grant of certificate of public convenience
and necessity?
A: 1. The grantee must be a citizen of the
Philippines or a corporation or entity 60%
of which is owned by such citizens; 2. The
grantee must have sufficient financial
capability to undertake the service; and 3.
The service will promote public interest
and convenience in a proper and suitable
manner.
*In Tatad v Garcia, the SC held that the
controlling factor is the citizenship of the
person operating a common carrier.
Guiding Principles:
1. Prior or Old Operator Rule the first
licensee will be protected in his
investment and will not be subjected
to ruinous competition.
*No certificate of public convenience
and necessity will be issued to other
operator as long as the prior operator
still in operation and can satisfy the
120

Corporation Code
public and that it still has the capacity
to do so.
2. Protection Investment Rule protects
from unfair competition
3. Prior Applicant Rule protects the first
applicant. Principle: all things being
equal
*Public interest is the first and paramount
consideration.
E. Concept of franchise and certificate
of public convenience
Franchise is a grant or privilege from the
sovereign power.
Certificate of Public Convenience is a
form
of
regulation
through
an
administrative agency.
Q: Is a legislative franchise necessary
before a public utility can be allowed to
secure a certificate of public convenience?
Exception: If a pertinent law requires
such legislative franchise.
Factors:
1. Public interest
2. Public convenience
3. Public necessity
GENERAL CONCEPTS:
A. Contract of transportation in general
Transportation is a contract whereby a
person, natural or juridical, obligates to
transport persons, goods, or both, from
one place to another, by land, air, or
water, for a price or commission.
*Importance: For liability purposes
B. Perfection
There is a perfected contract when there
was a meeting of the minds as to the
subject matter and consideration.
C. Common Carrier
1. Statutory definition
provides that: Common carriers are
persons,
corporations,
firms
or
associations engaged in the business
of carrying or transporting passengers
or goods or both, by land, water, or air,
for
compensation,
offering
their
services to the public.
- one that holds itself out as ready to
engage in the transportation of
goods for hire as a public
employment and not as a casual
occupation.
Implications being a common

carrier:
a. extraordinary diligence must be
exercised
b. in case of damage, presumption of
negligence on the part of the
common carrier
*It is the activity of the carrier that is
controlling.
Cases: A.F. Sanchez Brokerage, Inc
v CA; Asia Lighterage v CA; De
Guzman v CA
*The fact that there is no license at the
time of the incident happen is of no
moment for liability purposes.
2. Distinguished from private carrier
Common Private
Carrier
Carrier
As
to holds
Contracts
availabilit himself out with
y:
for
all particular
people
individual
indiscriminat s
or
ely
groups
only
As
to Extraordinar Ordinary
required
y diligence diligence
diligence: is required
is required
As
to Subject
to Not
regulatio
state
subject to
n:
regulation
state
regulation
Stipulatio Parties may Parties
n limiting not agree on may limit
liability:
limiting the the
carriers
carriers
liability
liability,
except when provided
provided by it is not
law
contrary
to
law,
morals or
good
customs
Exemptin
Prove
Caso
g
extraordinar fortuito,
circumsta y diligence Article
nce:
and Article 1174 NCC
1734 NCC
Presumpti There is a No
on
of presumption presumpti
Negligenc of fault or on of fault
e:
negligence
or
negligenc
e
Governing Law
on Law
on
law:
common
obligation
carriers
s
and
contracts
3. Distinguished
from
arrastre and stevedoring
towage,
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Corporation Code
Distinctions:
Towage
Arrastre
Stevedor
ing
One vessel The

The
is hired to functions of function
bring
an arrastre of
another
operator has stevedore
vessel
to nothing
to s involves
another
do with the the
place;
trade
and loading
refers to a business of and
service
navigation,
unloading
rendered to nor to the of
a vessel by use
or coastwise
towing for operation of vessels
the
mere vessels. He calling at
purpose of is
no the port.
expediting
different
her voyage from that of
without
a depositary
reference
or
to
any warehousem
circumstan an.
ces
of
danger.
*The SC held that the following services are not
considered a common carrier:
1) purely arrastre services;
*comparable to that as warehouseman and
depositor
2) purely stevedoring services; and
3) purely towage services.
*In Crisostomo v CA, the SC held that the
respondent being a travel agency is not a
common carrier because the services offered is
not one that carries passenger from one place to
another.
4. Tests to determine common carrier
Tests:
a. He must engaged in the business
of carrying goods for others as a
public employment and must hold
himself out as ready to engage in
the transportation of goods for
person generally as a business and
not as a casual occupation;
b. He must undertake to carry goods
of the kind to which his business is
confined;
c. He must undertake to carry by the
method by which his business is
conducted and over his established
roads;
d. The transportation must be for hire
Case: First Philippine Industrial
Corporation v CA
*Under Sec. 22 of the Electric
Power Distribution Reform Act, the
company like MERALCO distributing

electricity is a common carrier.
5. Parties to the contract of carriage
a. Carriage of passengers:
1. Common carrier
2. Passengers
b. Carriage of goods:
1. Shipper
2. Carrier
D. Registered owner rule and Kabit
system
General Rule: Registered owner rule is
applicable in this jurisdiction.
Registered owner rule states that the
person who is the registered owner of a
vehicle is liable for any damages caused
by the negligent operation of the vehicle
although the same was already sold or
conveyed to another person at the time of
the accident. The registered owner is
liable to the injured party subject to his
right of recourse against the transferee or
the buyer.
Purpose of this rule: easy identification
of the owner to be sued for liability.
Recourse: Registered owner may bring
the case to the court to sue the buyer or
operator of the vehicle at fault.
Exception:
in case of stolen vehicle
registered owner is not liable.
*In the case of Duavit v CA, the SC held
that the registered owner is not liable if
the vehicle was taken from his garage
without his knowledge or consent. To hold
the registered owner liable would be
absurd as it would be holding liable the
owner of a stolen vehicle for an accident
caused by the person who stole such
vehicle.
Kabit
System is an arrangement
whereby a person who has been granted a
certificate of public convenience allows
other persons who own motor vehicles to
operate
them
under
his
license,
sometimes for a fee or percentage of the
earnings.
*Kabit system is invariably recognized as
being contrary to public policy and
therefore void and inexistent under Article
1409 of the New Civil Code.
*If the registered owner and the buyer
entered into this transaction they are In
pari delicto thus, in case something
happen the court will not aid them. The
court will leave them as they were.
*This arrangement is a circumvention of
the requirement for license.
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Corporation Code
OBLIGATIONS OF THE COMMON CARRIER IN
A CONTRACT OF CARRIAGE OF GOODS:
A. Vigilance over the goods
1. Duty to exercise extraordinary
diligence Article 1733 of the New
Civil Code states that: 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
the passengers transported by them,
according to all the circumstances of
each case.
Such extraordinary diligence in the
vigilance over the goods is further
expressed in Articles 1734, 1735, and
1745, Nos. 5, 6, and 7, while the
extraordinary diligence for the safety
of the passengers is further set forth in
Articles 1755 and 1756.
Reason: The nature of the business is
imbued with public interest and public
policy; because of the exigencies of
the business. The public has no choice
but to trust on the skills of the
employees of the common carrier. The
goods and the life of the passenger are
placed in the hands of the common
carrier.
Commerce provides that: Outside of
the cases mentioned in the second
paragraph of Article 361, the carrier
shall be obliged to deliver the goods
shipped in the same condition in
which, according to the bill of lading,
they were found at the time they were
received, without any damage or
impairment, and failing to do so, to
pay the value which those not
delivered may have at the point and at
the time at which their delivery should
have been made. If those not delivered
form part of the goods transported, the
consignee may refuse to receive the
latter, when he proves that he cannot
make use of them independently of the
others.
Commerce provides that: If the
effect of the damage referred to in
Article 361 is merely a diminution in
the value of the gods, the obligation of
the carrier shall be reduced to the
payment of the amount which, in the
judgment of experts, constitutes such

difference in value.
Commerce provides that: If, in
consequence of the damage, the
goods are rendered useless for sale
and consumption for the purposes for
which they are properly destined, the
consignee shall not be bound to
receive them, and he may have them
in the hands of the carrier, demanding
of the latter their value at the current
price on that day. If among the
damaged goods there should be some
pieces in good condition and without
any defect, the foregoing provision
shall be applicable with respect to
those damaged and the consignee
shall receive those which are sound,
this segregation to be made by distinct
and separate pieces and without
dividing a single object, unless the
consignee proves that impossibility of
conveniently making use of them in
this form. The same rule shall be
applied to merchandise in bales or
packages, separating those parcels
which appear sound.
Presumption of negligence
provides that: In all cases other than
those mentioned in Nos. 1, 2, 3, 4, and
5 of the preceding article, if the goods
are lost, destroyed or deteriorated,
common carriers are presumed to
have been at fault or to have acted
negligently, unless they prove that
they observed extraordinary diligence
as required in Article 1733.
2. Duration of liability
states
that:
The
extraordinary
responsibility of the common carrier
lasts from the time the goods are
unconditionally
placed
in
the
possession of, and received by the
carrier for transportation until the
same are delivered, actually or
constructively, by the carrier to the
consignee, or to the person who has a
right
to
receive
them,
without
prejudice to the provisions of Article
1738.
states that: The common carrier's
duty
to
observe
extraordinary
diligence over the goods remains in full
123

Corporation Code
force and effect even when they are
temporarily unloaded or stored in
transit, unless the shipper or owner
has made use of the right of stoppage
in transitu.
provides that: The extraordinary
liability of the common carrier
continues to be operative even during
the time the goods are stored in a
warehouse of the carrier at the place
of destination, until the consignee has
been advised of the arrival of the
goods and has had reasonable
opportunity thereafter to remove them
or otherwise dispose of them.
3. Defenses of common carriers
responsible for the loss, destruction, or
deterioration of the goods, unless the
same is due to any of the following
causes only:
(1) Flood, storm, earthquake, lightning,
or other natural disaster or calamity;
(2) Act of the public enemy in war,
whether international or civil;
(3) Act of omission of the shipper or
owner of the goods;
(4) The character of the goods or
defects in the packing or in the
containers;
(5) Order or act of competent public
authority.
*The enumeration is exclusive or a
closed list.
General Rule: Common carriers are
responsible for the loss, destruction or
deterioration of the goods.
Exceptions:
1. Flood,
storm,
earthquake,
lightning
or
other
natural
disaster or calamity;
2. Act of the public enemy in war
whether international or civil;
3. Act of omission of the shipper
or owner of the goods;
4. The character of the goods or
defects in the packaging or in
the containers; and
5. Order or act of the competent
public authority
states that: If the common carrier
negligently
incurs
in
delay
in
transporting the goods, a natural
disaster shall not free such carrier from
responsibility.
a. Fortuitous event
Article 1739 of the New Civil

Code provides that: In order that
the common carrier may be
exempted from responsibility, the
natural disaster must have been
the proximate and only cause of
the loss. However, the common
carrier must exercise due diligence
to prevent or minimize loss before,
during and after the occurrence of
flood, storm or other natural
disaster in order that the common
carrier may be exempted from
liability for the loss, destruction, or
deterioration of the goods. The
same duty is incumbent upon the
common carrier in case of an act of
the public enemy referred to in
Article 1734, No. 2.
*Fire is not within the ambit of
natural disaster or calamity.
*Calamity includes thunderstorm.
*mechanical defect is not within
the ambit of the natural disaster; it
is within the control of the common
carrier.
Requisites:
1. Proximate cause is the natural
calamity
2. Absence of negligence on the
part of the common carrier
3. The common carrier must
exercise
due
diligence
to
prevent loss before, during and
after the occurrence of the
disaster
4. Free from unreasonable delay
by the common carrier or
unreasonable deviation
b. Public enemy
Code states that: In order that the
common carrier may be exempted
from responsibility, the natural
disaster must have been the
proximate and only cause of the
loss. However, the common carrier
must exercise due diligence to
prevent or minimize loss before,
during and after the occurrence of
flood, storm or other natural
disaster in order that the common
carrier may be exempted from
liability for the loss, destruction, or
deterioration of the goods. The
same duty is incumbent upon the
common carrier in case of an act of
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Corporation Code
the public enemy referred to in
Article 1734, No. 2.
*Public enemy includes pirates
however it does not include
robbery and thief.
*Pirates are enemies of all civilized
nation.
General
Rule:
rebels
and
insurreccion is not included.
Exception: If it they are cast of
and took allegiance a hostile
manner territory
*Existence of actual
war is
imperative.
c. Act of omission on the part of
the shipper or owner of the
goods
*There must be no fault or
contributory negligence on the part
of the carrier.
*In Compania Maritima v CA, the
SC held that the common carrier is
also at fault; the common carrier
should have exercise extraordinary
diligence by not relying solely on
the statement of the shipper; it
should have conducted its own
weighing. In this case the common
carrier is not totally absolved from
its liability.
d. Improper packing
Code states that: Even if the loss,
destruction, or deterioration of the
goods should be caused by the
character of the goods, or the
faulty nature of the packing or of
the containers, the common carrier
must exercise due diligence to
forestall or lessen the loss.
*If the defect is apparent, the
carrier may refuse to accept the
goods for carriage; if the shipper
insists, the remedy is to make a
protestation; make a foul bill of
lading.
*In Iron Bulk v CA (Dec. 8, 2003),
carrier issued pro forma bill of
lading stated where in that it
accepted goods in good condition.
The goods arrived defective. The
SC held that the carrier is not
exempt from liability because it
accepted
the
goods
without
protestation.
*Foul Bill of Lading preserves the
right of the carrier to use the
excuse provided in 1734.
e. Order of public authority

Code states that: If through the
order of public authority the goods
are seized or destroyed, the
common carrier is not responsible,
provided said public authority had
power to issue the order.
*The important requisite is that the
public authority has the power to
issue an order.
Case: Ganzon v CA
4. Contributory negligence of the
shipper
states that: If the shipper or owner
merely contributed to the loss,
destruction or deterioration of the
goods, the proximate cause thereof
being the negligence of the common
carrier, the latter shall be liable in
damages, which however, shall be
equitably reduced.
5. Stipulation limiting liability of
carrier
states that: A stipulation between the
common carrier and the shipper or
owner limiting the liability of the
former for the loss, destruction, or
deterioration of the goods to a degree
less than extraordinary diligence shall
be valid, provided it be:
(1) In writing, signed by the shipper or
owner;
(2)
Supported
by
a
valuable
consideration other than the service
rendered by the common carrier; and
(3) Reasonable, just and not contrary
to public policy.
*This is for the benefit of the carrier.
Consideration: Reduction of fare
*The stipulation must be in writing for
the purpose of preventing abuse from
the carrier.
provides that: An agreement limiting
the common carrier's liability for delay
on account of strikes or riots is valid.
states that: A stipulation that the
common carrier's liability is limited to
the value of the goods appearing in
the bill of lading, unless the shipper or
owner declares a greater value, is
binding.
provides that: A contract fixing the
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Corporation Code
sum that may be recovered by the
owner or shipper for the loss,
goods is valid, if it is reasonable and
just under the circumstances, and has
been fairly and freely agreed upon.
a. Requisites
Code states that: A stipulation
between the common carrier and
the shipper or owner limiting the
liability of the former for the loss,
goods to a degree less than
extraordinary diligence shall be
valid, provided it be:
(1) In writing, signed by the shipper
or owner;
(2) Supported by a valuable
consideration
other
than
the
service rendered by the common
carrier; and
(3) Reasonable, just and not
contrary to public policy.
Code provides that: The fact that
the common carrier has no
competitor along the line or route,
or a part thereof, to which the
contract refers shall be taken into
consideration on the question of
whether or not a stipulation limiting
the common carrier's liability is
reasonable, just and in consonance
with public policy.
*Liability can be limited but cannot
be totally exempted.
*Stipulations reducing diligence or
limiting liability must be in writing
to be enforceable.
b. Invalid stipulations
Code states that: Any of the
following or similar stipulations
shall be considered unreasonable,
unjust and contrary to public policy:
(1) That the goods are transported
at the risk of the owner or shipper;
(2) That the common carrier will
not be liable for any loss,
goods;
(3) That the common carrier need
not observe any diligence in the
custody of the goods;
(4) That the common carrier shall
exercise a degree of diligence less
than that of a good father of a
family, or of a man of ordinary

prudence in the vigilance over the
movables transported; (5) That the
common carrier shall not be
responsible for the acts or omission
of his or its employees;
(6) That the common carrier's
liability for acts committed by
thieves, or of robbers who do not
act with grave or irresistible threat,
violence or force, is dispensed with
or diminished;
(7) That the common carrier is not
responsible
for
the
loss,
destruction, or deterioration of
goods on account of the defective
condition of the car, vehicle, ship,
airplane or other equipment used
in the contract of carriage.
*Even if they agreed with regard to
numbers 1,2 and 3, the stipulation
is void because it is contrary to
public policy because all these
stipulations exempt the carrier
from liability.
General Rule: The degree of
diligence may be lowered
Exception: Not lower than that of
a good father of a family.
General
Rule:
stipulations
exempting
from
liability
acts
committed by robbers and thieves
who do not act with grave threat or
irresistible threats are not valid.
Exception: In case the robbers or
thieves used grave threat or
irresistible threats.
*In this case, the presumption of
negligence is still applicable, the
stipulation
only
affects
the
outcome of the case.
c. Effect of delay
Code states that: If the common
carrier, without just cause, delays
the transportation of the goods or
changes the stipulated or usual
route, the contract limiting the
common carrier's liability cannot be
availed of in case of the loss,
goods.
*Delay will prevent the carrier from
raising natural disaster as a
defense and that the agreement
limiting its liability cannot be raised
as a defense.
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Corporation Code
d. Rule
on
presumption
of
negligence despite stipulation
Code states that: Even when
there is an agreement limiting the
liability of the common carrier in
the vigilance over the goods, the
common carrier is disputably
presumed to have been negligent
in case of their loss, destruction or
deterioration.
B. Other obligations
1. Duty to accept goods
a. Grounds for valid refusal to
accept goods
i. General Rule: Goods sought
to
be
transported
are
dangerous
objects
or
substances including dynamite
and other explosives;
Exception: Carriers that are
permitted
or
allowed
to
transport dangerous objects or
substances for the reason that
it is their function to do so or it
is their operation.
ii. Goods
are
unfit
for
transportation;
*This can be found under Article
356 of the Code of Commerce
iii. Acceptance would result in
overloading;
iv. Contrabands or illegal goods;
v. Goods are injurious to health;
vi. Goods will be exposed to
untoward danger like flood,
capture by enemies and the
like;
vii. Goods like livestock will be
exposed to disease;
viii.Strike; and
ix. Failure to tender goods on time
2. Duty to deliver goods
a. Time of delivery
General Rule: It is by stipulation
Exception: In the absence of
stipulation Code of Commerce
governs.
Commerce provides that: If there
is no period fixed for the delivery of
the goods the carrier shall be
bound to forward them in the first
shipment of the same or similar
goods which he may make to the
point where he must deliver them;
and should he not do so, the
damages caused by the delay
should be for his account.
*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.
*Mercantile usage or practice
With
stipulation
Carrier
is
bound to fulfil
the
contract
and is liable
for any delay;
no
matter
from
what
cause it may
have arisen
Without
stipulation
1. Within
a
reasonable
time.
2. Carrier
is
bound
to
forward
them in the
first
shipment of
the same or
similar
goods
which
he
may make
to the point
of delivery
b. Consequences of delay
Code provides that: If the
common carrier negligently incurs
in delay in transporting the goods,
a natural disaster shall not free
such carrier from responsibility.
Code provides that: If the
common
carrier, without just
cause, delays the transportation of
the
goods
or
changes
the
stipulated or usual route, the
contract limiting the common
carrier's liability cannot be availed
of in case of the loss, destruction,
or deterioration of the goods.
Commerce provides that: If a
period has been fixed for the
delivery of the goods, it must be
made within such time, and, for
failure to do so, the carrier shall
pay the indemnity stipulated in the
bill of lading, neither the shipper
nor the consignee being entitled to
anything else. If no indemnity has
been stipulated and the delay
exceeds the time fixed in the bill of
lading, the carrier shall be liable for
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Corporation Code
the damages which the delay may
have caused.
Commerce provides that: In case
of delay through the fault of the
carrier, referred to in the preceding
articles, the consignee may leave
the goods transported in the hands
of the former, advising him thereof
in writing before their arrival at the
point of destination. When this
abandonment takes place, the
carrier shall pay the full value of
the goods as if they had been lost
or mislaid. If the abandonment is
not made, the indemnification for
losses and damages by reason of
the delay cannot exceed the
current price which the goods
transported would have had on the
day and at the place in which they
should have been delivered; this
same rule is to be observed in all
other cases in which this indemnity
may be due.
Commerce states that: The value
of the goods which the carrier must
pay
in
cases
of
loss
or
misplacement shall be determined
in accordance with that declared in
the bill of lading, the shipper not
being allowed to present proof that
among the goods declared therein
there were articles of greater value
and money. Horses, vehicles,
vessels, equipment and all other
principal and accessory means of
transportation shall be especially
bound in favour of the shipper,
although with respect to railroads
said liability shall be subordinated
to the provisions of the laws of
concession with respect to the
property, and to what this Code
established as to the manner and
form of effecting seizures and
attachments
against
said
companies.
Commerce states that: The
carrier who makes the delivery of
the merchandise to the consignee
by virtue of combined agreements
or services with other carriers shall
assume the obligations of those
who
preceded
him
in
the
conveyance, reserving his right to

proceed against the latter if he was
not the party directly responsible
for the fault which gave rise to the
claim of the shipper or consignee.
The carrier who makes the delivery
shall likewise acquire all the actins
and rights of those who preceded
him in the conveyance. The shipper
and the consignee shall have an
immediate right of action against
the carrier who executed the
transportation contract, or against
the other carriers who may have
received the goods transported
without reservation. However, the
reservation made by the latter shall
not
relieve
them
from
the
responsibilities which they may
have incurred by their own acts.
consignees to whom the shipment
was made may not defer the
payment of the expenses and
transportation charges of the goods
they receive after the lapse of 24
hours following their delivery; and
in case of delay in this payment,
the carrier may demand the judicial
sale of the goods transported in an
amount necessary to cover the
cost of transportation and the
expenses incurred.
Effects of delay:
1. Excusable delay in carriage
merely suspends and generally
does not terminate the contract
of carriage. When the cause is
removed, the master must
proceed with the voyage and
make delivery;
2. Carrier remains duty bound to
exercise
extraordinary
diligence;
3. Natural disaster shall not free
the carrier from responsibility;
4. If delay is without just cause,
the
contract
limiting
the
common
carriers
liability
cannot be availed of in case of
loss or deterioration of the
goods.
c. Place of Delivery
Commerce provides that: The
shipper, without changing the
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Corporation Code
place where the delivery is to be
made,
may
change
the
consignment of the goods which he
delivered to the carrier, provided
that at the time of ordering the
change of consignee the bill of
lading signed by the carrier, if one
has been issued, be returned to
him, in exchange for another
wherein the novation of the
contract appears. The expenses
which this change of consignment
occasions shall be for the account
of the shipper.
d. To whom delivery shall be
made
carrier
must
deliver
to
the
consignee, without any delay or
obstruction, the goods which he
may have received, by the mere
fact of being named in the bill of
lading to receive them; and if he
does not do so, he shall be liable
for the damages which may be
caused thereby.
consignee cannot be found at the
residence indicated in the bill of
lading, or if he refuses to pay the
transportation
charges
and
expenses, or if he refuses to
receive the goods, the municipal
judge, where there is none of the
first instance, shall provides for
their deposit at the disposal of the
shipper, this deposit producing all
the effects of delivery without
prejudice to third parties with a
better right.
OBLIGATIONS OF THE COMMON CARRIER IN
A CONTRACT OF CARRIAGE OF PASSENGERS:
A. Safety of Passengers
1. Duty to observe utmost diligence
provides that: A common carrier is
bound to carry the passengers safely
as far as human care and foresight can
provide, using the utmost diligence of
very cautious persons, with a due
regard for all the circumstances.
*There are claims not really focused on
death, injuries, loss or damage of
goods but concentrates on moral
damages; and the SC said that these

claims can still prosper in because
there is still a breach of contract of
carriage.
*Behavior of the employees towards to
passengers is also a factor considered
by the court to rule against a common
carrier.
*In CAL v PAL, the SC held that
hijacking of the airplane is considered
to be a force majeure thus cannot held
the carrier liable.
Case: Singapore Airline v Andion
Fernandez
*In Japan Airlines v Asuncion
(January 28, 2005), the SC held that
the things invoked by the respondent
do not fall within the ambit of
extraordinary diligence. Though it is
the duty of the carrier to check that
travel documents
are with the
passengers but it is not under the
obligation of the carrier to check the
veracity of the information in the travel
document; it also held that the
obligation of the carrier is limited to
endorsing and not to influence. The
issue of whether or not an alien be
admitted entrance to a country is a
sovereign act and such cannot be
interfered by the petitioner.
2. Duration of liability
*The carrier is bound to exercise
utmost diligence with respect to
passengers the moment the person
who purchases the ticket or token from
the carrier presents himself at the
proper place and in a proper manner to
be transported. Such person must
have a bona fide intention to use the
facilities of the carrier, possess
sufficient fare with which to pay for his
passage, and present himself to the
carrier for transportation in the place
and manner provided.
*In LRTA v Navidad, the SC held the
petitioner carrier liable for breach of
contract. The SC held that Nicanor
Navidad was a passenger when he
died after he fell on the LRT tracks and
was struck by a moving train. He was
considered a passenger because he
entered the LRT station after having
purchased a token and he fell while he
was on the platform waiting for a train.
Thus, he was where he was supposed
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Corporation Code
to be with the intention of boarding a
train.
*Once created, the relationship will not
ordinarily
terminate
until
the
passenger has, after reaching his
destination, safely alighted from the
carriers conveyance or has had a
reasonable opportunity to leave the
carriers premises. All persons who
remain on the premises within a
reasonable time after leaving the
conveyance are to be deemed
passengers, and what is a reasonable
time or a reasonable delay within this
rule is to be determined from all the
circumstances,
and
includes
reasonable time to look after his
baggage
and
prepare
for
his
departure.
*In La Mallorca v CA, the SC held
that there was a breach of duty to
exercise extraordinary diligence with
respect to the 4 year old child and the
carrier is liable as a consequence. The
presence of passengers near the bus
was not unreasonable and they were,
therefore, to be considered still as
passengers of the carrier, entitled to
the protection under their contract.
*In Aboitiz Shipping Corporation v
CA, the SC held that extraordinary
diligence was still owed to AV at the
time of the accident. It was ruled that
AVs presence in the premises was not
without cause. The victim had to claim
his baggage which was possible only
one hour after the vessel arrived since
it was the standard procedure in the
case of petitioners vessels that the
unloading operation shall start only
after that time.
*The differences between the La
Mallorca case and Aboitiz Shipping
Corporation are: 1. The business is
different from that of La Mallorca case;
and 2. The capacity of passengers and
baggages are different
3. Presumption of negligence
states that: In case of death of or
injuries
to
passengers,
common
carriers are presumed to have been at
fault or to have acted negligently,
unless they prove that they observed
extraordinary diligence as prescribed
in Articles 1733 and 1755.
4. Liability for acts of employees

liable for the death of or injuries to
passengers through the negligence or
wilful acts of the former's employees,
although such employees may have
acted beyond the scope of their
authority or in violation of the orders of
the common carriers.
This liability of the common carriers
does not cease upon proof that they
exercised all the diligence of a good
father of a family in the selection and
supervision of their employees.
Case: Maranan v Perez
5. Liability for acts of strangers
provides that: A common carrier is
responsible for injuries suffered by a
passenger on account of the wilful acts
or negligence of other passengers or of
strangers, if the common carrier's
employees through the exercise of the
diligence of a good father of a family
could have prevented or stopped the
act or omission.
Case: Bachelor Express v CA
6. Effect of stipulation on liability
provides that: The responsibility of a
common carrier for the safety of
passengers as required in Articles
1733 and 1755 cannot be dispensed
with or lessened by stipulation, by the
posting of notices, by statements on
tickets, or otherwise.
provides that: When a passenger is
carried gratuitously, a stipulation
limiting the common carrier's liability
for negligence is valid, but not for
wilful acts or gross negligence.
The reduction of fare does not justify
any limitation of the common carrier's
liability.
responsibility
prescribed
in
the
preceding article cannot be eliminated
or limited by stipulation, by the posting
of notices, by statements on the
tickets or otherwise.
B. Passengers Baggages
provides that: The provisions of Articles
1733 to 1753 shall apply to the
passenger's baggage which is not in his
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Corporation Code
personal custody or in that of his
employee. As to other baggage, the rules
in Articles 1998 and 2000 to 2003
concerning the responsibility of hotelkeepers shall be applicable.
states that: The deposit of effects made
by the travellers in hotels or inns shall also
be regarded as necessary. The keepers of
hotels or inns shall be responsible for
them as depositaries, provided that notice
was given to them, or to their employees,
of the effects brought by the guests and
that, on the part of the latter, they take
the precautions which said hotel-keepers
or their substitutes advised relative to the
care and vigilance of their effects.
states that: The responsibility referred to
in the two preceding articles shall include
the loss of, or injury to the personal
property of the guests caused by the
servants or employees of the keepers of
hotels or inns as well as strangers; but not
that which may proceed from any force
majeure. The fact that travellers are
constrained to rely on the vigilance of the
keeper of the hotels or inns shall be
considered in determining the degree of
care required of him.
provides that: The act of a thief or robber,
who has entered the hotel is not deemed
force majeure, unless it is done with the
use of arms or through an irresistible
force.
provides that: The hotel-keeper is not
liable for compensation if the loss is due to
the acts of the guest, his family, servants
or visitors, or if the loss arises from the
character of the things brought into the
hotel.
provides that: The hotel-keeper cannot
free himself from responsibility by posting
notices to the effect that he is not liable
for the articles brought by the guest. Any
stipulation between the hotel-keeper and
the guest whereby the responsibility of the
former as set forth in articles 1998 to
2001 is suppressed or diminished shall be
void.
*The baggage in the personal custody of
the passenger or his employee in that the
baggage in transit will be considered as
necessary deposits. The common carrier
shall be responsible for the baggage as

depositaries, provided that notice was
given to them or its employees, and the
passenger took the necessary precaution,
which the carrier has advised them
relative to the care and vigilance of their
baggage. In case of loss due to the fault
of the passenger the carrier will not be
liable.
*They are not absolutely responsible as
depository because the law requires
notice.
*It is also required to declare the value of
the baggage.
*The carrier who has in his custody the
baggage of the passenger to be carried
like any other goods is required to observe
extraordinary diligence. In case of loss or
damage the carrier is presumed negligent.
OBLIGATIONS OF THE SHIPPER, CONSIGNEE
AND PASSENGER:
A. Effect of negligence of shipper or
passenger Article 1741 of the New
Civil Code states that: If the shipper or
owner merely contributed to the loss,
destruction or deterioration of the goods,
the proximate cause thereof being the
negligence of the common carrier, the
latter shall be liable in damages, which
however, shall be equitably reduced.
provides that: The passenger must
observe the diligence of a good father of a
family to avoid injury to himself.
states that: The contributory negligence
of the passenger does not bar recovery of
damages for his death or injuries, if the
proximate cause thereof is the negligence
of the common carrier, but the amount of
damages shall be equitably reduced.
*The shipper is also obliged to exercise
due diligence in avoiding damage or injury.
*With respect to carriage of passengers,
the said passengers are likewise bound to
observe due diligence to avoid injury.
*The contributory negligence on the part
of the passenger is not a defense that will
excuse the carrier from liability. It will only
mitigate such liability.
*The carrier may be able to prove that the
only cause of the loss of the goods is any
of the following acts of the shipper:
1. failure of the shipper to disclose the
nature of the goods;
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Corporation Code
2. improper marking or direction as to
destination; and
3. improper loading when he assumed
such responsibility.
*The shipper must likewise see to it that
the goods are properly packed; otherwise,
liability of the carrier may be mitigated or
barred depending on the circumstances.
B. Payment of freight
Who will pay:
Shipper - before or at the time he delivers
the goods to the carrier for shipment.
Consignee - if agreed upon by the parties
at the point of destination is bound by
such stipulation the moment he accepts
the goods.
Passengers - they are contractually bound
to pay the fare within such time as
prescribed by regulations or by the carrier.
Time to pay:
Tickets are purchased in advance from
ticket outlets.
Consignees to whom the shipment was
made may not defer the payment of the
expenses and transportation charges of
the goods they receive after the lapse of
24 hours following their delivery.
*In case of delay in payment, the carrier
may demand the judicial sale of the goods
transported in an amount necessary to
cover the cost of transportation and the
expenses incurred.
provides that: The carrier who makes the
delivery of the merchandise to the
consignee
by
virtue
of
combined
agreements or services with other carriers
shall assume the obligations of those who
preceded
him
in
the
conveyance,
reserving his right to proceed against the
latter if he was not the party directly
responsible for the fault which gave rise to
the claim of the shipper or consignee. The
carrier who makes the delivery shall
likewise acquire all the actions and rights
of those who preceded him in the
conveyance.
The
shipper
and
the
consignee shall have an immediate right
of action against the carrier who executed
the transportation contract, or against the
other carriers who may have received the
goods transported without reservation.
However, the reservation made by the
latter shall not relieve them from the
responsibilities which they may have
incurred by their own acts.

provides that: The goods transported
shall be especially bound to answer for the
cost of transportation and for the
expenses and fees incurred for them
during their conveyance and until the
moment of their delivery. This special right
shall prescribe 8 days after the delivery
has been made, and once prescribed, the
carrier shall have no other action than that
corresponding to him as an ordinary
creditor.
C. Liability for demurrage
Demurrage is the compensation provided
for in the contract of affreightment for the
detention of the vessel beyond the time
agreed on for loading and unloading. It is a
claim for damages for failure to accept
delivery.
*Liability for demurrage exists only when
expressly stipulated in the contract.
EXTRAORDINARY DILIGENCE:
A. Underlying reason
Reasons:
1. From the nature of the business
and for reasons of public policy;
2. Relationship of trust;
3. Business is impressed with a
special public duty;
4. Possession of the goods;
5. Preciousness of human life
B. Effect of Stipulation
states that: A stipulation between the
common carrier and the shipper or
owner limiting the liability of the
former for the loss, destruction, or
deterioration of the goods to a degree
less than extraordinary diligence shall
be valid, provided it be:
(1) In writing, signed by the shipper or
owner;
(2)
Supported
by
a
valuable
consideration other than the service
rendered by the common carrier; and
(3) Reasonable, just and not contrary
to public policy.
states that: The responsibility of a
common carrier for the safety of
passengers as required in Articles
1733 and 1755 cannot be dispensed
with or lessened by stipulation, by the
posting of notices, by statements on
tickets, or otherwise.
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Corporation Code
states that: When a passenger is
carried gratuitously, a stipulation
limiting the common carrier's liability
for negligence is valid, but not for
wilful acts or gross negligence.
The reduction of fare does not justify
any limitation of the common carrier's
liability.
responsibility
prescribed
in
the
preceding article cannot be eliminated
or limited by stipulation, by the posting
of notices, by statements on the
tickets or otherwise.
C. Extraordinary diligence in carriage
by sea
1. Seaworthiness of the vessel
Sec. 3 [1] of the COGSA
provides that: The carrier shall be
bound before and at the beginning
of the voyage to exercise due
diligence to
(a) Make the ship seaworthy;
(b) Properly man,equip, and supply
the ship;
(c) Make the holds, refrigerating
and cooling chambers, and all
other parts of the ship in which
goods are carried, fit and safe for
their reception, carriage, and
preservation.
Sec. 3 [2] of the COGSA provides
that: The carrier shall properly and
carefully load, handle, stow, carry,
keep, care for, and discharge the
goods carried.
Sec. 116 of the IC
Sec. 119 of the IC
Commerce states that: Captains,
masters or patrons of vessels must
be Filipinos, have legal capacity to
contract in accordance with this
code, and prove the skill, capacity,
and qualifications necessary to
command and direct the vessel, as
established
by
marine
or
navigation laws, ordinances, or
regulations, and must not be
disqualified according to the same
for the discharge of the duties of
the position. If the owner of a
vessel desires to be the captain
thereof, without having the legal
qualifications therefor, he shall
2.
3.
4.
5.
limit himself to the financial

administration of the vessel, and
shall intrust the navigation to a
person
possessing
the
qualifications required by said
ordinances and regulations.
*Extraordinary diligence requires
that the ship which will transport
the passengers and goods is
seaworthy.
*The carriers are deemed to
warrant
impliedly
the
seaworthiness of the ship. The
failure of a common carrier to
maintain in seaworthy condition
the vessel involved in its contract
of carriage is a clear breach of its
duty prescribed in Article 1755 of
the NCC.
*Shippers of goods are not
expected to inquire into the
vessels
seaworthiness
and
compliance with all maritime laws.
*The unseaworthiness can be
established by the fact that it did
not withstand the natural and
inevitable action of the sea.
Overloading
*Duty to exercise due diligence
includes
the
duty
to
take
passengers or cargoes that are
within the carrying capacity of the
vessel.
Proper storage
*The ship must not be only
seaworthy but it must also be
cargoworthy. The ship must be an
efficient storehouse for her cargo.
*The vessel must be adequately
equipped and properly manned.
Obligation of captain and crew
*If the negligence of the captain
and crew can be traced to the fact
that they are really incompetent,
the Limited Liability Rule cannot be
invoked because the ship owner
may be deemed negligent.
Rule
on
deviation
and
transhipment Deviation
*If route is stipulated upon by the
shipper and carrier, carrier cant
change unless due to force
majeure.
*Carrier shall be liable for all losses
suffered from any other cause,
beside the sum stipulated for such
case.
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*If due to said force majeure he
took another route and incurred
expenses by reason thereof, he
shall be reimbursed for such
increase upon formal proof thereof
(Art. 359, Code of Commerce).
Transshipment is the act of taking
cargo out of one ship and loading it
in another.
*When done without legal excuse,
however competent and safe the
vessel into which the transfer is
made, is a violation of the contract
and an infringement of the right of
the shipper and subjects the carrier
to liability if the freight is lost even
by a cause otherwise excepted
(Magellan Manufacturing Corp. v.
CA).
Commerce provides that: If there
is an agreement between the
shipper and the carrier as to the
road over which the conveyance is
to be made, the carrier may not
change the route, unless it be by
reason of force majeure; and
should he do so without this cause,
he shall be liable for all the losses
which the goods he transports may
suffer from any other cause, beside
paying the sum which may have
been stipulated for such case.
When on account of said cause of
force majeure, the carrier had to
take another route which produced
an increase
in transportation
charges, he shall be reimbursed for
such increase upon formal proof
thereof.
D. Extraordinary diligence in carriage
by land
1. Vehicles condition
*Owners are required to make sure
that the vehicles they are using are
in good order and condition.
2. Traffic rules (RA 4136)
*In cases involving breach of
contract of carriage, proof of
violation of traffic rules confirms
that the carrier failed to exercise
extraordinary diligence.
3. Obligation to Inspect
*in
overland
transportation,
common carrier is not bound nor
empowered
to
make
an
examination of the contents of
packages or bags particularly those

hand carried.
Airline companies
are required to inspect each and
every cargo brought into the
aircraft (RA 6235).
E. Extraordinary diligence in carriage
by air
1. Airworthiness - an aircraft, its
engines,
propellers
and
other
components and accessories are of
proper design and construction, and
are safe for air navigation purposes,
such design and construction being
consistent with accepted engineering
practice and in accordance with
aerodynamic laws and aircraft science
(RA 779).
2. Competent and well trained crew
3. To take the required and prescribed
route
4. Adverse weather conditions or
extreme climatic changes are some of
the perils involved in air travel
consequence of which the passenger
must assume or expect.
5. RA 6235 (An Act Prohibiting
Certain Acts Inimical to Civil Aviation
and for Other Purposes) - acts
punishable:
a. to compel a change in the course
or destination of an aircraft of
Philippine registry; or
b. to seize or usurp control of the
aircraft while in flight.
ACTIONS IN CASE OF BREACH OF CONTRACT
OF CARRIAGE:
A. Causes
of
action
and
nature/extent of liability (culpa
contractual, culpa aquiliana and
culpa delictual)
Culpa contractual only the carrier is
primarily liable and not the driver.
Reason: There is no privity between
the driver and the passenger.
*The party to be impleaded is the
carrier itself.
Basis: Article 1759 of the New Civil
Code
Culpa delictual/criminal the driver is
primarily
liable.
The
carrier
is
subsidiarily liable only if the driver is
convicted and declared insolvent.
Basis: Article 100 of the Revised Penal
Code
Culpa aquiliana the carrier and the
driver are solidarily liable as joint
tortfeasor.
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Corporation Code
Basis: Article 2180 of the New Civil
Code
B. Prescriptive period and conditions
precedent
1. Overland
transportation
of
goods and coastwise shipping
(Domestic)
Commerce provides that: Within
the 24 hours following the receipt
of the merchandise, the claim
against the carrier for damage or
average which may be found
therein
upon
opening
the
packages, may be made, provided
that the indications of the damage
or average which gives rise to the
claim cannot be ascertained from
the outside part of such packages,
in which case the claim shall be
admitted only at the time of
receipt.
After
the
periods
mentioned have elapsed, or the
transportation charges have been
paid, no claim shall be admitted
against the carrier with regard to
the condition in which the goods
transported were delivered.
*Prior notice of claim does not
apply to misdelivery of goods.
Purpose of notice: To inform the
carrier that the shipment has been
damaged and that it is charged
with liability therefor, and to give it
an opportunity to make an
investigation and fix responsibility
while the matter is fresh.
*The filing of notice of claim is a
condition precedent for recovery in
case of damage condition of the
goods.
*Not provided by Article 366 of the
Code of Commerce. Thus, in such
absence, the New Civil Code rules
on prescription apply.
Prescriptive period:
General Rule: If written, 10 years,
if not written, 6 years
Exceptions:
1. COGSA 1 year
2. Warsaw Convention 2 years
Example: Q: In case of pending
extrajudicial claim, does it suspend
the one year period?
A: NO
*One year period applies to

shipper,
assignee,
insurer,
subrogees,
and
successor
in
interest.
*One year period does not apply in
cases of delay or misdelivery.
International Carriage of Goods
by Sea Sec. 3 [6] of the COGSA
substantially provides that in case
of patent damage, the shipper
should file a claim with the carrier
immediately upon delivery. In case
of latent damage, the shipper
should file a claim with the carrier
within 3 days from delivery. Action
for loss or damage to the cargo
should be brought within one year
after: delivery of the goods
(delivered but damaged goods); or
the date when the goods should
have been delivered (loss).
*The filing of a notice of claim is
not a condition precedent.
Recoverable Damages
The court may award the following
damages:
1. Actual/Compensatory Damages
2. Temperate Damages
3. Liquidated Damages
4. Exemplary Damages
5. Moral Damages
6. Nominal Damages
Actual/Compensatory damages are
those awarded to the aggrieved party as
adequate compensation only for such
pecuniary loss suffered by him as he has
alleged and duly proved.
Article 2199 of the Civil Code states
that: Except as provided by law or by
stipulation, one is entitled to an adequate
compensation only for such pecuniary loss
suffered by him as he has duly proved.
Such compensation is referred to as actual
or compensatory damages.
*To claim this award, proving the amount
is necessary.
*Procedures or plastic surgeries performed
to restore the part of the body injured are
included as a component of actual
damages.
Temperate damages or moderate
damages these are damages the amount
of which is left to the sound discretion of
the court, but it is necessary that there be
some injury or pecuniary loss established,
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Corporation Code
the exact amount of which, could not be
determined by the plaintiff by reason of
the nature of the case.
provides that: Temperate or moderate
damages, which are more than nominal
but less than compensatory damages,
may be recovered when the court finds
that some pecuniary loss has been
suffered but its amount can not, from the
nature of the case, be provided with
certainty.
*The court is convinced that there is
pecuniary loss.
*There is no actual certainty of the actual
amount loss. The court is allowed to
calculate the amount.
*This is in the form of actual damages
Liquidated damages are fixed damages
previously agreed by the parties to the
contract and payable to
the innocent
party in case of breach by the other.
provides that: Liquidated damages are
those agreed upon by the parties to a
contract, to be paid in case of breach
thereof.
*This is in the form of actual damages but
a stipulated one.
*Proving the amount is not necessary.
*In this kind of damages, estoppel applies.
General Rule: The court cannot change
the amount.
Exception: If the amount stipulated is
excessive the court may disregard said
amount and may compute the actual
damages.
*The only thing to be proved is the fact of
loss.
Exemplary
damages
are
mere
accessories to other forms of damages
except nominal damages. They are mere
additions to actual, moral, temperate and
liquidated damages which may or may not
be granted at all depending upon the
necessity of setting an example for the
public good as a form of deterrent to the
repetition of the same act by any one.
provides that: Exemplary or corrective
damages are imposed, by way of example
or correction for the public good, in
addition
to
the
moral,
temperate,
liquidated or compensatory damages.
*Awarded because of the wanton,
fraudulent, malevolent, oppressive acts of
the carrier.
*This is awarded to prevent other carrier

to commit oppressive acts.
*This cannot be awarded unless the
plaintiff is entitled to moral at the same
time actual or temperate damages.
states that: In quasi-delicts, exemplary
damages may be granted if the defendant
acted with gross negligence.
states that: In contracts and quasicontracts, the court may award exemplary
damages if the defendant acted in a
wanton, fraudulent, reckless, oppressive,
or malevolent manner.
states that: Exemplary damages cannot
be recovered as a matter of right; the
court will decide whether or not they
should be adjudicated.
states that: While the amount of the
exemplary damages need not be proved,
the plaintiff must show that he is entitled
to moral, temperate or compensatory
damages before the court may consider
the question of whether or not exemplary
damages should be awarded In case
liquidated damages have been agreed
upon, although no proof of loss is
necessary in order that such liquidated
damages may be recovered, nevertheless,
before the court may consider the
question of granting exemplary in addition
to the liquidated damages, the plaintiff
must show that he would be entitled to
moral,
temperate
or
compensatory
damages were it not for the stipulation for
liquidated damages.
states that: A stipulation whereby
exemplary damages are renounced in
advance shall be null and void.
Nominal
damages
are
not
for
indemnification of loss but for vindication
of a right violated.
provides that: Nominal damages are
adjudicated in order that a right of the
plaintiff, which has been violated or
invaded by the defendant, may be
vindicated or recognized, and not for the
purpose of indemnifying the plaintiff for
any loss suffered by him.
states that: The court may award nominal
damages in every obligation arising from
any source enumerated in Article 1157, or
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Corporation Code
in every case where any property right has
been invaded.
states that: The adjudication of nominal
damages shall preclude further contest
upon the right involved and all accessory
questions, as between the parties to the
suit, or their respective heirs and assigns.
*In Japan Airlines v CA, JAL failed to give
the plaintiff the priority for the first
available flight. The SC awarded nominal
damages.
Moral damages 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.
provides that: Moral damages include
physical suffering, mental anguish, fright,
serious anxiety, besmirched reputation,
wounded feelings, moral shock, social
humiliation, and similar injury. Though
incapable of pecuniary computation, moral
damages may be recovered if they are the
proximate result of the defendant's
wrongful act for omission.
Q: When moral damages may be
awarded?
A: 1. Death of a passenger; 2. Carrier is
guilty of fraud, malice, bad faith even if
there is no death of a passenger (Case:
Lopez v Pan-American); 3. In Air
France case
MARITIME LAW:
Source: Code of Commerce
A. Concept of Maritime Law
Maritime Law is the system of laws
which particularly relates to the affairs and
business of the sea, to ships, their crews
and
navigation,
and
to
maritime
conveyance of persons and property.
*Apply only to maritime trade and sea
voyages.
B. Limited Liability Rule
1. Concept
The exclusively real and hypothecary
nature of maritime law operates to
limit the liability of the shipowner to
the value of the vessel, earned
freightage and proceeds of the
insurance, if any. NO VESSEL NO
LIABILITY expresses in a nutshell the
limited
liability
rule.
The
total
destruction of the vessel extinguishes
maritime lien as there is no longer any

res to which it can attach.
Q: Is this rule applies in the handling of
the passengers?
A: YES
Q: Whose liability is this?
A: Shipowner or Agents.
Article 586 2nd paragraph states
that: By ship agent is understood the
person entrusted with provisioning or
representing the vessel in the port in
which it may be found.
*Ship agent is the only person that can
be sued directly.
Reason: Article 618 of the Code of
Commerce provides so.
Article 618 1st paragraph states
that: The ship captain shall be civilly
liable to the ship agent, and the latter
to the third persons who may have
made contracts with the former; x x
x.
Q: What kind?
A:
Maritime
in
nature;
marine
transactions connected with maritime
law; maritime trade and commerce
Purpose: To encourage shipbuilding
and maritime transactions
Commerce provides that: The ship
agent shall also be civilly liable for 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; but he
may exempt himself therefrom by
abandoning the vessel with all her
equipments and the freight it may
have earned during the voyage.
Commerce provides that: The coowners of a vessel shall be civilly liable
in the proportion of their interests in
the common fund, for the results of the
acts of the captain, referred to in
Article 587. Each co-owner may
exempt himself from this liability by
the abandonment, before a notary, of
the part of the vessel belonging to
him.
Commerce provides that: The civil
liability incurred by the shipowners in
the case prescribed in this section,
shall be understood as limited to the
value of the vessel with all its
appurtenances and freightage earned
during the voyage.
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When applicable:
The Code of Commerce sanctions the
application of the doctrine in the
following cases: 1. Civil liability for
which arise from the conduct of the
captain in the case of the goods which
the vessel carried; 2. Civil liability
arising from collisions; 3. Unpaid
wages of the captain and the crew if
the vessel and its cargo are totally lost
by reason of capture of shipwreck.
2. Exceptions to the rule
Exceptions:
1. When the injury to or death of a
passenger is due either to the fault
of the shipowner, or to the
concurring
negligence
of
the
shipowner and the captain;
2. When the vessel is insured to the
extent of the insurance proceeds;
and
*Freightage collectible
Q: How come insurance is an
exception?
A: Because there is no loss. The
loss was compensated by the
insurance company
3. In Workmens Compensation claims
Q: Why is an exception?
A: Because not maritime in nature
*In Yangco v Laserna case, the
SC held that it covers anything that
is
connected
with
maritime
transactions
3. Abandonment
Q: If theres partial loss can the
shipowner/agent be exempted from
liability?
A: YES. If there is abandonment.
Q: If there is total loss, is it necessary
to abandon?
A: NO. There is nothing to abandon.
Case: Luzon Stevedoring
Commerce states that: The ship
may exempt himself therefrom by
Q: How claims are satisfied under the
Limited Liability Rule?
A: All claims should be collated before
they can be satisfied from what
remains of the insurance proceeds and

freightage at the time of the loss. No
claimant should be given preference
over the others by the simple
expedience
of
having
filed
or
completed its action earlier than the
rest. Thus, the execution of judgment
in earlier completed cases, even those
already final and executory, must be
stayed pending completion of all cases
occasioned by the subject sinking.
Then and only then can all such claims
be simultaneously settled, either
completely or pro-rata should the
insurance proceeds and freightage be
not enough to satisfy the claim.
Case: Aboitiz Shipping Co. v
General Accident Fire and Life
Insurance Corporation
C. Vessels
- Those engaged in navigation,
whether coastwise or on the high
seas, including floating docks,
pontoons, dredges, scows and any
other floating apparatus destined
for the services of the industry or
maritime commerce. Excluded are
local and foreign military vessels,
bancas and other watercrafts of
less than 3 tons gross capacity and
small watercrafts engaged in river
and bay traffic.
1. Acquisition
a. By prescription
Commerce states that: Merchant
vessels constitute property which
may be acquired and transferred
by any of the means recognized by
law. The acquisition of a vessel
must
appear
in
a
written
instrument,
which
shall
not
produce any effect with respect to
third persons if not inscribed in the
registry of vessels. The ownership
of a vessel shall likewise be
acquired by possession in good
faith, continued for three years,
with a just title duly recorded. In
the absence of any of these
requisites, continuous possession
for ten years shall be necessary in
order to acquire ownership. A
captain may not acquire by
prescription the vessel of which he
is in command.
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Corporation Code
Requisites:
1. Acquisition must appear in a
written instrument
2. Such shall not produce any
effect to third persons if not
inscribed in the registry of
vessels
3. Shall be acquired by possession
in good faith, continued for 3
years
4. With a just title duly recorded
5. In the absence of any of there,
continuous possession for 10
years shall be necessary to
acquire ownership
Q: Can the ship captain acquire
vessel by prescription?
A: NO. The character of possession
he has is not those for acquisitive
possession.
The
requisite
for
acquisitive possession is that
possession as an owner.
Commerce
states that: Coowners of vessels shall have the
right of repurchase and redemption
in sales made to strangers, but
they may exercise the same only
within the 9 days following the
inscription of the sale in the
registry, and by depositing the
price at the same time.
b. By sale
Commerce states that: In the
sale of a vessel it shall always be
understood as included the rigging,
masts, stores and engine of a
steamer
appurtenant
thereto,
which at the time belongs to the
vendor. The arms, munitions of
war, provisions and fuel shall not
be considered as included in the
sale. The vendor shall be under the
obligation
to deliver to the
purchaser a certified copy of the
record sheet of the vessel in the
registry up to the date of sale.
Commerce states that: If the
alienation of the vessel should be
made while it is on voyage, the
freightage which it earns from the
time it receives its last cargo shall
pertain entirely to the purchaser,
and the payment of the crew and
other persons who make up its
complement for the same voyage

shall be for his account. If the sale
is made after the vessel has arrived
at the port of its destination, the
freightage shall pertain to the
vendor, and the payment of the
crew and other individuals who
make up its complement shall be
for his account, unless the contrary
is stipulated in either case.
*If made while it is on voyage, the
freightage which it earns from the
time it receives its last cargo shall
pertain entirely to the purchaser,
and the payment of the crew and
other persons who make up its
complement shall be for his
account.
*If made after vessel arrived at
port of its destination, freightage
shall pertain to the vendor, and the
payment of the crew and other
individuals who make up its
complement shall be for his
account, unless the contrary is
stipulated in either case.
Commerce states that: If the
vessel being on a voyage or in a
foreign port, its owner or owners
should voluntarily alienate it, either
to Filipinos or to foreigners
domiciled in the capital or in a port
of another country, the bill of sale
shall be executed before the consul
of the Republic of the Philippines at
the port where it terminates its
voyage and said instrument shall
produce no effect with respect to
third persons if it is not inscribed in
the registry of the consulate. The
consul shall immediately forward a
true copy of the instrument of
purchase and sale of the vessel to
the registry of vessels of the port
where said vessel is inscribed and
registered. In every case the
alienation of the vessel must be
made to appear with a statement
of whether the vendor receives its
price in whole or in part, or
whether he preserves in whole or in
part any claim on said vessel. In
case the sale is made to a Filipino,
this fact shall be stated in the
certificate of navigation. When a
vessel, being in a voyage, shall be
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Corporation Code
rendered useless for navigation,
the captain shall apply to the
competent judge or court of the
port of arrival, should it be in the
Philippines; and should it be in a
foreign country, to the consul of
the Republic of the Philippines,
should there be one, or, where
there is none, to the judge or court
or to the local authority; and the
consul, or the judge or court, shall
order an examination of the vessel
to be made. If the consignee or the
insurer should reside at said port,
or should have representatives
there, they must be cited in order
that they may take part in the
proceedings on behalf of whoever
may be concerned.
c. Registration
Section 810 of the Tariff and
Customs Code provides that:
The Bureau of Customs is vested
with exclusive authority over the
registration and documentation of
Philippine vessels. By it shall be
kept and preserved the records of
registration and of transfers and
encumbrances of vessels; and by it
shall be issued all certificates,
licenses
or
other
documents
incident
to
registration
and
documentation,
or
otherwise
requisite for Philippine vessels.
*Through the MARINA
d. Ships manifest
Sec. 906 of the Tariff and
Customs Code provides that:
Manifests shall be required for
cargo and passengers transported
from one place or port in the
Philippines to another only when
one or both of such places is a port
of entry.
*Declaration of the entire cargo.
The object is to furnish customs
officers with a list to check against,
to inform the revenue officers what
goods are brought into a port of the
country on a vessel. Hence, the
requirement that a vessel must
carry a manifest is not complied
with even if a bill of lading can be
presented.
*A bill of lading is just a declaration
of a specific cargo rather than the
entire cargo. It is issued as a
matter of convenience by virtue of

a contract.
D. Persons who take part in Maritime
Commerce
1. Shipowners and shipagents
Commerce
provides
that:
The
shipowner and the ship agent shall be
civilly liable for the acts of the captain
and for the obligations contracted by
the latter to repair, equip, and
provision the vessel, provided the
creditor proves that the amount
claimed was invested for the benefit of
the same. By ship agent is understood
the person entrusted with provisioning
or representing the vessel in the port
in which it may be found.
Commerce provides that: The ship
may exempt himself thereform by
Commerce provides that: Neither the
shipowner nor the ship agent shall be
liable for the obligations contracted by
the captain, if the latter exceeds the
powers and privileges pertaining to
him by reason of his position or
conferred upon him by the former.
Nevertheless, if the amounts claimed
were invested for the benefit of the
vessel, the responsibility therefor shall
devolve upon its owner or agent.
a. Rules in case of part-owners
Commerce provides that: If two
or more persons should be part
owners of a merchant vessel, a
partnership shall be presumes as
estrablished by the co-owners. This
partnership shall be governed by
the resolution of the majority of the
members. If the part-owners should
not be more than two, the
disagreement of views, if any, shall
be decided by the vote of the
member
having
the
largest
interest. If the interests are equal,
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Corporation Code
it should be decided by lot. The
person having the smallest share in
the ownership shall have one vote;
and proportionately the other part
owners as many votes as they
have parts equal to the smallest
one. A vessel may not be detained,
attached
or
levied
upon
in
execution in its entirety, for the
private debts of a part owner, but
the proceedings shall be limited to
the interest which the debtor may
have in the vessel, without
interfering with the navigation.
Commerce provides that: The coowners of a vessel shall be civilly
liable in the proportion of their
interests in the common fund, for
the results of the acts of the
captain, referred to in Article 587.
Commerce provides that: All the
part owners shall be liable, in
proportion to their respective
ownership, for the expenses for
repairing the vessel, and for other
expenses which are incurred by
virtue of a resolution of the
majority. They shall likewise be
liable in the same proportion for
the expenses for the maintenance,
equipment, and provisioning of the
vessel, necessary for navigation.
resolution of the majority with
regard to the repair, equipment,
and provisioning of the vessel in
the port of departure shall bind the
minority,
unless the
minority
members renounce their interests,
which must be acquired by the
other co-owners, after a judicial
appraisement of the value of the
portion or portions assigned. The
resolutions of the majority relating
to
the
dissolution
of
the
partnership and sale of the vessel
shall also be binding on the
minority. The sale of the vessel
must be made at public auction,
subject to the provisions of the law
of civil procedure, unless the coowners
unanimously
agree
otherwise, saving always the right
of repurchase and redemption

provided for in Article 575.
owners of a vessel shall have
preference in her charter over
other persons, under the same
conditions and price. If two or more
of them should claim this right, the
one having the greater interest
shall be preferred; and should they
have equal interests, the matter
shall be decided by lot.
Commerce states that: The coowners shall elect the manager
who is to represent them in the
capacity of ship agent. The
appointment of director or ship
agent shall be revocable at the will
of the members.
b. Rules in case of shipagents
agent, whether he is at the same
time the owner of the vessel, or a
manager for an owner or for an
association of co-owners, must
have the capacity to trade and
must be recorded in the merchants
registry of the province. The ship
agent
shall
represent
the
ownership of the vessel, and may,
in his own name and in such
capacity,
take
judicial
and
extrajudicial steps in matters
relating to commerce.
ship agent may discharge the
duties of captain of the vessel,
subject in every case to the
provision of Article 609. If two or
more co-owners apply for the
position
of
captain,
the
disagreement shall be decided by a
vote of the members; and if the
vote should result in a tie, it shall
be decided in favor of the co-owner
having the larger interest in the
vessel. If the interests of the
applicants should be equal, and
there should be a tie, the matter
shall be decided by lot.
agent shall designate and come to
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Corporation Code
terms with the captain, and shall
contract in the name of the owners,
who shall be bound in all that refer
to repairs, details equipment,
armament, provisions of food and
fuel, and freight of the vessel, and,
in general, in all that relate to the
requirements of navigation.
agent may not order a new voyage,
or make contracts for a new
charter, or insure the vessel,
without the authorization of its
owner or resolution of the majority
of the co-owners, unless these
powers were granted him in the
certificate of his appointment. If he
insures
the
vessel
without
authorization therefore, he is
subsidiarily liable for the solvency
of the insurer.
agent managing for an association
shall render to his associates an
account of the results of each
voyage of the vessel, without
prejudice to always having the
books and correspondence relating
to the vessel and to its voyages at
their disposal.
Commerce states that: After the
account of the managing agent has
been approved by a relative
majority, the co-owners shall pay
the expenses in proportion to their
interest, without prejudice to the
civil or criminal actions which the
minority may deem fit to institute
afterwards. In order to enforce the
payment, the managing agent shall
be entitled to an executor action
(accion ejecutiva), which shall be
instituted by virtue of a resolution
of the majority, and without further
proceedings
than
the
acknowledgment of the signatures
of the persons who voted for the
resolution.
Commerce states that: Should
there be any profits, the co-owners
may demand of the managing
agent the amount corresponding to
their interests by means of an
executor action (accion ejecutiva),

without any other requisite than
the
acknowledgment
of
the
signatures on the instrument
approving the account.
agent shall indemnify the captain
for all the expenses he may have
incurred with funds of his own or of
others, for the benefit of the
vessel.
*The ship agent is entrusted with
the provisioning and representing
the vessel in the port in which it
may be found. His liability to
passengers and cargo owners for
loss or injury is the same as the
shipowner.
*He is solidarily liable with the
owner for such loss or damage
subject to his right to claim
reimbursement from the shipowner.
*Only agent that can be sued
directly.
2. Captains and masters of vessels
a. Qualifications
Commerce states that: Captains,
masters or patrons of vessels must
be Filipinos, have legal capacity to
contract in accordance with this
code, and prove the skill, capacity,
and qualifications necessary to
command and direct the vessel, as
established
by
marine
or
navigation laws, ordinances, or
regulations, and must not be
disqualified according to the same
for the discharge of the duties of
the position. If the owner of a
vessel desired to be the captain
thereof, without having the legal
qualifications therefor, he shall
limit himself to the financial
administration of the vessel, and
shall intrust the navigation to a
person
possessing
the
qualifications required by said
ordinances and regulations.
b. Powers and functions
following powers shall be inherent
in the position of captain, master or
patron of a vessel: 1. To appoint or
make contracts with the crew in
the absence of the ship agent, and
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Corporation Code
to propose said crew, should said
agent be present; but the ship
agent may not employ any
member against the captains
express refusal; 2. To command the
crew and direct the vessel to the
port
of
its
destination,
in
accordance with the instructions he
may have received from the ship
agent; 3. To impose, in accordance
with the contracts and with the
laws and regulations of the
merchant marine, and when on
board the vessel, correctional
punishment upon those who fail to
comply with his orders or are
wanting in discipline, holding a
preliminary hearing on the crimes
committed on board the vessel on
the seas, which crimes shall be
turned over to the authorities
having jurisdiction over the same
at the first port touched; 4. To
make contracts for the charter of
the vessel in the absence of the
ship agent or of its consignee,
acting in accordance with the
instructions
received
and
protecting the interests of the
owner with utmost care; 5. To
adopt all proper measures to keep
the vessel well supplied and
equipped, purchasing all that may
be necessary for the purpose,
provided there is no time to
request instruction from the ship
agent; and 6. To order, in similar
urgent cases while on a voyage,
the repairs on the hull and engines
of the vessel and in its rigging and
equipment, which are absolutely
necessary to enable it to continue
and finish its voyage; but if he
should arrive at a point where
there is a consignee of the vessel,
he shall act in concurrence with the
latter.
Commerce states that: In order
to comply with the obligations
mentioned in the preceding article,
the captain, when he has no funds
and does not expect to receive any
from the ship agent, shall obtain
the same in the successive order
stated below: 1. By requesting said
funds from the consignee of the
vessel or correspondents of the

ship agent; 2. By applying to the
consignees of the cargo or to those
interested therein; 3. By drawing
on the ship agent; 4. By borrowing
the amount required by means of a
loan on bottomry; and 5. By selling
a sufficient amount of the cargo to
cover
the
sum
absolutely
indispensable for the repair of the
vessel and to enable it to continue
its voyage. In these two last cases
he must apply to the judicial
authority of the port, if in the
Philippines, and to the consul of the
Republic of the Philippines if in a
foreign country, and where there is
none, to the local authority,
proceeding in accordance with the
provisions of Article 583, and with
the provisions of the law of civil
procedure.
following obligations shall be
inherent in the office of the
captain:
1. To have on board before starting
on a voyage a detailed inventory of
the hull, engines, rigging, sparemasts, tackle, and other equipment
of the vessel; the royal or the
navigation certificate; the roll of
the persons who make up the crew
of the vessel, and the contracts
entered into with them; the lists of
passengers; the bill of health; the
certificate of the registry proving
the ownership of the vessel and all
the obligations which encumber
the same up to that date; the
charter parties or authenticated
copies thereof; the invoices or
manifests of the cargo, and the
memorandum of the visit or
inspection by experts, should it
have been made at the port of
departure;
2. To have a copy of this code on
board; 3. To have thee folioed and
stamped books, placing at the
beginning
of
each
one
a
memorandum of the number of
folios it contains, signed by the
maritime authority, and in his
absence
by
the
competent
authority. In the first book, which
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Corporation Code
shall be called log book, he shall
enter day by day the condition of
the atmosphere, the prevailing
winds, the courses taken, the
rigging carried, the power of the
engines used in navigation, the
distances covered, the maneuvers
executed, and other incidents of
navigation; he shall also enter the
damage suffered by the vessel in
her hull, engines, rigging, and
tackle, no matter what its cause
may be, as well as the impairment
and damage suffered by cargo, and
the effect and importance of the
jettison, should there be any; and
in cases of serious decisions which
require the advice or a meeting of
the officers of the vessel, or even
of the crew and passengers, he
shall record the decisions adopted.
For the information indicated he
shall make use of the binnacle
book and of the steam of engine
book kept by the engineer. In the
second book called the accounting
book, he shall record all the
amounts collected and paid for the
account of the vessel, entering
specifically the article by article,
the source of the collection and the
amounts spent for provisions,
repairs, acquisitions of equipment
or goods, fuel, food, outfits, wages,
and other expenses of whatever
nature they may be. He shall
furthermore enter therein a list of
all the members of the crew,
stating their domiciles, their wages
and salaries, and the amounts they
may have received on account,
directly or by delivery to their
families. In the third book, called
freight book, he shall record the
loading and discharge of all the
gods, stating their marks and
packages, names of the shippers
and of the consignees, ports of
loading and unloading, and the
freightage they give. In this same
book he shall record the names and
places of sailing of the passengers,
the number of packages in their
baggage, and the price of passage;
4. Before receiving cargo, to make
with the officers of the crew and
two experts, if required by the
shippers
and
passengers,
an
examination of the vessel, in order
to ascertain whether it is watertight, with the rigging and engines
in good condition, and with the
equipment
required
for
good
navigation, preserving under his
responsibility a certificate of the
memorandum of his inspection,
signed by all those who may have
taken part therein. The experts
shall be appointed, one by the
captain of the vessel and another
by
those
who
request
its
examination, and in case of
disagreement a third shall be
appointed by the marine authority
of the port or by the authority
exercising his functions;
5. To remain constantly on board
the vessel with the crew while the
cargo is being taken on board and
to carefully watch the stowage
thereof; not to consent to the
loading of any merchandise or
matter of a dangerous character,
such as inflammable or explosive
substances,
without
the
precautions
which
are
recommended for their packing,
handling and isolation; not to
permit the carriage on deck of any
cargo which by reason of its
arrangement, volume, or weight
makes the work of the sailors
difficult, and which might endanger
the safety of the vessel; and if, on
account of the nature of the
merchandise, the special character
of the shipment, and principally the
favorable season in which it is
undertaken, merchandise may be
carried on deck, he must hear the
opinion of the officers of the vessel
and have the consent of the
shippers and of the ship agent;
6. To demand a pilot at the expense
of the vessel whenever required by
the navigation, and principally
when he has to enter a port, canal,
or river, or has to take a roadstead
or anchoring place with which
neither he nor the officers and crew
are acquainted;
7. To be on deck on reaching land
and to take command on entering
and
leaving
ports,
canals,
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Corporation Code
roadsteads, and rivers, unless
there
is
a
pilot
on
board
discharging his duties. He shall not
spend the night away from the
vessel except for serious causes or
by reason of official business;
8. To present himself, when making
a port in distress, to the maritime
authority if in the Philippines and to
the consul of the Republic of the
Philippines if in a foreign country,
before 24 hours have elapsed, and
to make a statement of the name
registry, and port of departure of
the vessel, of its cargo, and the
cause of arrival which declaration
shall be visaed by the authority or
the consul, if after examining the
same it is found to be acceptable,
giving the captain the proper
certificate proving his arrival in
distress and the reasons therefor.
In the absence of the maritime
authority or of the consul, the
declaration must be made before
the local authority;
9. To take the necessary steps
before the competent authority in
order to record in the certificate of
the vessel in the registry of vessels
the obligations which he may
contract in accordance with Article
583;
10. To place under good care and
custody
all the papers and
belongings of any members of the
crew who might die on the vessel,
drawing up a detailed inventory, in
the presence of passengers, or, in
their absence, of members of the
crew as witnesses;
11. To conduct himself according to
the rules and precepts contained in
the instructions of the ship agent,
being liable for all that which he
may do in violation thereof;
12. To inform the ship agent from
the port at which the vessel
arrives, of the reason of his arrival,
taking
advantage
of
the
semaphore, telegraph, mail, etc.,
as the case may be; to notify him
of the cargo he may have received,
stating the names and domiciles of
the shippers, freightage earned,
and
amounts
borrowed
on
bottomry loan; to advise him of his
departure, and of any operation

and date which may be of interest
to him;
13. To observe the rules with
respect to situation, lights and
maneuvers in order to avoid
collisions;
14. To remain on board, in case the
vessel is in danger, until all hope to
save it is lost, and before
abandoning it, to hear the officers
of the crew, abiding by the decision
of the majority; and if the boats are
to be taken to, he shall take with
him, before anything else, the
books and papers, and then the
articles of most value, being
obliged to prove, in case of the loss
of the books and papers, that he
did all he could to save them;
15. In case of wreck, to make the
proper protest in due form at the
first port of arrival, before the
competent
authority
or
the
Philippine consul, within 24 hours,
specifying therein all the incidents
of the wreck, in accordance with
subdivision 8 of this article;
16. To comply with the obligations
imposed
by
the
laws
and
regulations on navigation, customs,
health, and others.
c. Discretion powers
*A ships captain must be accorded
a
reasonable
measure
of
discretionary authority to decide
what the safety of the ship and of
its crew and cargo specifically
requires on a stipulated ocean
voyage.
Case:Inter-Orient
Maritime
Enterprises Inc. v CA
3. Pilot
a. Concept
Pilot is a person duly qualified and
licensed to conduct a vessel into or
out of ports or in certain waters.
*Generally connotes a person
taken on board at a particular place
for the purpose of conducting a
ship through a river, road or
channel or from a port.
*If he is in command, he becomes
the Master pro hac vice.
*While exercising his functions a
pilot is in sole command of the ship
and supersedes the master for the
time being in the command and
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Corporation Code
navigation of the ship; the master
does not surrender his vessel to the
pilot and the pilot is not the master.
There are occasions when the
master may and should interfere
and even displace the pilot, as
when the pilot is obviously
incompetent or intoxicated.
Case: Far Eastern Shipping v
CA
b. Relationship to master and
shipowner
4. Officers and crew of the vessel
i.
Sailing mate/First mate
ii. Second mate
iii. Engineers marine engineers
iv. Crew cabin boy; paramedics;
watchkeeper; radio officers
5. Supercargoes person who discharges
administrative duties assigned to him
by ship agent or shippers, keeping an
account and record of transaction as
required in the accounting book of the
captain.
E. Charter parties
1. Concept
Commerce states that: Charter
parties executed by the captain in the
absence of the ship agent shall be
valid and effective, even though in
executing them he should have acted
in violation of the orders and
instructions of the ship agent or
shipowner; but the latter shall have a
right of action against the captain for
indemnification of damages.
Charter party is a lease contract by
which with the entire ship or some
principal part thereof is let by the
owner to another person for a
specified period of time or use.
2. Kinds; bareboat and contract of
affreightment
Kinds:
1. Bareboat or demise means the
whole vessel is lend to the
charterer which transfers to him its
entire command and possession
and consequent control over its
navigation, including the master
and crew who are his servants. The
charterer is treated as owner pro
hac vice of the vessel. In such
case, a common carrier becomes a
private carrier.
*Charterer
means
the
vessel
assumes all responsibilities of
navigation and provides his own

people.
*Shipowner is not liable to third
person; it is the charterer who is
liable to them.
General Rule: The charterer is
liable to the third person.
Exception: Shipowner may still be
held liable if the injury was caused
by unseaworthiness or negligence
of the shipowner beyond before the
demise or bareboat took over.
2. Contract
of
affreightment
involves that use of shipping space
leased by the owner in part or as a
whole, to carry goods for others.
*The
shipowner
retains
the
possession,
command
and
navigation
of
the
ship,
the
charterer merely having use of the
space in the vessel in return for his
payment of the charter hired.
*The shipowner is liable to third
person.
3. Persons qualified to make charter
Q: Can the captain enter into a charter
contract?
A: YES provided that he is authorized.
Q: Can the charterer enter into a subcharter contract?
A: YES provided it is not prohibited.
This is just like the rule in lease.
4. Requisites of a valid charter
Commerce states that: A charter
party must be drawn in duplicate and
signed by the contracting parties, and
when either does not know how or is
not able to do so, by two witnesses at
his request. The charter party shall
contain, besides the conditions freely
stipulated,
the
following
circumstances: 1. The kind, name, and
tonnage of the vessel; 2. Its flag and
port of registry; 3. The name, surname,
and domicile of the captain; 4. The
name, surname, and domicile of the
ship agent, if the latter should make
the charter party; 5. The name,
surname,
and
domicile
of
the
charterer; and if he states that he is
acting by commission, that of the
person for whose account he makes
the contract; 6. The port of loading and
unloading; 7. The capacity, number of
tons or the weight or measurement
which
they
respectively
bind
themselves to load and to transport, or
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Corporation Code
whether the charter party is total; 8.
The freightage to be paid, stating
whether it is to be a fixed amount for
the voyage or so much per month, or
for the space to be occupied, or for the
weight or measure of the goods of
which the cargo consists, or in any
other manner whatsoever agreed
upon; 9. The amount of primage to be
paid to the captain; 10. The days
agreed
upon
for
loading
and
unloading; 11. The lay days and extra
lay days to be allowed and the
demurrage to be paid for each of
them.
Requisites:
1. Consent of the contracting parties
2. Existing vessel which should be
placed at the disposition of the
shipper
3. Freight
4. Compliance with Article 652 of the
Code of Commerce
5. Concept
of
and
liability
for
demurrage
Demurrage is the sum due, by
express contract, for the detention of
the vessel, in loading and unloading,
beyond the time allowed in the
contract of affreightment, and to any
other improper detention or delay
beyond the time set for loading.
6. Rights and obligations of charter
parties
Shipowner or
Charterer
Ship agent
If the vessel is To pay the agreed
chartered wholly, charter price
not
to
accept
cargo from others
To
observe To pay freightage
represented
on
unboarded
capacity
cargo
To unload cargo To pay losses to
clandestinely
others for loading
placed
uncontracted
cargo
or
illicit
cargo
To
substitute To wait if the
another vessel if vessel
needs
load is less than repair
3/5 of capacity
To leave the port To pay expenses
if the charterer for deviation
does not bring the
cargo within the
lay days and extra
lay days allowed
To place in a
vessel
in
a
condition
to
navigate; to bring
cargo to nearest
neutral port in
case of war or
blockade
F. Loans on Bottomry and Respondentia
1. Definition
Commerce states that: A loan in
which under any condition whatever,
the repayment of the sum loaned and
of the premium stipulated depends
upon the safe arrival in port of the
goods on which it is made, or of the
price they may receive in case of
accident, shall be considered a loan on
bottomry or respondentia.
Bottomry is a loan secured by the
shipowner or ship agent guaranteed by
the vessel itself and payable only upon
arrival of vessel at destination.
*Captain may enter into bottomry loan
provided there is justification, example
of which is, for immediate repairs.
Respondentia is a loan secured by
the owner of the cargo payable upon
safe arrival of cargo at destination.
Barratry is an act of the captain or
crew for fraudulent purposes.
2. Distinguished from ordinary loan
Ordinary
Loan
With or without
collateral
Any
property
may be used
as collateral
Absolutely
payable
Obligation
to
pay still exists
in the event
the
collateral
was lost
First lender is
the
first
priority
Need not be in
writing to be
enforceable
Bottomry/Respond
entia
Always with collateral
Property is limited to
vessel/cargo
Conditionally payable
Loan is extinguished
in the event that the
vessel/cargo was lost
Last lender is the first
priority
Need to be in writing
to be enforceable
3. Parties to the loan

Parties:
1. Ship owner or ship agent
2. Owner of the cargo
3. Lender
4. Formalities needed
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Corporation Code
Commerce states that: Loans on
bottomry or respondentia may be
executed:
1. By means of a public instrument;
2. By means of a policy signed by the
contracting parties and the broker
taking part therein;
3. By means of a private instrument.
Under whichever of these forms the
contract is executed, it shall be
entered in the certificate of the
registry of the vessel and shall be
recorded in the registry of vessels,
without which requisites the credits of
this kind shall not have, with regard to
other credits, the preference which,
according to their nature, they should
have, although the obligation shall be
valid between the contracting parties.
Formal Requirements: a. By means
of public instrument; b. Policy signed
by the contracting parties and the
broker taking part therein; and c. by
means of private instrument.
Reason: Must be in writing to be
enforceable.
5. Effect of loss of on loan
Commerce states that: The actions
pertaining to the lender shall be
extinguished by the absolute loss of
the goods on which the loan was
made, if it arose from an accident of
the sea at the time and during the
voyage designated in the contract, and
it is proven that the cargo was on
board; but this shall not take place if
the loss was caused by the inherent
defect of the thing, or through the fault
or malice, of the borrower, or barratry
on the part of the captain, or if it was
caused by damages suffered by the
vessel as a consequence of being
engaged in contraband, or if it arose
from having loaded the merchandise
on a vessel different from that
designated in the contract, unless this
change should have been made by
reason of force majeure. Proof of the
loss as well as of the existence of the
vessel of the goods declared to the
lender as the object of the loan is
incumbent upon him who received the
loan.
General Rule: If the property that was
collateral was loss, the loan is
extinguished.
Exceptions: 1. Perished due to

inherent defects; 2. Brought about by
malicious conduct of the shipowner; 3.
Barratry of the captain; 4. Engaged in
unlawful transaction; and 5. The cargo
loaded on the vessel be different in
from that agreed upon.
*Commonality of all the exceptions is
that the borrower is at fault.
6. Cases where loan is regarded as
simple loan
a. The loan must be made in
connection with the maritime
transaction otherwise the loan
becomes a simple loan.
b. If the loan is bigger than the value
of the collateral, the loan becomes
a simple loan.
c. If the property is not exposed to
maritime peril.
Reason: To prevent abuse by the
borrower of the benefits of this loan.
Commerce states that: If the lender
should prove that he loaned as amount
larger than the value of the object
liable for the bottomry loan, on
account
of
fraudulent
measures
employed by the borrower, the loan
shall be valid only for the amount at
which said object is appraised by
experts. The surplus principal shall be
returned with legal interests for the
entire time required for repayment.
Commerce states that: If the full
amount of the loan contracted in order
to load the vessel should not be used
for the cargo, the balance shall be
returned before clearing. The same
procedure shall be observed with
regard to the goods taken as loan, if
they were not loaded.
Commerce states that: The loan
which the captain takes at the point of
residence of the owners of the vessel
shall only affect that part thereof
which belongs to the captain, if the
other owners or their agents should
not
have
given
their
express
authorization therefor or should not
have taken part in the transaction. If
one or more of the owners should be
requested to furnish the amount
necessary to repair or provision the
vessel, and they should not do so
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Corporation Code
within 24 hours, the interest which the
parties in default may have in the
vessel shall be liable for the loan in the
proper proportion. Outside of the
residence of the owners the captain
may contract loans in accordance with
the provisions of Articles 583 and
611.
Commerce provides that: Should the
goods on which money is taken not be
subjected to risk, the contract shall be
considered a simple loan, with the
obligation on the part of the borrower
to return the principal and interest at
the legal rate, if that agreed upon
should not be lower.
G. Averages
1. Concept
Commerce provides that: For the
purposes of this code the following
shall be considered averages: 1. All
extraordinary or accidental expenses
which may be incurred during the
voyage in order to preserve the vessel,
the cargo, or both; 2. Any damages or
deteriorations which the vessel may
suffer from the time it puts to sea from
the port of departure until it casts
anchor in the port of destination, and
those suffered by the merchandise
from the time they are loaded in the
port of shipment until they are
unloaded in the port of their
consignment.
2. Classes of average and the
persons liable
a. Simple average
Commerce provides that: As a
general rule, simple or particular
averages shall include all the
expenses and damages caused to
the vessel or to her cargo which
have not inured to the common
benefit and profit of all the persons
interested in the vessel and her
cargo, and especially the following:
1. The losses suffered by the
cargo from the time of its
embarkation
until
it
is
unloaded, either on account of
inherent defect of the goods or
by reason of an accident of the
sea or force majeure, and the
expenses incurred to avoid and

repair the same;
2. The
losses
and
expenses
suffered by the vessel in its
hull,
rigging,
arms,
and
equipment, for the same causes
and reasons, from the time it
puts to sea from the port of
departure until it anchors and
lands in the port of destination;
3. The losses suffered by the
merchandise loaded on deck,
except in coastwise navigation,
if the marine ordinances allow
it;
4. The wages and victuals of the
crew when the vessel is
detained or embargoed by
legitimate
order
or
force
majeure, if the charter has been
contracted for a fixed sum for
the voyage;
5. The necessary expenses on
arrival at a port, in order to
make
repairs
or
secure
provisions;
6. The lowest value of the goods
sold by the captain in arrivals
under stress for the payment of
provisions and in order to save
the crew, or to meet any other
need of the vessel, against
which the proper amount shall
be charged;
7. The victuals and wages of the
crew while the vessel is in
quarantine;
8. The loss inflicted upon the
vessel or cargo by reason of an
impact or collision with another,
if
it
is
accidental
and
unavoidable. If the accident
should occur through the fault
or negligence of the captain,
the latter shall be liable for all
the losses caused;
9. Any loss suffered by the cargo
through the fault, negligence,
or barratry of the captain or of
the crew, without prejudice to
the right of the owner to
recover
the
corresponding
indemnity from the captain, the
vessel, and the freightage.
General Rule: No reimbursement
Principle: Loss will lie where it
falls
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Corporation Code
Reason: There was no common
benefit
Exception: if there is insurance
Exception to the Exception:
Stipulated in the insurance policy
stating no liability on the part of
the insurer regarding particular
average.
owner of the goods which gave rise
to the expense or suffered the
damage shall bear the simple or
particular averages.
Q: Who is liable?
A: Owner of the goods
b. General average
Commerce provides that: As a
general rule, general or gross
averages shall include all the
damages and expenses which are
deliberately caused in order to
save the vessel, its cargo, or both
at the same time, from a real and
known risk, and particularly the
following:
1. The goods or cash invested in
the redemption of the vessel or
of the cargo captured by
enemies, privateers, or pirates,
and the provisions, wages, and
expenses of the vessel detained
during the time the settlement
or redemption is being made;
2. The goods jettisoned to lighten
the vessel, whether they belong
to the cargo, to the vessel, or to
the crew, and the damage
suffered through said act by the
goods which are kept on board;
3. The cables and masts which are
cut or rendered useless, the
anchors and the chains which
are abandoned, in order to save
the cargo, the vessel, or both;
4. The expenses of removing or
transferring a portion of the
cargo in order to lighten the
vessel and place it in condition
to enter a port or roadstead,
and the damage resulting
therefrom
to
the
goods
removed or transferred;
5. The damage suffered by the
goods of the cargo by the
opening made in the vessel in
order to drain it and prevent its

sinking;
6. The expenses caused in order
to float a vessel intentionally
stranded for the purpose of
saving it;
7. The damage caused to the
vessel which had to be opened,
scuttled or broken in order to
save the cargo;
8. The expenses for the treatment
and
subsistence
of
the
members of the crew who may
have been wounded or crippled
in defending or saving the
vessel;
9. The wages of any member of
the crew held as hostage by
enemies, privateers, or pirates,
and the necessary expenses
which he may incur in his
imprisonment,
until
he
is
returned to the vessel or to his
domicile, should he prefer it;
10. The wages and victuals of the
crew of a vessel chartered by
the month, during the time that
it is embargoed or detained by
force majeure or by order of the
government, or in order to
repair the damage caused for
the common benefit;
11. The depreciation resulting in
the value of the goods sold at
arrival under stress in order to
repair the vessel by reason of
gross average;
12. The expenses of the liquidation
of the average.
Commerce provides that: In order
to satisfy the amount of the gross
or general averages, all the
persons having an interest in the
vessel and cargo therein at the
time of the occurrence of the
average shall contribute.
Commerce provides that: In
order to incur the expenses and
cause the damages corresponding
to gross average, there must be a
resolution of the captain, adopted
after deliberation with the sailing
mate and other officers of the
vessel, and after hearing the
persons interested in the cargo
who may be present. If the latter
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shall object, and the captain and
officers or a majority of them, or
the captain, if opposed to the
majority, should consider certain
measures necessary, they may be
executed under his responsibility,
without prejudice to the right of the
shippers to proceed against the
captain before the competent
judge or court, if they can prove
that he acted with malice, lack of
skill, or negligence. If the persons
interested in the cargo, being on
board the vessel, have not been
heard, they shall not contribute to
the gross average, their share
being chargeable against the
captain, unless the urgency of the
case should be such that the time
necessary
for
previous
deliberations was wanting.
Commerce states that: In order
that the goods jettisoned may be
included in the gross average and
the owners thereof be entitled to
indemnity, it shall be necessary
insofar as the cargo is concerned
that their existence on board be
proven by means of the bill of
lading; and with regard to those
belonging to the vessel, by means
of the inventory prepared before
the departure in accordance with
the first paragraph of Article 812.
Commerce states that: if in
lightning a vessel on account of a
storm, in order to facilitate its entry
into a port or roadstead, part of the
cargo should be transferred to
lighters or barges and be lost, the
owner of said part shall be entitled
to indemnity, as if the loss had
originated from a gross average,
the
amount
thereof
being
distributed between the vessel and
cargo from which it came. If, on the
contrary,
the
merchandise
transferred should be saved and
the vessel should be lost, no
liability may be demanded of the
salvage.
Commerce states that: If, as a
necessary measure to extinguish a
fire in port, roadstead, creek, or
bay, it should be decided to sink

any vessel, this loss shall be
considered gross average, to which
the vessels saved shall contribute.
Commerce provides that: Lenders
on bottomry or respondentia shall
suffer, in proportion to their
respective interest, the general
average which may take place in
the goods on which the loan is
made. In particular averages, in the
absence of an express agreement
between the contracting parties,
the
lender
on
bottomry
or
respondentia shall also contribute
in proportion to his respective
interest, should it not belong to the
kind of risks excepted in the
foregoing article.
insurers of the vessel of the
freightage, and of the cargo shall
be obliged to pay for the
indemnification
of
the
gross
average, insofar as is required of
each
one
of
these
objects
respectively.
Commerce provides that: If,
notwithstanding the jettison of
merchandise, breakage of masts,
ropes, and equipment, the vessel
should be lost running the same
risk, no contribution whatsoever by
reason of gross average shall be
proper. The owners of the goods
saved shall not be liable for the
indemnification of those jettisoned,
lost, or damaged.
Commerce provides that: If, after
the vessel has been saved from the
risk which gave rise to the jettison,
it should be lost through another
accident taking place during the
voyage, the goods saved and
existing from the first risk shall
continue liable to contribution by
reason of the gross average
according to their value in the
condition in which they may be
found, deducting the expenses
incurred in saving them.
Remedy: Reimbursement
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General Rule: The sacrifice made
must be in the course of the
voyage.
Exceptions:
General
average
exists even if there is no voyage
yet: 1. Article 817 of the Code of
Commerce which covers fire in the
port; and 2. Article 818 of the Code
of Commerce which covers transfer
of cargo to another vessel for the
necessity to enter another port.
Requisites:
1. Exposure to common danger to
ship and the cargo after it has
been loaded whether during
voyage or port of loading and
unloading;
2. That for the common safety
part of the vessel or the cargo
or
both
is
sacrificed
deliberately;
3. That from the expenses or
damages caused follows the
successful saving of the vessel
and cargo;
4. That the expenses or damages
should have been incurred or
inflicted after taking legal steps
and authority
Formalities:
1. There must be a resolution of
the captain, adopted after a
deliberation with the other
officers of the vessel and after
hearing all persons interested
in the cargoes. If the latter
disagree, the decision of the
captain should prevail but they
shall register their objections.
2. The resolution must be entered
in the logbook, stating the
reasons and motives for the
dissent, and the irresistible and
urgent causes if he acted in his
own accord. It must be signed,
in the first case, by all persons
present in the hearing. In the
second case, by the captain
and all the officers of the
vessel. The minutes must also
contain a detail of all the goods
jettisoned and those injuries
caused to those on board.
H. Collisions
1. Definition
Collision is an impact of two vessels
both of which are moving.
Allision is an impact between a

moving vessel and a stationary one.
Possible damage:
a. Damage to vessel
b. Loss/damage to cargo
c. Injury or death of passenger
Example:
Q: A and B collided, A was found to be
negligent,
who
bears
the
consequential damages?
A: A shall be liable for the
consequential damages for she is at
fault.
Q: What if A and B were found to be
negligent,
who
bears
the
consequential damages?
A: With regard to the vessel, each
vessel shall be liable for their own
losses. With regard to the cargoes and
passengers, they are solidarily liable.
2. Zones in collision (Doctrine of
error in extremis)
*Knowing these zones are important
for liability purposes.
1. First zone all time up to the
moment when risk of collision
begins
2. Second zone time between
moment when risk of collision
begins and moment it becomes a
practical certainty.
*It is in this period where conduct
of the vessels is primordial. It is in
this zone that vessels must strictly
observe nautical rules unless a
departure
therefrom
becomes
necessary to avoid imminent
danger.
3. Third zone time when collision is
certain and time of impact.
*An error in this zone would no
longer be legally consequential.
Doctrine of Error in Extremis is a
sudden movement made by a faultless
vessel during the third zone of collision
with another vessel which is at fault
during the second zone. Even if such
sudden movement is wrong, no
responsibility will fall on said faultless
vessel.
Doctrine of Last Clear Chance
provides that a negligent defendant is
held liable to a negligent plaintiff or
even to a plaintiff who has been
grossly negligent where he should
have been aware of it in the
reasonable exercise of due care, had in
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fact an opportunity later than that of
the plaintiff to avoid an accident.
*In this doctrine, both parties are at
fault but only one party is liable. Only
the party who has the last clear
opportunity to avoid the impact is held
liable.
*This doctrine is inapplicable in the
following instances:
1. If the suit is between a parties of
contract of carriage; and
2. In case of collision of vessels
3. Rule on liability
Commerce provides that: If a vessel
should collide with another, through
the fault, negligence, or lack of skill of
the captain, sailing mate, or any other
member of the complement, the owner
of the vessel at fault shall indemnify
the losses and damages suffered, after
an expert appraisal.
collision is imputable to both vessels,
each one shall suffer its own damages,
and both shall be solidarily responsible
for the losses and damages occasioned
to their cargoes.
*This is known as the Doctrine of
Inscrutable Fault.
Doctrine
of
Inscrutable
Fault
provides that in case of collision where
it cannot be determined which
between the two vessels was at fault,
both vessels bear their respective
damage, but both should be solidarily
liable for damage to the cargo of both
vessels.
Commerce
states
that:
The
provisions of the preceding article are
applicable to the use in which it cannot
be determined which of the two
vessels has caused the collision.
Commerce states that: In the cases
above mentioned the civil action of the
owner against the person causing the
injury as well as the criminal liabilities,
which may be proper, are reserved.
Commerce states that: If a vessel
should collide with another, through
fortuitous event or force majeure, each
vessel and its cargo shall bear its own
damages.
Requisites:
1. The natural disaster must have
been the proximate and only cause
of the loss;
2. The common carrier must have
exercised due diligence to prevent
or minimize loss before, during and
after the occurrence of the natural
disaster;
3. The common carrier must not have
been guilty of delay; and
4. The captain must have made a
protest before the competent
authority at the first port he
touched within the 24 hours
following his arrival, and should
have ratified it within the same
period when he arrived at the port
of
destination,
proceeding
immediately with the proof of the
facts, without opening the hatches
until after this has been done.
Commerce provides that: If a vessel
should be forced by a third vessel to
collide with another, the owner of the
third vessel shall indemnify the losses
and damages caused, the captain
thereof being civilly liable to said
owner.
*This is known as the Doctrine of
Proximate Cause
Commerce states that: If by reason
of a storm or other cause of force
majeure, a vessel which is properly
anchored and moored should collide
with those nearby, causing them
damages, the injury occasioned shall
be considered as particular average of
the vessel run into.
4. Limited liability rule
*There must be no fault on the part of
the shipowner.
*The fault falls only with his crew.
Commerce states that: The civil
liability incurred by the shipowners in
the case prescribed in this section,
shall be understood as limited to the
value of the vessel with all its
appurtenances and freightage.
I.
Arrival under stress

1. Concept
The arrival of a vessel at the nearest
and most convenient port instead of
the port of destination, if during the
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voyage the vessel cannot continue the
trip to the port of destination.
Commerce provides that: If during
the voyage the captain should believe
that the vessel can not continue the
trip to the port of destination on
account of the lack provisions, well
founded fear of seizure, privateers, or
pirates, or by reason of any accident of
the sea disabling it to navigate, he
shall assemble the officers and shall
summon the persons interested in the
cargo who may be present, and who
may attend the meeting without the
right to vote; and if, after examining
the circumstances of the case, the
reason should be considered wellfounded, the arrival at the nearest and
most convenient port shall be agreed
upon, drafting and entering the proper
minutes, which shall be signed by all,
in the log book. The captain shall have
the deciding vote, and the persons
interested in the cargo, may make the
objections and protests they may
deem proper, which shall be entered in
the minutes in order that they may
make use thereof in the manner they
may consider advisable.
2. When improper
Commerce provides that: An arrival
shall not be considered lawful in the
following cases:
1. If the lack of provisions should arise
from the failure to take the
necessary
provisions
for
the
voyage according to usage and
customs, or if they should have
been rendered useless or lost
through bad stowage or negligence
in their care;
2. If the risk of enemies, privateers, or
pirates should not have been well
known, manifest, and based on
positive and provable facts;
3. If the defect of the vessel should
have arisen from the fact that it
was not repaired, rigged, equipped,
and prepared in a manner suitable
for the voyage, or from some
erroneous order of the captain;
4. When malice, negligence, want of
foresight, or lack of skill on the part
of the captain exists in the act
causing the damage.
3. Expenses
Commerce
provides
that:
The
expenses of an arrival under stress
shall always be for the account of the
shipowner or agent, but they shall not
be liable for the damages which may
be caused the shippers by reason of
the arrival, provided the latter is
legitimate. Otherwise, the ship agent
and the captain shall be jointly liable.
Commerce provides that: If in order
to make repairs to the vessel or
because there is danger that the cargo
may suffer, it should be necessary to
unload, the captain must request the
authorization from the competent
judge or court for the removal, and
carry it out with the knowledge of the
person interested in the cargo, or his
representative, should there be any. In
a foreign port, it shall be the duty of
the Philippine Consul, where there is
one, to give the authorization. In the
first case, the expenses shall be for the
account of the ship agent or owner,
and in the second, they shall be
chargeable against the owners of the
merchandise for whose benefit the act
was performed. If the unloading should
take place for both reasons, the
expenses
shall
be
divided
proportionately between the value of
the vessel and that of the cargo.
4. Custody of Cargo
Commerce
provides
that:
The
custody and preservation of the cargo
which has been unloaded shall be
intrusted to the captain, who shall be
responsible for the same, except in
cases of force majeure.
Commerce states that: If the entire
cargo or part thereof should appear to
be damaged, or there should be
imminent
danger
of
its
being
damaged, the captain may request of
the competent judge or court, or of the
consul in a proper case, the sale of all
or of part of the former, and the
person taking cognizance of the matter
shall authorize it, after an examination
and
declaration
of
experts,
advertisements, and other formalities
required by the case, and an entry in
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the book, in accordance with the
provisions of Article 624. The captain
shall, in proper case, justify the legality
of his conduct, under the penalty of
answering to the shipper for the price
the merchandise would have brought if
they had arrived in good condition at
the port of destination.
5. Captains liability
Commerce states that: The captain
shall be responsible for the damages
caused by his delay, if after the cause
of the arrival under stress has ceased,
he should not continue the voyage. If
the cause of arrival should have been
the fear of enemies, privateers, or
pirates, a deliberation and resolution in
a meeting of the officers of the vessel
and persons interested in the cargo
who may be present, in accordance
with the provisions contained in Article
819, shall precede the departure.
6. Rules in case of shipwreck
Shipwreck denotes all types of loss/
wreck of a vessel at sea either by
being swallowed up by the waves, by
running against another vessel or thing
at sea or on coast where the vessel is
rendered incapable of navigation.
Commerce provides that: The losses
and deteriorations by a vessel and her
cargo by reason of shipwreck or
stranding shall be individually for the
account of the owners, the part which
may be saved belonging to them in the
same proportion.
Commerce states that: If the wreck
or stranding should be caused by the
malice, negligence, or lack of skill of
the captain, or because the vessel put
to sea was insufficiently repaired and
equipped, the ship agent or the
shippers may demand indemnity of the
captain for the damages caused to the
vessel or to the cargo by the accident,
in accordance with the provisions
contained in Articles 610, 612, 614,
and 621.
Commerce states that: The goods
saved from the wreck shall be specially
bound for the payment of the
expenses of the respective salvage,
and the amount thereof must be paid
by the owners of the former before

they are delivered to them, and with
preference over any other obligation if
the merchandise should be sold.
Commerce states that: If several
vessels sail under convoy, and any of
them should be wrecked, the cargo
saved shall be distributed among the
rest in proportion to the amount which
each one is able to take. If any captain
should refuse, without sufficient cause,
to receive what may correspond to
him, the captain of the wrecked vessel
shall enter a protest against him,
before two sea officials, of the losses
and damages resulting therefrom,
ratifying the protest within 24 hours
after arrival at the first port, and
including it in the proceedings he must
institute in accordance with the
provisions contained in Article 612. If it
is not possible to transfer to the other
vessels the entire cargo of the vessel
wrecked, the goods of the highest
value and smallest volume shall be
saved first, the designation thereof to
be made by the captain with the
concurrence of the officers of his
vessel.
Commerce provides that: A captain
who may have taken on board the
goods saved from the wreck shall
continue his course to the port of
destination, and on arrival shall
deposit the same, with judicial
intervention, at the disposal of their
legitimate owners. In case he changes
his course, if he can unload them at
the port of which they were consigned,
the captain may make said port if the
shippers or supercargoes present and
the officers and passengers of the
vessel consent thereto; but he may not
do so, even with said consent, in time
of war or when the port is difficult and
dangerous to make. The owners of the
cargo shall defray all the expenses of
this arrival as well as the payment of
the freightage which, after taking into
consideration the circumstances of the
case, may be fixed by agreement or by
a judicial decision.
Commerce provides that: If on the
vessel there should be no person
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Corporation Code
interested in the cargo who can pay
the
expenses
and
freightage
corresponding to the salvage, the
competent judge or court may order
the sale of the part necessary to cover
the same. This shall also be done when
its preservation is dangerous, or when
in a period of one year it should not
have been possible to ascertain who
are its legitimate owners. In both cases
the proceedings shall be with the
publicity and formalities prescribed in
Article 579, and the net proceeds of
the sale shall be safely deposited, in
the discretion of the judge or court, so
that they may be delivered to the
legitimate owner thereof.
*It is the loss of the vessel at sea as a
consequence of its grounding, or
running against an object in sea or on
the coast. It occurs when the vessel
sustains injuries due to a marine peril
rendering her incapable of navigation.
*The rules on collision or allusion, as
may be pertinent, can equally apply to
shipwrecks.
J.
Salvage
1. Definition
Salvage - Compensation allowed to
persons by whose voluntary assistance
a ship at sea or her cargo or both have
been saved in whole or in part from an
impending or actual peril, shipwrecks,
derelicts or recapture
- Services one person render to the
owner of a ship or goods, by his own
labor, preserving the goods or the ship
which the owner or those entrusted
with the care of them have either
abandoned in distress at sea, or are
unable to protect or secure.
2. Rights and obligations of salvors
and owners (Salvage Law)
Salvors
Entitled
to
compensation for
services rendered
Acquires a lien
upon the property
salvaged until he
is compensated
To all intents and

purposes, he is a
Owners
He
does
not
renounce his right
to the derelict
Has a right to the
delivery of the
vessel or things
saved after the
salvage
is
accomplished,
provided he pays
or gives a bond
Should make a
claim
within
3
joint owner and if

the property is
lost he must bear
his share
Acquires the right
of possession of
derelict
for
purposes
of
a
salvage claim
months after the

publication of a
salvage
report,
otherwise
the
thing saved shall
be sold
Entitled to the
salvage reward for
the use of his
vessel
in
rendering salvage
services
Entitled to half of
the deposit of the
derelict sold, if
after the lapse of
3 years no claim
was made
WARSAW CONVENTION:
Warsaw Convention is an agreement among
sovereign countries concerning the regulation in
a uniform manner of the conditions of
international transportation by air in respect of
the documents used for such transportation and
of the liability of the carrier.
Signed on October 12, 1929 in Warsaw,
Poland.
Purpose:
To
protect
the
emerging
air
transportation industry and to secure the
uniformity of recovery by the passengers.
Applicability: The transportation must be:
1. International transportation
2. Air transportation
3. Carriage of passengers, baggage or goods
*The Warsaw Convention shall also apply to
fortuitous events affecting transportation by
aircraft performed by an air transportation
enterprise.
*The Convention is likewise applicable to air
transportation by legal entities constituted under
public law of the High Contracting Parties.
*The Convention does not apply to transportation
performed under the terms of any international
postal convention.
International
Transportation
is
any
transportation in which the place of departure
and the place of destination are situated either:
1. Within the territories of two High
Contracting Parties regardless of whether
or not there be a break in the
transportation or transhipment; or
Controlling: Two territories must be High
Contracting Parties
*Also called as one way ticket
2. Within the territory of a single High
Contracting Parties, if there is an agreed
stopping place within a territory subject to
the sovereignty, mandate or authority of
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Corporation Code
another power, even though that power is
not a party to the Convention.
Controlling: There must be a stopping
place in another territory.
*Also called as round trip ticket.
High Contracting Party is one of the original
parties to the convention.
When inapplicable:
1. When public policy is contradicted;
2. If the requirement under the Convention
are not complied with
Transportation Documents:
a. Passenger passenger ticket
b. Checked-in baggage baggage check
c. Goods to be shipped airway bill
Liability of carrier for damages:
1. Death or injury of a passenger if the
accident causing it took place on board
the aircraft or in the course of its
operations of embarking or disembarking;
2. Destruction, loss or damage to any
baggage or goods, if it took place during
the transportation by air; and
3. Delay in the transportation of passengers,
baggage or goods.
Limit of Liability:
1. Passenger:
In case of death or injury, general rule:
100,000 STR per passenger
*1.51 US Dollar
Exception: Agreement to a higher limit
In case of delay, 4150 STR per passenger
2. Checked in baggage:
General Rule: 20 STR per kilogram
Exception: In case of special declaration
of value and payment of a supplementary
sum by consignor, carrier is liable to not
more than the declared sum unless it
proves the sum is greater than actual
value.
3. Hand carried baggage: 1000 STR per
passenger
4. Goods to be shipped:
General Rule: 17 STR per kilogram
Exception: In case of special declaration
of value and payment of a supplementary
sum by consignor, carrier is liable to not
more than the declared sum unless it
proves the sum is greater than actual
value.
Action for damages:
1. Notice of claim
*A written complaint must be made
within: 3 days from receipt of baggage;
7 days from receipt of goods; in case
of delay, 14 days from receipt of
baggage/goods.
*The
complaint
is
a
condition
precedent. Without the complaint, the
action is barred except in case of fraud

on the part of the carrier.
2. Prescriptive period
*Action must be filed within 2 years
from:
a. The date of arrival at the
destination
*An intermediate place where
carriage may be broken is not a
place of destination.
b. The date of expected arrival
c. The
date
on
which
the
transportation stopped
Venue:
At the option of the plaintiff, the action for
damages may be filed in the:
1. Court of domicile of the carrier;
2. Court of its principal place of business;
3. Court where it has a place of business
through which the contract has been
made; or
4. Court of the place of destination.
*In Santos III v Northwest Airline, the SC held
that the forum of action is a matter of jurisdiction
rather than of venue.
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BANKING LAW (R.A. 8791)

General Banking Law:
Sec. 3 of the General Banking Law provides
that: "Banks" shall refer to entities engaged in
the lending of funds obtained in the form of
deposits.
that: The Monetary Board may authorize the
organization of a bank or quasi-bank subject to
the following conditions:
8.1 That the entity is a stock corporation;
8.2 That its funds are obtained from the public,
which shall mean twenty (20) or more persons;
and
8.3 That the minimum capital requirements
prescribed by the Monetary Board for each
category of banks are satisfied.
No new commercial bank shall be established
within three (3) years from the effectivity of this
Act. In the exercise of the authority granted
herein, the Monetary Board shall take into
consideration their capability in terms of their
financial resources and technical expertise and
integrity. The bank licensing process shall
incorporate an assessment of the banks
ownership structure, directors and senior
management, its operating plan and internal
controls as well as its projected financial
condition and capital base.
*To be registered as bank, it must be a stock
corporation.
*Banks must obtain funds from the public.
Minimum number of depositor is 20 persons.
Nature of Business:
Sec. 2 of the General Banking Law states
that: The State recognizes the vital role of banks
providing an environment conducive to the
sustained development of the national economy
and the fiduciary nature of banking that requires
high standards of integrity and performance. In

furtherance thereof, the State shall promote and
maintain a stable and efficient banking and
financial system that is globally competitive,
dynamic and responsive to the demands of a
developing economy.
Consequences:
1. Sec. 9 of the General Banking Law
provides that: The Monetary Board may
prescribe rules and regulations on the
types of stock a bank may issue, including
the terms thereof and rights appurtenant
thereto to determine compliance with laws
and regulations governing capital and
equity structure of banks; Provided, That
banks shall issue par value stocks only.
2. Bank must be an open corporation
Reason: Vital to industry
3. The word bank cannot be used if such
person or entity is not engaged in banking
business.
4. It is subject to heavy and close supervision
and/or regulation by the Bangko Sentral
ng Pilipinas.
5. Banks must observe highest degree of
diligence.
states that: The banking industry is
hereby declared as indispensable to the
national interest and, notwithstanding the
provisions of any law to the contrary, any
strike or lockout involving banks, if
unsettled after seven (7) calendar days
shall be reported by the Bangko Sentral to
the Secretary of Labor who may assume
jurisdiction over the dispute or decide it or
certify the same to the National Labor
Relations Commission for compulsory
arbitration. However, the President of the
Philippines may at any time intervene and
assume jurisdiction over such labor
dispute in order to settle or terminate the
same.
*In DBP v CA, the SC held that while an
innocent mortgagee is not expected to
conduct an exhaustive investigation on the
history of the mortgagors title, in case of a
banking institution, it must exercise due
diligence before entering into said contract,
and cannot rely upon on what is or is not
annotated on the title.
Cases: China Banking v Lagon; Citibank v
Cabangongan
Authority to incorporate and operate:
that: The Securities and Exchange Commission
shall not register the articles of incorporation of
any bank, or any amendment thereto, unless
accompanied by a certificate of authority issued
by the Monetary Board, under its seal. Such
certificate shall not be issued unless the
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Corporation Code
Monetary Board is satisfied from the evidence
submitted to it:
14.1. That all requirements of existing laws and
regulations to engage in the business for which
the applicant is proposed to be incorporated have
been complied with;
14.2. That the public interest and economic
conditions, both general and local, justify the
authorization; and
14.3. That the amount of capital, the financing,
organization, direction and administration, as well
as the integrity and responsibility of the
organizers and administrators reasonably assure
the safety of deposits and the public interest.
The Securities and Exchange Commission shall
not register the by-laws of any bank, or any
amendment thereto, unless accompanied by a
certificate of authority from the Bangko Sentral.
*The
articles
of
incorporation
must
be
accompanied by the favorable recommendation
of the BSP.
that: No person or entity shall engage in banking
operations or quasi-banking functions without
authority from the Bangko Sentral: Provided,
however, That an entity authorized by the Bangko
Sentral to perform universal or commercial
banking functions shall likewise have the
authority to engage in quasi-banking functions.
The determination of whether a person or entity
is performing banking or quasi-banking functions
without Bangko Sentral authority shall be decided
by the Monetary Board. To resolve such issue,
the Monetary Board may; through the appropriate
supervising and examining department of the
Bangko Sentral, examine, inspect or investigate
the books and records of such person or entity.
Upon issuance of this authority, such person or
entity may commence to engage in banking
operations or quasi-banking function and shall
continue to do so unless such authority is sooner
surrendered, revoked, suspended or annulled by
the Bangko Sentral in accordance with this Act or
other special laws.
The department head and the examiners of the
appropriate
supervising
and
examining
department are hereby authorized to administer
oaths to any such person, employee, officer, or
director of any such entity and to compel the
presentation or production of such books,
documents, papers or records that are reasonably
necessary to ascertain the facts relative to the
true functions and operations of such person or
entity. Failure or refusal to comply with the
required presentation or production of such
books, documents, papers or records within a
reasonable time shall subject the persons
responsible therefore to the penal sanctions
provided under the New Central Bank Act.
Persons or entities found to be performing

banking or quasi-banking functions without
authority from the Bangko Sentral shall be
subject to appropriate sanctions under the New
Central Bank Act and other applicable laws.
Classification of banks:
Sec. 3.2 of the General Banking Law
provides that: Banks shall be classified into:
(a) Universal banks;
(b) Commercial banks;
(c) Thrift banks, composed of:
(i) Savings and mortgage banks;
(ii) Stock savings and loan associations;
and
(iii) Private development banks, as defined
in the Republic Act No. 7906 (hereafter the
Thrift Banks Act);
(d)
Rural banks, as defined in Republic Act
No. 73S3 (hereafter the "Rural Banks Act");
(e)
Cooperative banks, as defined in
Republic Act No 6938 (hereafter the
"Cooperative Code");
(f)
Islamic banks as defined in Republic Act
No. 6848, otherwise known as the Charter of
Al Amanah Islamic Investment Bank of the
Philippines; and
(g)
Other classifications of banks as
determined by the Monetary Board of the
Bangko Sentral ng Pilipinas.
Distinctions
banks:
between
different
kinds
of
a. As to Capitalization: They have different

minimum capitalization requirements.
b. As to Purpose: Some of the banks have
specific purposes and social functions.
c. As to Powers or Functions: There are
functions and powers that are not
exercised by one that are exercised by
others. Some banks may exercise certain
powers only upon prior approval of the
Monetary Board.
*Universal banks can engage into nonallied enterprises. It can also act as an
investment house, thus, it can enter into
underwriting
commitments
and
do
underwriting securities.
d. As to who can be directors: Public
officers can be directors of Rural Banks
while such officers are prohibited from
being directors or officers of other types of
banks.
e. As to Incorporators: General Rule:
Incorporators must be natural persons.
Exception: In rural banks, it can be
organized or established by cooperatives
and corporations primarily organized to
hold equities in rural banks.
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Corporation Code
f.
As to Foreign Equity: A rural bank must

be wholly owned by Filipinos while other
banks require only 40% Filipino ownership
of their voting stocks.
*In RA 6938, majority of the shares must
be owned by cooperatives.
g. As to necessity of public offering:
Public offering of shares is necessary for
domestic banks seeking authority to act as
universal bank while there is no such
requirement for other banks.
Functions of the bank:
1. Deposit Functions
2. Loan Functions
Deposit Function:
*The relationship created is one of creditor-debtor
relation.
*There is passing of ownership to the bank.
*The bank can appropriate the deposits without
the consent of the depositor.
*Legal compensation can take place because
they are mutually creditor-debtor of each other.
*Prior to incorporation, the deposits can be
named to corporate treasurer. He will held it in
trust for the corporation.
Depositors:
1. Minors:
- They can open bank accounts in their
own right provided that they are at least 7
years of age; they are able to read and
write and have sufficient discretion; they
are not otherwise disqualified by any other
incapacity; and it should only be savings
or time deposits.
* They cannot open checking account nor
demand deposits.
2. Married Women:
- They are allowed to open bank
accounts without the assistance of
their husbands.
Reason: equality in capacity
*Bank account may be opened by one individual
or two or more persons. Whenever two or more
persons open an account, the same may be an
and/or account or an and account.
General Rule: Fictitious accounts or anonymous
accounts are prohibited.
Exception: Foreign currency deposits which may
be a numbered account.
*The law requires that necessary measures are
undertaken by the bank to record and establish
the true identity of the depositor.
*Joint accounts may be the subject of
survivorship
agreement
whereby
the
codepositors agree to permit either of them to
withdraw the whole deposit during their lifetime
and transferring the balance to the survivor upon
the death of one of them.
Basis: Trust and Confidence
*What is prohibited under the Family Code is

donation inter vivos and not donation mortis
causa.
Secrecy of Bank Deposits:
Peso deposits:
General Rule: Sec. 2 of Republic Act No.
1405 provides that: All deposits of whatever
nature with banks or banking institutions in the
Philippines including investments in bonds issued
by the Government of the Philippines, its political
subdivisions and its instrumentalities, are hereby
considered as of an absolutely confidential nature
and may not be examined, inquired or looked into
by any person, governmental official, bureau or
office.
Exceptions:
1. When there is written permission of the
depositor or investor;
2. Impeachment cases;
3. Upon the order of a competent court in
cases of bribery or dereliction of duty of
public officials;
4. Upon the order of a competent court in
cases where the money deposited or
invested is the subject of litigation;
5. Upon order of the competent court or
tribunal in cases involving unexplained
wealth under Sec. 8 of the Anti-Graft and
Corrupt Practices Act (R.A. 3019);
6. Upon inquiry by the Commissioner of
Internal Revenue for the purpose of
determining the net estate of a deceased
depositor;
*In case the taxpayer compromised his tax
liability by reason of financial incapacity.
7. General Rule: Upon the order of a
competent court or in proper cases by the
Anti-Money Laundering Council where
there is probable cause of money
laundering.
Exception: In some instances even
without court order.
8. Disclosure of the Treasurer of the
Philippines for dormant deposits for at
least 10 years under the Unclaimed
Balances Act (R.A. 3936)
*Escheat proceedings
Foreign Currency deposits:
*Subsequent to secrecy law.
Under the Foreign Currency Deposit Act, there is
only one exception and that is: When there is a
written consent of depositor.
Secrecy of Deposits under the Anti-Money
Laundering Law:
General Rule: The Anti-Money Laundering
Council may inquire into deposits upon order of
the court when there is probable cause that the
deposits are related to the crime of unlawful
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Corporation Code
activities defined in Sec. 3(1) and Sec. 4 of R.A.
9160 as amended by R.A. 9194.
Exception: A court order is not even necessary
when the offense or unlawful activity involved is
any of the following: 1. Kidnapping for ransom
under Article 267 of the Revised Penal Code; 2.
Sections 4, 5, 7, 8, 9, 10, 12, 13, 14, 15, and 16 of
the Comprehensive Dangerous Drugs Act of
2002; and Hi-jacking and other violations under
R.A. 6235; destructive arson and murder, as
defined under the Revised Penal Code, as
amended, including those perpetrated by
terrorists against non-combatant persons and
similar targets.
Garnishment:
General Rule: Bank accounts may be garnished
by the creditors of the depositor.
Reason: Not deposits for investment, thus, law
on secrecy is not applicable.
Exceptions:
1. Foreign Currency Deposits
*In Salvacion v Central Bank of the
Philippines, the SC held that foreign
currency deposits of an American tourist
who was found guilty of repeatedly raping
a twelve years old child is subject to
garnishment.
2. Those exempt under the Rules of Civil
Procedure like provision for the family for
four months
Deposit Insurance:
*All deposits of any bank are insured with the
PDIC.
*Obligation to pay the premium lies on the bank.
Risk insured against: closure of banks due to
liquidity problems.
*Insured deposit under the law means the net
amount due to any depositor for deposits in an
insured bank but should not exceed P250,000. If
the depositor has two or more accounts with the
same bank, the maximum coverage of P250,000
pertains to the sum of all such accounts
maintained in the same right and capacity.
*A joint account shall be insured separately from
any individual-owned account.
*A joint account held by a juridical person or
entity jointly with natural person/s shall be
presumed to belong to the juridical person.
*The aggregate share in all joint accounts is
subject to P250,000 threshold.
Loan Function of the Banks:
*A bank shall grant loans and other credit
accommodations only in amounts and for the
periods of time essential for the effective
completion of the operations to be financed.
Single Borrowers Limit:
Sec. 35.1 of the General Banking Law

provides that: Except as the Monetary Board
may
otherwise
prescribe
for reasons
of
national interest, the total amount of loans,
credit accommodations and guarantees as may
be defined by the Monetary Board that may be
extended
by
a
bank
to
any
person,
partnership, association, corporation or other
entity shall at no time exceed twenty-five percent
(25%) of the net worth of such bank. The
basis for determining compliance with single
borrower limit is the total credit commitment
of the bank to the borrower.
Sec. 35.2 of the General Banking Law states
that: Unless the Monetary Board prescribes
otherwise, the total amount of loans, credit
accommodations and guarantees prescribed in
the preceding paragraph may be increased by
an additional ten percent (10%) of the net worth
of such bank provided the additional liabilities of
any borrower are adequately secured by trust
receipts, shipping documents, warehouse receipts
or other similar documents transferring
or
securing title covering readily marketable,
non-perishable goods which must be fully
covered by insurance.
DOSRI ACCOUNTS:
that: No director or officer of any bank shall,
directly or indirectly, for himself or as the
representative or agent of others, borrow from
such bank nor shall he become a guarantor,
endorser or surety for loans from such bank to
others, or in any manner be an obligor or incur
any contractual liability to the bank except with
the written approval of the majority of all the
directors of the bank, excluding the director
concerned: Provided, That such written approval
shall not be required for loans, other credit
accommodations and advances granted to
officers under a fringe benefit plan approved by
the Bangko Sentral. The required approval shall
be entered upon the records of the bank and
a copy of such entry shall be transmitted
forthwith to the appropriate supervising and
examining department of the Bangko Sentral.
Dealings of a bank with any of its directors,
officers
or stockholders and their related
interests shall be upon terms not less favorable to
the bank than those offered to others.
After due notice to the board of directors of the
bank, the office of any bank director or officer
who violates the provisions of this Section may
be declared vacant and the director or officer
shall be
subject to the penal provisions of the New Central
Bank Act.
The Monetary Board may regulate the amount of
loans, credit accommodations and guarantees
that may be extended, directly or indirectly,
by
a
bank
to
its
directors,
officers,
stockholders and their related interests, as well
as investments of such bank in enterprises owned
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Corporation Code
or controlled by said directors, officers,
stockholders and their related
interests.
However,
the
outstanding
loans,
credit
accommodations and guarantees which a bank
may extend to each of its stockholders, directors,
or officers and their related interests, shall be
limited to an amount equivalent to their
respective unencumbered deposits and book
value of their paid-in capital contribution in
the bank: Provided, however, That loans,
credit accommodations and guarantees secured
by assets considered as non-risk by the
Monetary Board shall be excluded from such
limit: Provided, further, That loans, credit
accommodations and advances to officers in
the form of fringe benefits granted in
accordance with rules as may be prescribed
by the Monetary Board shall not be subject to
the individual limit.
The Monetary Board shall define the term
related interests.
The limit on loans, credit accommodations and
guarantees prescribed herein shall not apply
to
loans,
credit
accommodations and
guarantees extended by a cooperative bank
to its cooperative shareholders.
Purpose: To protect the general public from the
abuse of the directors, officers, stockholders and
related interests of the bank.
Requisites:
1. The borrower is a director, officer or any
stockholder of a bank;
2. He contract a loan or any form of financial
accommodation;
3. The loan or financial accommodation is
from: a. his bank, or b. a bank that is a
subsidiary of a bank holding company of
which both his bank and lending bank are
subsidiaries, c. a bank in which a
controlling proportion of the shares is
owned by the same interest that owns a
controlling proportion of the shares of his
bank; and
4. The loan or financial accommodation of
the director, officer or stockholder, singly
or with that of his related interest, is in
excess of 5% of the capital and surplus of
the lending bank or in the maximum
amount permitted by law, whichever is
lower.
Examples:
1. If there is interlocking directors subject
to DOSRI restrictions
2. General partner is either a director, officer,
stockholder or related interest of a lending
bank subject to DOSRI restrictions
3. Stranger applied for a loan and a property
was collateral: a. if the property is owned
by stranger alone not subject to DOSRI
restrictions; b. if the property is co-owned
by a director, officer, stockholder or
related interest of the bank subject to
DOSRI restrictions
4. A director, officer, stockholder, or related
interests owned more than 20% share in a
corporation (borrower) subject to DOSRI

restriction.
Restrictions:
1. Procedural requirement: The account
should be upon written approval of all the
director of the lending bank excluding the
director concerned.
2. Arms Length Rule: The account should
be upon terms not less favorable to the
bank than those offered to others.
3. Reportorial requirement: The resolution
approving the loan shall be entered in the
records of the bank and a copy of the
entry shall be transmitted forthwith to the
Supervising and Examination Sector of the
BSP.
Foreclosure of Mortgage
that: In the event of foreclosure, whether
judicially or extra-judicially, of any mortgage on
real estate which is security for any loan or
other
credit accommodation granted, the
mortgagor or debtor whose real property
has been sold for the full or partial payment
of his obligation shall have the right within
one year after the sale of the real estate, to
redeem the property by paying the amount due
under the mortgage deed, with interest thereon
at rate specified in the mortgage, and all the
costs and expenses incurred by the bank or
institution from the sale and custody of said
property less the income derived there from.
However, the purchaser at the auction sale
concerned whether in a judicial or extra-judicial
foreclosure shall have the right to enter upon and
take possession of such property immediately
after the date of the confirmation of the
auction sale and administer the same in
accordance with law. Any petition in court to
enjoin or restrain the conduct of foreclosure
proceedings
instituted
pursuant
to
this
provision shall be given due course only upon
the filing by the petitioner of a bond in an
amount fixed by the court conditioned that he
will pay all the damages which the bank may
suffer by the enjoining or the restraint of the
foreclosure proceeding.
Notwithstanding
Act
3135,juridical
persons
whose property is being sold pursuant to an
extra judicial foreclosure, shall have the right
to redeem the property in accordance with
this provision until, but not after, the registration
of the certificate of foreclosure sale with the
applicable Register of Deeds which in no case
shall be more than three (3) months after
foreclosure, whichever is earlier. Owners of
property that has been sold in a foreclosure sale
prior to the effectivity of this Act shall retain
their redemption rights until their expiration.
Prohibited acts of Borrowers:
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Corporation Code
Sec. 55.2 of the General Banking Law states
that: No borrower of a bank shall (a)
Fraudulently overvalue property offered as
security for a loan or other credit accommodation
from the bank;
(b) Furnish false or make misrepresentation or
suppression of material facts for the purpose of
obtaining, renewing, or increasing a loan or other
credit accommodation or extending the period
thereof;
(c)
Attempt to defraud the said bank in the
event of a court action to recover a loan or other
credit accommodation; or
(d)
Offer any director, officer, employee or
agent of a bank any gift, fee, commission, or any
other form of compensation in order to influence
such persons into approving a loan or other
credit accommodation application.
A Corporation which is not a banking institution

500,000 shares
*A domestic non-bank corporation can only own
upto 40% of the voting stock of the bank.
800,000 owned by Filipinos; 200,000 owned by
foreigners
In the 800,000 owned by Filipinos; 400,000 of
which is owned by A and the 200,000 is owned by
A Corporation
In A Corporation, A is a stockholder owning 50%
of the controlling stock of A Corporation.
Q: Is this allowed?
A: NO. 50% of 200,000 is indirectly owned by a
Filipino individual, the 40% threshold is violated.
*The 40% threshold includes both direct and
indirect ownership of shares of the bank.
Ownership of Banks:
Act Liberalizing Entry of Foreign Banks:

that:
Foreign
individuals
and
non-bank
corporations may own or control up to forty
percent (40%) of the voting stock of a domestic
bank. This rule shall apply to Filipinos and
domestic non-bank corporations.
The percentage of foreign-owned voting stocks in
a bank shall be determined by the citizenship of
the individual stockholders in that bank. The
citizenship of the corporation which is a
stockholder in a bank shall follow the citizenship
of the controlling stockholders of the corporation,
irrespective of the place of incorporation.
General Rule: Banks are partly nationalized
*The 60% minimum threshold must be satisfied
by the bank.
*Filipino ownership voting stocks owned by
Filipinos
Examples:
X bank has 1M voting stocks: 600,000 owned by
Filipinos and 400,000 owned by foreigners. The
bank complied with the 60% requirement.
Sec. 2 of Republic Act No. 7721 provides that:

The Monetary Board may authorize foreign
banks to operate in the Philippine banking system
through any of the following modes of entry: (i)
by acquiring, purchasing or owning up to sixty
percent (60%) of the voting stock of an existing
bank; (ii) by investing in up to sixty percent (60%)
of the voting stock of a new banking subsidiary
incorporated under the laws of the Philippines; or
(iii) by establishing branches with full banking
authority: Provided, That a foreign bank may avail
itself of only one (1) mode of entry: Provided,
further, That a foreign bank or a Philippine
corporation may own up to a sixty percent (60%)
of the voting stock of only one (1) domestic bank
or new banking subsidiary.
Sec. 3 of Republic Act No. 7721 states that:
In approving entry applications of foreign banks,
the Monetary Board shall: (i) ensure geographic
representation
and
complementation;
(ii)
consider
strategic
trade
and
investment
relationships between the Philippines and the
country of incorporation of the foreign bank; (iii)
study
the
demonstrated
capacity,
global
reputation for financial innovations and stability
in a competitive environment of the applicant;
(iv) see to it that reciprocity rights are enjoyed by
Philippine banks in the applicant's country; and
(v) consider willingness to fully share their
technology.
Only those among the top one hundred fifty (150)
foreign banks in the world or the top five (5)
banks in their country of origin as of the date of
application shall be allowed entry in accordance
with Section 2 (ii) and (iii) hereof.
In the exercise of this authority, the Monetary
Board shall adopt such measures as may be
necessary to: (i) ensure that at all times the
control of seventy percent (70%) of the resources
or assets of the entire banking system is held by
X bank has 1M voting shares: 400,000 owned by

Filipinos; 400,000 owned by foreigners and
200,000 owned by Y Corporation.
Q: Does the 60% requirement satisfied?
A: IT DEPENDS. Depending on the citizenship of
Y Corporation. If the majority controlling
stockholders are Filipino thus Y Corporation is a
Filipino citizen hence the 60% is complied with. If
Y corporation is controlled by a foreigners there is
non-compliance of the 60% requirement.
*The 40% requirement is applicable not only to
foreigners but also to individual Filipino
shareholders and domestic non-bank corporation.
*If the corporation acquiring is a bank the 40%
threshold is not applicable.
Examples:
600,000 owned by Filipinos; 400,000 owned by
foreigners
A owned 500,000 shares
*A single Filipino stockholders can only own upto
40% of the voting stock of the bank.
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Corporation Code
domestic banks which are at least majorityowned by Filipinos; (ii) prevent a dominant
market position by one bank or the concentration
of economic power in one or more financial
institutions, or in corporations, participations,
partnerships, groups or individuals with related
interests; and (iii) secure the listing in the
Philippine Stock Exchange of the shares of stocks
of banking corporations established under
Section 2(i) and (ii) of this Act: Provided, That
said banking corporations shall establish stock
option plans for their officers and employees as
the resources or assets of these corporations may
allow in the best business judgment of their
respective boards of directors, pursuant to the
Corporation Code of the Philippines.
To qualify to establish a branch or a subsidiary,
the foreign bank applicant must be widely-owned
and publicly-listed in its country of origin, unless
the foreign bank applicant is owned by the
government of its country of origin.
General Rule: Foreigners must own only upto
40% of the voting shares of a bank.
Exception: Foreign bank can own upto 60% of
the voting shares of a bank.
Directors and Officers:
Composition:
that: The provisions of the Corporation Code to
the contrary notwithstanding, there shall be at
least five (5), and a maximum of fifteen (15)
members of the board or directors of a bank, two
(2) of whom shall be independent directors. An
"independent director" shall mean a person other
than an officer or employee of the bank, its
subsidiaries or affiliates or related interests.
Non-Filipino citizens may become members of
the board of directors of a bank to the extent
of the foreign participation in the equity of
said bank.
The meetings of the board of directors may be
conducted through modern technologies such as,
but not limited to, teleconferencing and videoconferencing.
that: Except as otherwise provided in the Rural
Banks Act, no appointive or elective public
official whether full-time or part-time shall at the
same time serve as officer of any private bank,
save in cases where such service is incident
to financial
assistance provided by the
government
or
a government
owned
or
controlled corporation to the bank or unless
otherwise provided under existing laws.
General Rule: The Board of Directors is
composed of 5 to 15 members only.
Exception: In case of merger
that: To maintain the quality of bank
management and afford better protection to

depositors and the public in general the Monetary
Board shall prescribe, pass upon and review the
qualifications and disqualifications of individuals
elected or appointed bank directors or officers
and disqualify those found unfit.
After due notice to the board of directors of
the bank, the Monetary Board may disqualify,
suspend or remove any bank director or officer
who commits or omits an act which render him
unfit for the position.
In determining whether an individual is fit and
proper to hold the position of a director or officer
of a bank, regard shall be given to his integrity,
experience,
education,
training,
and
competence.
Justification: Police power
Reason: Banking institution is imbued with
public interest.
Regulations
security:
to
maintain
liquidity
and

provides that: The Monetary Board shall
prescribe the minimum ratio which the net
worth of a bank must bear to its total risk
assets which may include contingent
accounts.
For purposes of this Section, the Monetary
Board may require such ratio be
determined on the basis of the net worth
and risk assets of a bank and its
subsidiaries, financial or otherwise, as
well as prescribe the composition and
the manner of determining the net
worth and total risk assets of banks and
their subsidiaries: Provided, That in the
exercise of this authority, the Monetary
Board shall, to the extent
feasible
conform
to
internationally
accepted
standards, including those of the Bank
for
International
Settlements
(BIS),
relating
to
risk-based
capital
requirements: Provided further, That it
may alter or suspend compliance with
such ratio whenever necessary for
a
maximum period of one (1) year:
Provided, finally, That such ratio shall be
applied uniformly to banks of the same
category. In case a bank does not comply
with the prescribed minimum ratio, the
Monetary Board may limit or prohibit the
distribution of net profits by such bank
and may require that part or all of the net
profits be used to increase the capital
accounts
of
the
bank
until
the
minimum requirement has been met The
Monetary
Board
may, furthermore,
restrict or prohibit the acquisition of major
assets and the making
of
new
investments by the bank, with the
exception
of purchases
of
readily
marketable evidences of indebtedness
of the Republic of the Philippines and of
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Corporation Code
the Bangko Sentral and any other
evidences
of
indebtedness
or
obligations the servicing and repayment
of which are fully guaranteed by the
Republic of the Philippines, until the
minimum required capital ratio has
been restored. In case of a bank
merger or consolidation, or when a bank
is under rehabilitation under a program
approved by the Bangko Sentral, Monetary
Board may temporarily relieve the
surviving bank, consolidated bank, or
constituent bank or corporations under
rehabilitation from full compliance with the
required
capital
ratio
under
such
conditions as it may prescribe. Before the
effectivity of rules which the Monetary
Board is authorized to prescribe under
this provision, Section 22 of the
General Banking Act, as amended, Section
9 of the Thrift Banks Act, and all pertinent
rules issued pursuant thereto, shall
continue to be in force.
2. The law imposes limits on loans, credit
accommodations and guarantees that
may be extended by banks.
states that: No director or officer of any
bank shall, directly or indirectly, for
himself or as the representative or agent
of others, borrow from such bank nor shall
he become a guarantor, endorser or
surety for loans from such bank to others,
or in any manner be an obligor or incur
any contractual liability to the bank except
with the written approval of the majority
of all the directors
of
the
bank,
excluding
the
director
concerned:
Provided, That such written approval shall
not be required for loans, other credit
accommodations and advances granted
to officers under a fringe benefit plan
approved by the Bangko Sentral. The
required approval shall be entered upon
the records of the bank and a copy of
such entry shall be transmitted forthwith
to the appropriate supervising and
examining department of the Bangko
Sentral.
Dealings of a bank with any of its
directors, officers or stockholders and
their related interests shall be upon terms
not less favorable to the bank than those
offered to others.
After due notice to the board of directors
of the bank, the office of any bank
director or officer who violates the
provisions
of
this Section may be
declared vacant and the director or
officer shall be subject to the penal
provisions of the New Central Bank Act.
The Monetary Board may regulate the
amount of loans, credit accommodations
and guarantees that may be extended,
directly or indirectly, by a bank to its
directors, officers, stockholders and their

related interests, as well as investments of
such bank in enterprises owned or
controlled by said directors, officers,
stockholders and their related interests.
However, the outstanding loans, credit
accommodations and guarantees which a
bank may extend to each of its
stockholders, directors, or officers and
their related interests, shall be limited
to an amount equivalent to their
respective unencumbered deposits and
book value of their paid-in capital
contribution in the bank: Provided,
however,
That
loans,
credit
accommodations
and
guarantees
secured by assets considered as nonrisk by the Monetary Board shall be
excluded from
such limit: Provided,
further,
That
loans,
credit
accommodations and advances to officers
in the form of fringe benefits granted
in accordance with rules as may be
prescribed by the Monetary Board shall
not be subject to the individual limit.
The Monetary Board shall define the term
related interests.
The
limit
on
loans,
credit
accommodations
and
guarantees
prescribed herein shall not apply to
loans,
credit
accommodations and
guarantees extended by a cooperative
bank to its cooperative shareholders.
4. The law imposes restrictions on the value
of collaterals on loans.
provides that: The Monetary Board is
hereby
authorized
to
issue
such
regulations as it may deem necessary with
respect to unsecured loans or other credit
accommodations that may be granted by
banks.
provides that: The
Monetary
Board,
may, similarly in accordance with the
authority granted to it in Section 106 of
the New Central Bank Act, and taking
into account the requirements of the
economy for the effective utilization of
long-term funds,
prescribe
the
maturities, as well as related terms
and conditions for various types of
bank
loans
and
other
credit
accommodations. Any change by the
Board in the maximum maturities, as
well as related terms and conditions for
various types of bank loans and other
credit accommodations. Any change by
the Board in the maximum maturities shall
apply only to loans and other credit
accommodations made after the date of
such action. The Monetary Board shall
regulate the interest imposed on micro
finance borrowers by lending investors
and similar lenders such as, but not
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Corporation Code
limited to, the unconscionable rates of
interest collected on salary loans and
similar credit accommodations.
states that: No bank or quasi-bank shall
declare dividends, if at the time of
declaration:
57.1 Its clearing account with the Bangko
Sentral is overdrawn; or
57.2
It is deficient in the required
liquidity floor for government deposits
for five (5) or more consecutive days, or
57.3 It does not comply with the liquidity
standards/ratios prescribed by the Bangko
Sentral for purposes of determining funds
available for dividend declaration; or
57.4 It has committed a major violation as
may be determined by the Bangko
Sentral.
Other functions
Sentral:
of
the
Bangko
A. Emergency Loan
Sec. 84 of the New Central Bank
Act states that: In periods of national
and/or local emergency or of imminent
financial panic which directly threaten
monetary and banking stability, the
Monetary Board may, by a vote of at
least five (5) of its members, authorize
the
Bangko
Sentral
to
grant
extraordinary loans or advances to
banking institutions secured by assets
as defined hereunder: Provided, That
while such loans or advances are
outstanding, the debtor institution
shall
not,
except
upon
prior
authorization by the Monetary Board,
expand the total volume of its loans or
investments.
The Monetary Board may, at its
discretion, likewise authorize the
Bangko Sentral to grant emergency
loans
or
advances
to
banking
institutions,
even
during
normal
periods, for the purpose of assisting a
bank in a precarious financial condition
or under serious financial pressures
brought by unforeseen events, or
events which, though foreseeable,
could not be prevented by the bank
concerned: Provided, however, That
the Monetary Board has ascertained
that the bank is not insolvent and has
the assets defined hereunder to secure
the advances: Provided, further, That a
concurrent vote of at least five (5)
members of the Monetary Board is
obtained.
The amount of any emergency loan or
advance shall not exceed the sum of
fifty percent (50%) of total deposits
and deposit substitutes of the banking
institution and shall be disbursed in
two (2) or more tranches. The amount

of the first tranche shall be limited to
twenty-five percent (25%) of the total
deposit and deposit substitutes of the
institution and shall be secured by
government securities to the extent of
their applicable loan values and other
unencumbered first class collaterals
which the Monetary Board may
approve:
Provided,
That
if
as
determined by the Monetary Board,
the circumstances surrounding the
emergency warrant a loan or advance
greater than the amount provided
hereinabove, the amount of the first
tranche
may
exceed
twenty-five
percent (25%) of the bank's total
deposit and deposit substitutes if the
same is adequately secured by
applicable loan values of government
securities and unencumbered first
class collaterals approved by the
Monetary Board, and the principal
stockholders of the institution furnish
an
acceptable
undertaking
to
indemnify and hold harmless from suit
a conservator whose appointment the
Monetary Board may find necessary at
any time.
Prior to the release of the first tranche,
the banking institution shall submit to
the Bangko Sentral a resolution of its
board of directors authorizing the
Bangko Sentral to evaluate other
assets of the banking institution
certified by its external auditor to be
good and available for collateral
purposes should the release of the
subsequent tranche be thereafter
applied for.
The Monetary Board may, by a vote of
at least five (5) of its members,
authorize the release of a subsequent
tranche on condition that the principal
stockholders of the institution:
(a) furnish an acceptable undertaking
to indemnify and hold harmless from
suit a conservator whose appointment
the
Monetary
Board
may
find
necessary at any time; and
(b) provide acceptable security which,
in the judgment of the Monetary
Board,
would
be
adequate
to
supplement, where necessary, the
assets tendered by the banking
institution
to
collateralize
the
subsequent tranche.
In connection with the exercise of
these powers, the prohibitions in
Section 128 of this Act shall not apply
insofar as it refers to acceptance as
collateral
of
shares
and
their
acquisition as a result of foreclosure
proceedings, including the exercise of
voting rights pertaining to said shares:
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Corporation Code
Provided, however, That should the
Bangko Sentral acquire any of the
shares it has accepted as collateral as
a result of foreclosure proceedings, the
Bangko Sentral shall dispose of said
shares by public bidding within one (1)
year from the date of consolidation of
title by the Bangko Sentral.
Whenever a financial institution incurs
an overdraft in its account with the
Bangko Sentral, the same shall be
eliminated within the period prescribed
in Section 102 of this Act.
B. Appointment of Conservator
Act states that: Whenever, on the
basis of a report submitted by the
appropriate supervising or examining
department, the Monetary Board finds
that a bank or a quasi-bank is in a
state
of
continuing
inability
or
unwillingness to maintain a condition
of liquidity deemed adequate to
protect the interest of depositors and
creditors, the Monetary Board may
appoint a conservator with such
powers as the Monetary Board shall
deem necessary to take charge of the
assets, liabilities, and the management
thereof, reorganize the management,
collect all monies and debts due said
institution, and exercise all powers
necessary to restore its viability. The
conservator shall report and be
responsible to the Monetary Board and
shall have the power to overrule or
revoke the actions of the previous
management and board of directors of
the bank or quasi-bank.
The conservator should be competent
and knowledgeable in bank operations
and management. The conservatorship
shall not exceed one (1) year.
The
conservator
shall
receive
remuneration to be fixed by the
Monetary Board in an amount not to
exceed two-thirds (2/3) of the salary of
the president of the institution in one
(1) year, payable in twelve (12) equal
monthly payments: Provided, That, if
at any time within one-year period, the
conservatorship is terminated on the
ground that the institution can operate
on its own, the conservator shall
receive
the
balance
of
the
remuneration which he would have
received up to the end of the year; but
if the conservatorship is terminated on
other grounds, the conservator shall
not be entitled to such remaining
balance. The Monetary Board may
appoint a conservator connected with
the Bangko Sentral, in which case he
shall not be entitled to receive any
remuneration or emolument from the
Bangko
Sentral
during
the
conservatorship.
The
expenses
attendant to the conservatorship shall
be borne by the bank or quasi-bank
concerned.
The Monetary Board shall terminate
the conservatorship when it is satisfied
that the institution can continue to
operate
on
its
own
and
the
conservatorship is no longer necessary.
The conservatorship shall likewise be
terminated should the Monetary Board,
on the basis of the report of the
conservator or of its own findings,
determine that the continuance in
business of the institution would
involve probable loss to its depositors
or creditors, in which case the
provisions of Section 30 shall apply.
*Experiencing liquidity problems only.
Powers of Conservator:
1. To take charge of the assets,
liabilities, and the management
thereof;
2. To reorganize the management of
the subject bank;
3. To collect all monies and debts due
said institutions; and
4. To exercise all powers necessary to
restore its viability
Except: Those already perfected
C. Appointment of Receiver
Act provides that: Whenever, upon
report of the head of the supervising or
examining department, the Monetary
Board finds that a bank or quasi-bank:
(a) is unable to pay its liabilities as
they become due in the ordinary
course of business: Provided, That this
shall not include inability to pay
caused by extraordinary demands
induced by financial panic in the
banking community;
(b) has insufficient realizable assets,
as determined by the Bangko Sentral,
to meet its liabilities; or
(c)
cannot continue in business
without involving probable losses to its
depositors or creditors; or
(d) has willfully violated a cease and
desist order under Section 37 that has
become final, involving acts or
transactions which amount to fraud or
a dissipation of the assets of the
institution; in which cases, the
Monetary Board may summarily and
without need for prior hearing forbid
the institution from doing business in
the Philippines and designate the
Philippine
Deposit
Insurance
Corporation as receiver of the banking
institution.
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Corporation Code
For a quasi-bank, any person of
recognized competence in banking or
finance may be designed as receiver.
The receiver shall immediately gather
and take charge of all the assets and
liabilities of the institution, administer
the same for the benefit of its
creditors, and exercise the general
powers of a receiver under the Revised
Rules of Court but shall not, with the
exception
of
administrative
expenditures, pay or commit any act
that will involve the transfer or
disposition of any asset of the
institution: Provided, That the receiver
may deposit or place the funds of the
institution
in
non-speculative
investments.
The
receiver
shall
determine as soon as possible, but not
later than ninety (90) days from
takeover, whether the institution may
be rehabilitated or otherwise placed in
such a condition so that it may be
permitted to resume business with
safety to its depositors and creditors
and the general public: Provided, That
any determination for the resumption
of business of the institution shall be
subject to prior approval of the
Monetary Board.
If the receiver determines that the
institution cannot be rehabilitated or
permitted to resume business in
accordance with the next preceding
paragraph, the Monetary Board shall
notify in writing the board of directors
of its findings and direct the receiver to
proceed with the liquidation of the
institution. The receiver shall:
(1) file ex parte with the proper
regional trial court, and without
requirement of prior notice or any
other action, a petition for assistance
in the liquidation of the institution
pursuant to a liquidation plan adopted
by the Philippine Deposit Insurance
Corporation for general application to
all closed banks. In case of quasibanks, the liquidation plan shall be
adopted by the Monetary Board. Upon
acquiring jurisdiction, the court shall,
upon motion by the receiver after due
notice, adjudicate disputed claims
against the institution, assist the
enforcement of individual liabilities of
the
stockholders,
directors
and
officers, and decide on other issues as
may be material to implement the
liquidation plan adopted. The receiver
shall pay the cost of the proceedings
from the assets of the institution.
(2) convert the assets of the
institutions to money, dispose of the
same to creditors and other parties, for
the purpose of paying the debts of
such institution in accordance with the

rules on concurrence and preference of
credit under the Civil Code of the
Philippines and he may, in the name of
the institution, and with the assistance
of counsel as he may retain, institute
such actions as may be necessary to
collect and recover accounts and
assets of, or defend any action against,
the institution. The assets of an
institution
under
receivership
or
liquidation shall be deemed in custodia
legis in the hands of the receiver and
shall, from the moment the institution
was placed under such receivership or
liquidation, be exempt from any order
of garnishment, levy, attachment, or
execution.
The actions of the Monetary Board
taken under this section or under
Section 29 of this Act shall be final and
executory, and may not be restrained
or set aside by the court except on
petition for certiorari on the ground
that the action taken was in excess of
jurisdiction or with such grave abuse of
discretion as to amount to lack or
excess of jurisdiction. The petition for
certiorari may only be filed by the
stockholders of record representing the
majority of the capital stock within ten
(10) days from receipt by the board of
directors of the institution of the order
directing receivership, liquidation or
conservatorship. The designation of a
conservator under Section 29 of this
Act or the appointment of a receiver
under this section shall be vested
exclusively with the Monetary Board.
Furthermore, the designation of a
conservator is not a precondition to
the designation of a receiver.
*There is a bank closure.
Close Now, Hear Later Scheme:
Sec. 29 of the New Central Bank Act states
that: Whenever, on the basis of a report
submitted by the appropriate supervising or
examining department, the Monetary Board finds
that a bank or a quasi-bank is in a state of
continuing inability or unwillingness to maintain a
condition of liquidity deemed adequate to protect
the interest of depositors and creditors, the
Monetary Board may appoint a conservator with
such powers as the Monetary Board shall deem
necessary to take charge of the assets, liabilities,
and the management thereof, reorganize the
management, collect all monies and debts due
said institution, and exercise all powers necessary
to restore its viability. The conservator shall
report and be responsible to the Monetary Board
and shall have the power to overrule or revoke
the actions of the previous management and
board of directors of the bank or quasi-bank.
168

Corporation Code
The conservator should be competent and
knowledgeable
in
bank
operations
and
management. The conservatorship shall not
exceed one (1) year.
The conservator shall receive remuneration to be
fixed by the Monetary Board in an amount not to
exceed two-thirds (2/3) of the salary of the
president of the institution in one (1) year,
payable in twelve (12) equal monthly payments:
Provided, That, if at any time within one-year
period, the conservatorship is terminated on the
ground that the institution can operate on its
own, the conservator shall receive the balance of
the remuneration which he would have received
up to the end of the year; but if the
conservatorship is terminated on other grounds,
the conservator shall not be entitled to such
remaining balance. The Monetary Board may
appoint a conservator connected with the Bangko
Sentral, in which case he shall not be entitled to
receive any remuneration or emolument from the
Bangko Sentral during the conservatorship. The
expenses attendant to the conservatorship shall
be borne by the bank or quasi-bank concerned.
The Monetary Board shall terminate the
conservatorship when it is satisfied that the
institution can continue to operate on its own and
the conservatorship is no longer necessary. The
conservatorship shall likewise be terminated
should the Monetary Board, on the basis of the
report of the conservator or of its own findings,
determine that the continuance in business of the
institution would involve probable loss to its
depositors or creditors, in which case the
provisions of Section 30 shall apply.
*No prior hearing is necessary in appointing a
receiver and in closing the bank. It is enough that
subsequent judicial review is provided for. Indeed,
to require such previous hearing would not only
be impractical but would tend to defeat the very
purpose of the law when it invested the Monetary
Board with such authority.
Purpose: To avoid creation of panic from the
depositors or public.
Reason: The government has responsibility to
see to it that the person dealing with the bank is
protected.
Effects of receivership and liquidation:
1. Suspension of operation
2. The
assets
under
receivership
or
liquidation shall be deemed in custodia
legis in the hands of the receiver and shall
be exempt from garnishment, levy,
attachment or execution
3. Bank is not liable to pay interest on
deposits during the period of suspension
of operation
Reason: There is no source of income
4. Banks under liquidation retain their legal
personality
*The bank can sue and be sued but any
case should be initiated and prosecuted
through the liquidator.
5. There will be no preference even if the

claimant-depositor obtained a writ of
preliminary attachment.
Supervision of Banks:
that: The operations and activities of banks
shall be subject to supervision of the Bangko
Sentral. Supervision shall include the following:
4.1.
The issuance of rules of, conduct or the
establishment standards of operation for uniform
application to all institutions or functions covered,
taking into consideration the distinctive character
of the operations of institutions and the
substantive similarities of specific functions to
which such rules, modes or standards are to be
applied;
4.2
The conduct of examination to determine
compliance with laws and regulations if the
circumstances so warrant as determined by the
Monetary Board;
4.3
Overseeing to ascertain that laws and
regulations are complied with;
4.4
Regular investigation which shall not be
oftener than once a year from the last date of
examination
to
determine
whether
an
institution is conducting its business on a
safe or sound basis: Provided, That the
deficiencies/irregularities
found
by
or
discovered by an audit shall be immediately
addressed;
4.5
Inquiring into the solvency and liquidity of
the institution; or
4.6 Enforcing prompt corrective action.
The Bangko Sentral shall also have supervision
over the operations of and exercise regulatory
powers over quasi-banks, trust entities
and
other financial institutions which under special
laws are subject to Bangko Sentral supervision.
For the purposes of this Act, quasi-banks
shall
refer
to entities
engaged
in
the
borrowing of funds through the issuance,
endorsement or assignment with recourse or
acceptance of deposit substitutes as defined in
Section 95 of Republic Act No. 7653 (hereafter
the New Central Bank Act) for purposes of relending or purchasing of receivables and other
obligations.
Money Function:
Sec. 50 of the New Central Bank Act states
that: The Bangko Sentral shall have the sole
power and authority to issue currency, within the
territory of the Philippines. No other person or
entity, public or private, may put into circulation
notes, coins or any other object or document
which, in the opinion of the Monetary Board,
might circulate as currency, nor reproduce or
imitate the facsimiles of Bangko Sentral notes
without prior authority from the Bangko Sentral.
The Monetary Board may issue such regulations
as it may deem advisable in order to prevent the
circulation of foreign currency or of currency
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Corporation Code
substitutes as well as to prevent the reproduction
of facsimiles of Bangko Sentral notes.
The Bangko Sentral shall have the authority to
investigate, make arrests, conduct searches and
seizures in accordance with law, for the purpose
of maintaining the integrity of the currency.
Violation of this provision or any regulation issued
by the Bangko Sentral pursuant thereto shall
constitute an offense punishable by imprisonment
of not less than five (5) years but not more than
ten (10) years. In case the Revised Penal Code
provides for a greater penalty, then that penalty
shall be imposed.
Anti-Money Laundering Act:
Sec. 4.1 of Republic Act 9160 states that:
Money laundering is a crime whereby the
proceeds of an unlawful activity AS HEREIN
DEFINED are transacted, thereby making them
appear to have originated from legitimate
sources. It is committed by the following:
a) Any person knowing that any monetary
instrument or property represents, involves, or
relates to, the proceeds of any unlawful activity,
transacts or attempts to transact said monetary
instrument or property.
b) Any person knowing that any monetary
instrument or property involves the proceeds of
any unlawful activity, performs or fails to perform
any act as a result of which he facilitates the
offense of money laundering referred to in
paragraph (a) above.
c) Any person knowing that any monetary
instrument or property is required under this Act
to be disclosed and filed with the Anti-Money
Laundering
Council (AMLC), fails to do so.
Definitions:
Covered Transaction is a transaction in cash or
other equivalent monetary instrument involving
total amount in excess of P500,000 within one
banking day.
*P500,000 is the threshold/controlling
Suspicious
Transaction
are
transactions,
regardless of amount, where any of the following
circumstances exists:
1. There is no underlying legal or trade
obligation,
purpose
or
economic
justification;
2. The client is not properly identified;
3. The amount involved is not commensurate
with the business or financial capacity of
the client;
4. Taking
into
account
all
known
circumstances, it may be perceived that
the clients transaction is structured in
order to avoid being the subject of
reporting requirements under the ACT;
5. Any
circumstance
relating
to
the
transaction which is observed to deviate
from the profile of the client and/or the
clients past transactions with the covered

institution;
6. The transaction is in any way related to an
unlawful activity or any money laundering
activity or offense under this ACT that is
about to be, is being or has been
committed; or
7. Any transaction that is similar, analogous
or identical to any of the foregoing.
Sec. 3.i. of Republic Act 9160 states that:
Unlawful activity" refers to any act or omission
or series or combination thereof involving or
having relation, to the following:
(A) Kidnapping for ransom under Article 267 of
Act No. 3815, otherwise known as the Revised
Penal Code, as amended; (14) Kidnapping for
ransom
(B) Sections 4, 5, 6, 8, 9, 10, 12,13, 14, 15 and 16
of Republic Act No.9165, otherwise known as the
COMPREHENSIVE Dangerous Drugs Act of 2002;
(14) Importation of prohibited drugs;
(15) Sale of prohibited drugs;
(16) Administration of prohibited drugs;
(17) Delivery of prohibited drugs
(18) Distribution of prohibited drugs
(19) Transportation of prohibited drugs
(20) Maintenance of a Den, Dive or Resort for
prohibited users
(21) Manufacture of prohibited drugs
(22) Possession of prohibited drugs
(23) Use of prohibited drugs
(24) Cultivation of plants which are sources of
prohibited drugs
(25) Culture of plants which are sources of
prohibited drugs
(C) Section 3 paragraphs b, c, e, g, h and i of
Republic Act No. 3019, as amended, otherwise
known as the Anti-Graft and Corrupt Practices
Act;
(14) Directly or indirectly requesting or receiving
any gift, present, share, percentage or benefit for
himself or for any other person in connection with
any contract or transaction between the
Government and any party, wherein the public
officer in his official capacity has to intervene
under the law;
(15) Directly or indirectly requesting or receiving
any gift, present or other pecuniary or material
benefit, for himself or for another, from any
person for whom the public officer, in any manner
or capacity, has secured or obtained, or will
secure or obtain, any government permit or
license, in consideration for the help given or to
be given, without prejudice to Section 13 of R.A.
3019;
(16) Causing any undue injury to any party,
including the government, or giving any private
party any unwarranted benefits, advantage or
preference in the discharge of his official,
administrative or judicial functions through
manifest partiality, evident bad faith or gross
inexcusable negligence;
(17) Entering, on behalf of the government, into
any contract or transaction manifestly and
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Corporation Code
grossly disadvantageous to the same, whether or
not the public officer profited or will profit
thereby;
(18) Directly or indirectly having financial or
pecuniary interest in any business contract or
transaction in connection with which he
intervenes or takes part in his official capacity, or
in which he is prohibited by the Constitution or by
any law from having any interest;
(19) Directly or indirectly becoming interested, for
personal gain, or having material interest in any
transaction or act requiring the approval of a
board, panel or group of which he is a member,
and which exercise of discretion in such approval,
even if he votes against the same or he does not
participate in the action of the board, committee,
panel or group.
(D) Plunder under Republic Act No. 7080, as
amended;
(20)
Plunder
through
misappropriation,
conversion, misuse or malversation of public
funds or raids upon the public treasury;
(21) Plunder by receiving, directly or indirectly,
any
commission,
gift,
share,
percentage,
kickbacks or any other form of pecuniary benefit
from any person and/or entity in connection with
any government contract or project or by reason
of the office or position of the public officer
concerned;
(22) Plunder by the illegal or fraudulent
conveyance or disposition of assets belonging to
the National Government or any of its
subdivisions,
agencies,
instrumentalities
or
government-owned or controlled corporations or
their subsidiaries;
(23) Plunder by obtaining, receiving or accepting,
directly or indirectly, any shares of stock, equity
or any other form of interest or participation
including the promise of future employment in
any business enterprise or undertaking;
(24)
Plunder
by
establishing
agricultural,
industrial or commercial monopolies or other
combinations and/or implementation of decrees
and orders intended to benefit particular persons
or special interests;
(25) Plunder by taking undue advantage of official
position, authority, relationship, connection or
influence to unjustly enrich himself or themselves
at the expense and to the damage and prejudice
of the Filipino people and the Republic of the
Philippines
(E) Robbery and extortion under Articles 294,
295, 296, 299, 300, 301 and 302 of the Revised
Penal Code, as amended;
(26) Robbery with violence or intimidation of
persons;
(27) Robbery with physical injuries, committed in
an uninhabited place and by a band, or with use
of firearms on a street, road or alley;
(28) Robbery in an uninhabited house or public
building or edifice devoted to worship.
(F) Jueteng and Masiao punished as illegal
gambling under Presidential Decree No. 1602;
(29) Jueteng;
(30) Masiao.
(G) Piracy on the high seas under the Revised

Penal Code, as amended and Presidential Decree
No. 532;
(31) Piracy on the high seas;
(32) Piracy in inland Philippine waters;
(33) Aiding and abetting pirates and brigands.
(H) Qualified theft under Article 310 of the
Revised Penal Code, as amended;
(34) Qualified theft.
(I) Swindling 'under Article 315 of the Revised
Penal Code, as amended;
(35) Estafa with unfaithfulness or abuse of
confidence by altering the substance, quality or
quantity of anything of value which the offender
shall deliver by virtue of an obligation to do so,
even though such obligation be based on an
immoral or illegal consideration;
confidence by misappropriating or converting, to
the prejudice of another, money, goods or any
other personal property received by the offender
in trust or on commission, or for administration,
or under any other obligation involving the duty
to make delivery or to return the same, even
though such obligation be totally or partially
guaranteed by a bond; or by denying having
received such money, goods, or other property;
confidence by taking undue advantage of the
signature of the offended party in blank, and by
writing any document above such signature in
blank, to the prejudice of the offended party or
any third person;
(38) Estafa by using a fictitious name, or falsely
pretending
to
possess
power,
influence,
qualifications, property, credit, agency, business
or imaginary transactions, or by means of other
similar deceits;
(39) Estafa by altering the quality, fineness or
weight of anything pertaining to his art or
business;
(40) Estafa by pretending to have bribed any
government employee;
(41) Estafa by postdating a check, or issuing a
check in payment of an obligation when the
offender has no funds in the bank, or his funds
deposited therein were not sufficient to cover the
amount of the check;
(42) Estafa by inducing another, by means of
deceit, to sign any document;
(43) Estafa by resorting to some fraudulent
practice to ensure success in a gambling game;
(44) Estafa by removing, concealing or
destroying, in whole or in part, any court record,
office files, document or any other papers.
(J) Smuggling under Republic Act Nos. 455 and
1937;
(45) Fraudulent importation of any vehicle;
(46) Fraudulent exportation of any vehicle;
(47) Assisting in any fraudulent importation;
(48) Assisting in any fraudulent exportation;
(49) Receiving smuggled article after fraudulent
importation;
(50) Concealing smuggled article after fraudulent
importation;
171

Corporation Code
(51) Buying smuggled article after fraudulent
importation;
(52) Selling smuggled article after fraudulent
importation;
(53) Transportation of smuggled article after
fraudulent importation;
(54) Fraudulent practices against customs
revenue.
(K) Violations under Republic Act No. 8792,
otherwise known as the Electronic Commerce Act
of 2000;
K.1. Hacking or cracking, which refers to:
(55) unauthorized access into or interference in a
computer system/server or information and
communication system; or
(56) any access in order to corrupt, alter, steal, or
destroy using a computer or other similar
information and communication devices, without
the knowledge and consent of the owner of the
computer or information and communications
system, including
(57) the introduction of computer viruses and the
like, resulting in the corruption, destruction,
alteration, theft or loss of electronic data
messages or electronic document;
K.2. Piracy, which refers to:
(58) the unauthorized copying, reproduction,
(59) the unauthorized dissemination, distribution,
(60) the unauthorized importation,
(61) the unauthorized use, removal, alteration,
substitution, modification,
(62) the unauthorized storage, uploading,
downloading, communication, making available
to the public, or
(63) the unauthorized broadcasting, of protected
material, electronic signature or copyrighted
works
including
legally
protected
sound
recordings or phonograms or information material
on protected works, through the use of
telecommunication networks, such but not
limited to, the internet, in a manner that infringes
intellectual property rights;
K.3. Violations of the Consumer Act or Republic
Act No. 7394 and other relevant or pertinent laws
through transactions covered by or using
electronic
data
messages
or
electronic
documents:
(64) Sale of any consumer product that is not in
conformity with standards under the Consumer
Act;
(65) Sale of any product that has been banned by
a rule under the Consumer Act; ,
(66) Sale of any adulterated or mislabeled
product using electronic documents;
(67) Adulteration or misbranding of any consumer
product;
(68) Forging, counterfeiting or simulating any
mark, stamp, tag, label or other identification
device;
(69) Revealing trade secrets;
(70) Alteration or removal of the labeling of any
drug or device held for sale;
(71) Sale of any drug or device not registered in
accordance with the provisions of the ECommerce Act;
(72) Sale of any drug or device by any person not

licensed in accordance with the provisions of the
E-Commerce Act;
(73) Sale of any drug or device beyond its
expiration date;
(74) Introduction into commerce of any
mislabeled or banned hazardous substance;
(75) Alteration or removal of the labeling of a
hazardous substance;
(76) Deceptive sales acts and practices;
(77) Unfair or unconscionable sales acts and
practices;
(78) Fraudulent practices relative to weights and
measures;
(79) False representations in advertisements as
the existence of a warranty or guarantee;
(80) Violation of price tag requirements;
(81) Mislabeling consumer products;
(82)
False,
deceptive
or
misleading
advertisements;
(83) Violation of required disclosures on
consumer loans;
(84) Other violations of the provisions of the ECommerce Act;
(L) Hijacking and other violations under Republic
Act No. 6235; destructive arson and murder, as
defined under the Revised Penal Code, as
amended, including those perpetrated by
terrorists against non-combatant persons and
similar targets;
(85) Hijacking;
(86) Destructive arson;
(87) Murder;
(88) Hijacking, destructive arson or murder
perpetrated by terrorists against non-combatant
persons and similar targets;
(M) Fraudulent practices and other violations
under Republic Act No. 8799, otherwise known as
the Securities Regulation Code of 2000;
(89) Sale, offer or distribution of securities within
the Philippines without a registration statement
duly filed with and approved by the SEC;
(90) Sale or offer to the public of any pre-need
plan not in accordance with the rules and
regulations which the SEC shall prescribe;
(91) Violation of reportorial requirements imposed
upon issuers of securities;
(92) Manipulation of security prices by creating a
false or misleading appearance of active trading
in any listed security traded in an Exchange or
any other trading market;
(93) Manipulation of security prices by effecting,
alone or with others, a series of transactions in
securities that raises their prices to induce the
purchase of a security, whether of the same or
different class, of the same issuer or of a
controlling, controlled or commonly controlled
company by others;
alone or with others, series of transactions in
securities that depresses their price to induce the
sale of a security, whether of the same or
different class, of the same issuer or of a
controlling, controlled or commonly controlled
company by others;
172

Corporation Code
alone or with others, a series of transactions in
securities that creates active trading to induce
such a purchase or sale though manipulative
devices such as marking the close, painting the
tape, squeezing the float, hype and dump, boiler
room operations and such other similar devices;
(96) Manipulation of security prices by circulating
or disseminating' information that the price of
any security listed in an Exchange will or is likely
to rise or fall because of manipulative market
operations of anyone or more persons conducted
for the purpose of raising or depressing the price
of the security for the purpose of inducing the
purchase or sale of such security;
(97) Manipulation of security prices by making
false or misleading statements with respect to
any material fact; which he knew or had
reasonable ground to believe was so false and
misleading, for the purpose of inducing the
purchase or sale of any security listed or traded
in an Exchange;
alone or with others, any series of transactions
for the purchase and/or sale of any security
traded in an Exchange for the purpose of
pegging, fixing or stabilizing the price of such
security, unless otherwise allowed by the
Securities Regulation Code or by the rules of the
SEC;
(99) Sale or purchase of any security using any
manipulative deceptive device or contrivance;
(100) Execution of short sales or stop-loss order
in connection with the purchase or sale of any
security not in accordance with such rules and
regulations as the SEC may prescribe as
necessary and appropriate in the public interest
or the protection of the investors;
(101) Employment of any device, scheme or
artifice to defraud in connection with the
purchase and sale of any securities;
(102) Obtaining money or property in connection
with the purchase and sale of any security by
means of any untrue statement of a material fact
or any omission to state a material fact necessary
in order to make the statements made, in the
light of the circumstances under which they were
made, not misleading;
(103) Engaging in any act, transaction, practice
or course of action in the sale and purchase of
any security which operates or would operate as
a fraud or deceit upon any person;
(104) Insider trading;
(105) Engaging in the business of buying and
selling securities in the Philippines as a broker or
dealer, or acting as a salesman, or an associated
person of any broker or dealer without any
registration from the Commission;
(106) Employment by a broker or dealer of any
salesman or associated person or by an issuer of
any salesman, not registered with the SEC; ,
(107) Effecting any transaction in any security, or
reporting such transaction, in an Exchange or
using the facility of an Exchange which is not
registered with the SEC;
(108) Making use of the facility of a clearing

agency which is not registered with the SEC;
(109) Violations of margin requirements;
(110) Violations on the restrictions on borrowings
by members, brokers and dealers;
(111) Aiding and Abetting in any violations of the
Securities Regulation Code;
(112) Hindering, obstructing or delaying the filing
of any document required under the Securities
Regulation Code or the rules and regulations of
the SEC;
(113) Violations of any of the provisions of the
implementing rules and regulations of the SEC;
(114) Any other violations of any of the provisions
of the Securities Regulation Code.
(N) Felonies or offenses of a similar nature to the
afore-mentioned unlawful activities that are
punishable under the penal laws of other
countries.
In determining whether or not a felony or offense
punishable under the penal laws of other
countries, is "of a similar nature", as to constitute
the same as an unlawful activity under the AMLA,
the nomenclature of said felony or offense need
not be identical to any of the predicate crimes
listed under Rule 3.i.
Safe Harbor Provisions:
Sec. 9.3.e of Republic Act 9160 states that:
No administrative, criminal or civil proceedings,
shall lie against any person for having made a
covered transaction report or a suspicious
transaction report in the regular performance of
his duties and in good faith, whether or not such
reporting results in any criminal prosecution
under this Act or any other Philippine law.
Truth in Lending Act:
Sec. 4 of Republic Act No. 3765 states that:
Any creditor shall furnish to each person to
whom credit is extended, prior to the
consummation of the transaction, a clear
statement in writing setting forth, to the extent
applicable and in accordance with rules and
regulations prescribed by the Board, the following
information:
(1) the cash price or delivered price of the
property or service to be acquired;
(2) the amounts, if any, to be credited as down
payment and/or trade-in;
(3) the difference between the amounts set forth
under clauses (1) and (2);
(4) the charges, individually itemized, which are
paid or to be paid by such person in connection
with the transaction but which are not incident to
the extension of credit;
(5) the total amount to be financed;
(6) the finance charge expressed in terms of
pesos and centavos; and
(7) the percentage that the finance bears to the
total amount to be financed expressed as a
simple annual rate on the outstanding unpaid
balance of the obligation.
173

Corporation Code
*Failure to comply with the Truth in Lending Act,
the contract of loan is still valid however, the
bank cannot recover finance charges.
Purpose: To avoid hidden charges; to know the
actual amount borrowed.
174

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Commercial Law Review

*Corporation Code is the general law on Private

A. Statutory definition of a Corporation

It exist by fiction of law only, hence

Commercial Law Review

*Right against self-incrimination

compensatory, exemplary, loss

Commercial Law Review

Creature of enumerated powers,

C. Classification of Private Corporations:

Commercial Law Review

2. An attempt in good faith to

Commercial Law Review

A. Submission of Articles of Incorporation;

certificate of incorporation under the

Commercial Law Review

of the corporation. It is the ordinary

application for existence within the

Commercial Law Review

distinction of the shares of stock, all

Commercial Law Review

distribution of the assets of the

Commercial Law Review

creditors and to answer for

noncompliance with the minimum

Commercial Law Review

Effects of Non-Use of Corporate Charter

A. Levels of Corporate Control

Commercial Law Review

to the honest decision of officers and

committed within 5 years prior to the

Commercial Law Review

distribute the same among as many

Commercial Law Review

except for the election of officers

non-stock corporation, on the written

Commercial Law Review

other than by removal by the

Commercial Law Review

objections with the secretary

Commercial Law Review

interlocking director in one corporation

Commercial Law Review

Committee is invalid it may be ratified by

Commercial Law Review

Express those expressly authorized

Doctrine of Necessary Implication those

retirement, and other plans for the benefit

Commercial Law Review

Q: When the corporation increases its

Commercial Law Review

minimum stock ownership by the

Q: What makes the disposition

Commercial Law Review

3. If and when application of piercing

Trust Fund Doctrine The capital stock,

Investment of Corporate Funds

Sec. 42 of the Corporation Code

Commercial Law Review

Requisites for declaration of stock

1. Unrestricted Retained Earnings;

Commercial Law Review

one holding the shares are considered